Apr 26, 2012
Executives
Donald M. James - Chairman, Chief Executive Officer and Chairman of Executive Committee John R.
McPherson - Senior Vice President of Strategy and Business Development Danny R. Shepherd - Executive Vice President of Construction Materials Daniel Sansone - Chief Financial Officer and Executive Vice President
Analysts
Ted Grace - Susquehanna Financial Group, LLLP, Research Division L. Todd Vencil - Sterne Agee & Leach Inc., Research Division Garik S.
Shmois - Longbow Research LLC Rodny Nacier - KeyBanc Capital Markets Inc., Research Division Trey Grooms - Stephens Inc., Research Division Michael Betts - Jefferies & Company, Inc., Research Division Kathryn I. Thompson - Thompson Research Group, LLC.
Judy Merrick Brent Thielman - D.A. Davidson & Co., Research Division
Operator
Good day, ladies and gentlemen, and welcome to the First Quarter 2012 Vulcan Materials Company Earnings Conference Call. My name is Erica and I'll be your coordinator for today.
[Operator Instructions] I would now like to turn the presentation over to your host for today's call, Mr. Don James, Chairman and Chief Executive Officer.
Please proceed.
Donald M. James
Good morning. Thank you for joining us to discuss our results for the first quarter of 2012.
I'm Don James, Chairman and Chief Executive Officer of Vulcan Materials. Joining me today are Dan Sansone, our Executive Vice President and Chief Financial Officer; Danny Shepherd, our Executive Vice President for Construction Materials; and John McPherson, Senior Vice President, Strategy and Business Development.
We have posted to our website a short slide presentation that we will be referring to during the call. The slides are also available to those of you on the webcast.
Before we begin, let me remind you that certain matters discussed in this conference call, as indicated on Slide 2 of our presentation, contain forward-looking statements, which are subject to risk and uncertainties. Description of these risk and uncertainties are detailed in the company's SEC reports, including our most recent report on Form 10-K.
In addition, during this call, management will refer to certain non-GAAP financial measures, including EBITDA, adjusted EBITDA and adjusted diluted EPS for continuing operations. These measures are not prepared in accordance with U.S.
Generally Accepted Accounting Principles. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures and other related information in Vulcan's first quarter 2012 earnings release and in the Investor Relations section of Vulcan's website at vulcanmaterials.com.
I would now like to walk you through our first quarter results. As you saw in the press release we issued this morning, we began 2012 with another strongly improved quarter.
Our results were substantially better compared to the first quarter of last year. Net sales were approximately $500 million.
This is a 10% increase from the first quarter of 2011. Although some of this year-over-year growth is attributable to milder weather, we also benefited from the continued recovery of our markets, particularly in the demand for Aggregates, combined with the strength of our market positions.
Gross profit for the first quarter increased $29 million from the first quarter of 2011, reflecting sales growth in every segment and the favorable earnings effect of improved productivity and cost reduction. Gross profit as a percent of net sales increased 600 basis points from the same period last year.
When making year-over-year comparisons of earnings and EBITDA, it's important to note a few items that impact these comparisons. One, the first quarter of 2012 included $10 million of cost related to Martin Marietta's unsolicited offer.
Two, the first quarter of 2012 also included a $6 million gain on the sale of real estate in California. And three, in the first quarter of last year, the company received approximately $25.5 million in an insurance arbitration award for the recovery of settlement and legal cost related to a lawsuit settled in 2010.
Excluding these items, EBITDA increased to $46 million in the first quarter of 2012 compared to $5 million of EBITDA in the prior year. Earnings from continuing operations, excluding the items I highlighted, were a loss of $0.42 per diluted share in the first quarter of 2012 compared to a loss of $0.62 per diluted share in the same period last year.
Further enhancing operating earnings, SAG expenses decreased by $13 million or 17% compared to the prior year period. This decrease was due mainly to cost reduction initiatives undertaken in 2011.
In addition, the Profit Enhancement Plan we announced in February is well underway, and will generate significant additional savings and profit enhancements. John McPherson will update you on that shortly.
Turning to our segment results on Slide 4, our Aggregate segment performed very well, reflecting continued market recovery and favorable weather. Segment revenues, which include sales to our Asphalt and Concrete businesses, increased approximately $24 million or roughly 7% from the prior year period.
And gross profit increased $23 million. Aggregate revenues reflect stronger demand, including increased demand from our Asphalt and Concrete operations, as well as generally stable pricing.
First quarter Aggregate shipments increased 10% from the prior year, and coupled with lower unit cost of sales, led to a sharp increase in Aggregates' gross profit margin. Shipments increased in almost all of our geographic markets.
Our operations in California and Virginia continued their trend of achieving much stronger than average volume gains from the prior year. Our Aggregates businesses in 8 other states also achieved double-digit volume gains over the prior year's first quarter, most notably key states like Florida, Texas and Alabama.
These increases were due mainly to large infrastructure project work, primarily highways, some improvement in private construction activity, as well as favorable weather conditions. Average freight adjusted selling price decreased by 1% in the first quarter due mostly to a less favorable product mix.
In the first quarter, above-average levels of lower priced products, including base stone and fill material, were shipped to large projects in Virginia. Excluding the fill material shipments, which are sporadic and infrequent relative to other sizes, first quarter pricing was flat with the prior year.
Overall, we continued to see pricing stability across our markets. In the first quarter, more than half of our markets realized price improvement from the prior year, a trend that has continued for the last 4 quarters.
Importantly, Aggregates gross profit increased to approximately $34 million, reflecting the earnings effect of higher volumes and improved productivity, which contributed to lower unit cost of sales. This increase is more than triple the $11 million in Aggregates gross profit we recorded in the first quarter of 2011 and shows the favorable earnings impact of the operating leverage inherent in our business.
This is also a continuation of what we achieved in the fourth quarter of 2011. As a result, net sales have increased $73 million and gross profit has increased $53 million in the trailing 6 months ended March 31, 2012, compared to the prior period last year.
Aggregates gross profit as a percent of segment revenues for the quarter increased by 640 basis points. Cash earnings per ton increased by 11% to $3.36.
Helping to drive our first quarter results in Aggregates, we continued to pursue opportunities in plant operations, including executing a turnaround of specific underperforming facilities, increasing the exchange of operating practices and talent across geographies, and improving central service facility sharing across regions. Segment unit cost of sales decreased approximately 10% from the prior year due to increased productivity, cost-reduction initiatives and the operating leverage realized from higher volumes.
All key labor productivity and energy efficiency metrics for Aggregates improved compared to last year's first quarter, more than offsetting an 11% increase in the unit cost for diesel fuel. For our Asphalt Mix segment, gross profit in the first quarter was a loss of less than $1 million, approximating last year's breakeven earnings.
The average sales price for asphalt mix increased approximately 6%, offsetting most of the earnings effect of a 16% increase in liquid asphalt cost. The Asphalt Mix volume increased 3% from last year's first quarter.
In Concrete, gross profit was a loss of $12 million compared to a loss of $14 million in the prior year. Ready-mixed concrete volumes increased 12% from the prior year.
The average sales price increased 1% from the prior year, contributing to improved unit materials margin. Finally, Cement segment gross profit was $1 million, an improvement of $4 million from the prior year due to increased volumes and lower operating costs.
In total, gross profit for our non-Aggregate segments improved by $6 million, reflecting cost reduction initiatives. Turning now to Slide 5.
We wanted to take a step back and review the significant progress Vulcan has made and continues to make in reducing cost. As you can see in this slide, our full year SAG expense reductions should further accelerate as a result of our cost savings initiatives and by leveraging our ERP and Shared Services platforms.
By the end of 2012, Vulcan is on target to have reduced run rate SAG expenses by at least 32% since 2007. Spending for our new ERP systems peaked in 2010.
We are now reaping the benefits, both in improved efficiency and in our ability to undertake the restructuring actions we announced last year, as well as pursuing the Profit Enhancement Plan. Now I'd like to turn the call over to John McPherson who will provide a brief update on our Profit Enhancement Plan.
John?
John R. McPherson
Thanks, Don. Hey, now turning to Slide 6.
I'd like to highlight the steady progress we've been making in the Profit Enhancement Plan that we announced in February. As you may recall, the Profit Enhancement Plan includes cost reductions and other profit enhancements to improve our run rate profitability as measured by EBITDA at current volumes by more than $100 million annually.
Of that $100 million in profit enhancements, $25 million is expected to be achieved in 2012, $75 million is expected to be achieved in 2013, with the full run rate in place by mid-2013. And as a result, the full $100 million is expected to be achieved and hit the P&L in 2014.
These enhancements are, and I'd like to underscore this, in addition to the $55 million in run rate overhead reductions achieved through our restructuring actions announced in 2011. Of the $100 million in profit enhancements we expect to achieve through this initiative, $55 million should be derived from savings in sourcing, $25 million from G&A and support functions and another $20 million from transportation and logistics.
I'd now like to give a brief update on progress in each of these 3 areas. In sourcing, we have renegotiated vendor agreements and pricing for categories ranging from office supplies to mobile equipment.
In addition, we have expanded the role of our professional procurement staff. We have strengthened certain procurement policies and programs, and we've taken steps to accelerate company-wide adoption of these programs.
Initial actions have been taken to reduce spending related to outside services, a category that includes costs such as drilling and blasting, electrical, repair and maintenance, and landscaping. This category includes over $150 million in annual spending at the plant level.
We will address other categories of procured goods and services over at least the next 2 quarters, and we remain fully committed to reducing the annual run rate spending on third-party goods and services by $55 million or more before mid-2013. In G&A, additional efficiencies have been identified in accounting, HR, IT, legal and other support functions.
These efficiencies leverage our prior restructuring in ERP investments and include actions such as further standardization and simplification of administrative policies and practices, further consolidation of support activities to leverage the company's systems of scale, and further streamlining in automation of management processes and reporting. We implemented certain of these improvements during the first quarter and we'll implement others throughout the balance of the year.
Again, we remain fully committed to reducing overhead costs by $25 million or more without negatively impacting our safety, environmental, customer service or sales performance. In the area of transportation and logistics, our transition to the 4-region structure has positioned the company to further optimize intermodal transportation decisions to better manage the deployment of rail cars and other assets, and to consistently assess and adopt best trucking practices across operating units.
For each of our trucking, rail and marine operations, we have identified opportunities to reduce cost and increase revenues associated with our owned and contracted transportation assets. We remain on target to increase profits in this area by more than $20 million through our initiatives in -- over the next year.
I'd like to note that across all of these areas, our employees at all levels of the business have demonstrated great ingenuity and commitment in managing costs smartly, while remaining focused on serving our customers and operating safely. With that, I'd like to turn the call over to Danny Shepherd.
Danny R. Shepherd
Thank you, John. Well, as John noted, we are very pleased with our progress over the last 2 months, and the organization is fully committed and engaged in the Profit Enhancement Program.
We remain very optimistic that we will achieve our goals. Now if you turn to Slide 7, during the quarter, we also continued to execute on our Planned Asset Sales initiative, which was also announced in February.
As previously disclosed, we'll be selling operations that are not core to our strategy. These are quality assets, many of which will have significant value to a number of potential purchasers.
Thus far, we've been pleased with the level of interest and activity surrounding the process. The divested assets will include ready-mixed Concrete and Cement operations, nonstrategic Aggregates assets and real estate.
This initiative is in line with our strategy to focus our capital on higher return, higher growth Aggregates positions, optimize our exposure to downstream businesses and unlock value of real estate from our portfolio. We have completed similar transactions in the past in states like Virginia, Indiana, New Mexico, Arizona and others.
We are focused on optimizing value as a disciplined seller, and we continue to expect this initiative will generate net proceeds of approximately $500 million by mid-2013. Importantly, these actions will enhance our longer-term earnings growth profile, margins and return on capital employed as demand for our products improves with the economic recovery.
Thank you. I will now turn the call back over to Don.
Donald M. James
Thanks, Danny. If you will turn with me now to Slide 8.
Sentiment is spreading that the worst of this economic downturn is behind us. This view appears to be supported by the U.S.
contract awards for new construction projects, particularly in private construction, which bodes well for continued demand recovery in our high-growth markets. Multi-family housing starts have remained strong, growing now for 17 consecutive months.
Trailing 12 months single-family housing starts turned positive in the first quarter of 2012 on the back of higher starts reported in recent months. As of March of 2012, the year-over-year change in trailing 12-month contract awards for private nonresidential construction has remained positive for the last year.
This positive trend is driven by growth in contract awards for commercial and retail building. Additionally, trailing 3-month awards for Vulcan-served states are up 10% versus other states, which are down 12%.
This is another positive indicator for continued demand recovery in our high growth markets. Finally, private non-highway infrastructure projects, mainly power-related projects, have been positive, although very lumpy due to the large scale and scope of these projects, which can consume large quantities of Aggregates.
Trailing 12-month contract awards in Vulcan-served states are up 34% compared with other states, which are down 27%. On the public side, contract award activity has been mixed.
Trailing 12-month awards for non-highway infrastructure projects are down 2% versus the prior year. In highways, trailing 12-month awards for the period ending March 2012 were $51.4 billion, down 11% from the prior year, reflecting the absence of $7.5 billion in stimulus-related project awards from last year.
Prospects for the next federal highway bill are improving. At this time, we are operating under a 90-day extension at current funding levels.
Last week, the House of Representatives passed by a wide and bipartisan margin, additional legislation designed to expedite a House-Senate conference on a new highway bill. This follows the bipartisan passage of the Senate highway bill earlier in the spring.
It is the stated intention of both the House and Senate leadership to resolve their differences on the highway bill and produce a conference agreement before the end of the current extension that avoids additional disruption in the Federal Highway Program. Just this week, Senate and House leaders have announced the members of the conference committee that will focus on reconciling the Senate bill with the House proposals.
It is a streamlined conference committee, notably smaller than was the case with SAFETEA-LU, and it is composed of a number of strong highway program proponents from both parties and from both the House and the Senate. We, along with a broad coalition of stakeholders including unions, highway users, industry and state and local government officials are urging Congress to reach agreement on this new bill as quickly as possible to facilitate a recovery in construction activity.
Turning now to Slide 9. For 2012, we continued to expect earnings in each of our segments to improve from the prior year due to continued growth in volumes, higher pricing and reduced cost.
We now expect that total aggregate shipments will increase by approximately 2% to 4% based on our strong performance in the first quarter and solid demand levels. We have adjusted our full year freight-adjusted pricing for Aggregates to reflect the impact of the product mix shift in the first quarter.
As a result, we now expect aggregate pricing to increase by 1% to 3% for the full year. In addition, Aggregates segment unit cost should be lower than in 2011 due to improved productivity, restructuring of overhead support functions and the implementation of the Profit Enhancement Plan.
As a result, Aggregate segment earnings are expected to improve substantially from 2011. Asphalt earnings are expected to increase due to higher pricing and modest growth in volumes.
Ready-mixed Concrete pricing should continue to improve and shipments should increase modestly from the prior year, contributing to an improvement in earnings. Cement earnings should approach the breakeven levels in 2012.
And energy-related costs, specifically unit costs for diesel fuel and liquid asphalt, are now expected to increase 5% to 10% from full year 2011 levels. As we noted earlier, we continue to expect full year 2012 SAG cost to be approximately $270 million.
We also continue to expect 2012 EBITDA of about $500 million, including $25 million related to the Profit Enhancement Plan and approximately $29 million in gains for 2 real estate transactions that were initiated in 2011 prior to the announcement of the Planned Asset Sales that are not part of that program. Our full year EBITDA guidance excludes impacts from Planned Asset Sales and costs associated with the unsolicited offer.
We continue to expect capital spending in 2012 to be approximately $100 million. In summary, we had a much better first quarter and our outlook for the year remains favorable.
Moving to Slide 10, I should note that in addition to delivering strong improvements in our financial results for the last 2 quarters, we also recorded the best safety and health performance in the history of our company in 2011. And our environmental performance resulted in the lowest number of environmental citation since 1999, when we were a very much smaller company.
We take pride in our safety record, which is among the best in the industry, but we are always looking to improve. Our performance last year is a testament to the focus and professionalism of our employees and their commitment to maintaining a safe work environment.
Finally, before taking your questions, I wanted to take a moment to briefly comment on Martin Marietta's offer. Vulcan has been and continues to be open to transactions that create value for our shareholders.
The long history of discussions between Vulcan and Martin Marietta demonstrates our willingness to explore potential value-adding strategies. However, we will not agree to a transaction that dilutes Vulcan's shareholder value.
And put simply, we do not believe that Martin Marietta's offer reflects the intrinsic value of Vulcan's assets or would create value for our shareholders. It doesn't compensate our shareholders for Vulcan's strong operating leverage, which we believe should continue to drive strong performance as our markets recover.
The benefits of this leverage are clear in the results we announced today. Nor does Martin's offer compensate Vulcan shareholders for the benefits of our Profit Enhancement Plan, which is delivering real, tangible results for Vulcan shareholders.
In addition, the offer would enable Martin Marietta shareholders to capture a significant portion of the value that our ongoing initiatives are creating. We believe this is value that belongs to Vulcan shareholders.
Finally, the significant divestitures that may be required by the Department of Justice to complete a transaction will erode value that belongs to Vulcan shareholders and add great uncertainty to the Martin Marietta offer. Accordingly, we continue to recommend that shareholders not tender any shares to Martin Marietta.
We remain focused on shareholder value. We are executing our initiatives to generate higher levels of earnings and cash flow, improve our operating leverage, reduce overhead costs, strengthen our credit profile and restore a meaningful dividend as rapidly as possible.
And if Vulcan decides to pursue a value-enhancing transaction, whether with Martin Marietta, one of its competitors or none of the above, it is Vulcan's board, which has undivided loyalty to Vulcan and its shareholders, and not Martin Marietta's hand-picked nominees that should be negotiating on Vulcan's behalf. I know many of you have an interest in Martin Marietta's offer.
But we hope that you will focus today on our results, on our outlook for 2012, and on the initiatives we have in place to further enhance our performance and shareholder value. With that, I'll now turn it back to the operator to begin Q&A.
Operator
[Operator Instructions] And our first question comes from the line of Ted Grace with Susquehanna.
Ted Grace - Susquehanna Financial Group, LLLP, Research Division
Don, I apologize if I missed it, but I wanted to come back and revisit the highway contract awards. We tracked the data and I guess we've noticed a pretty sharp decline, certainly January, February, improvement on a relative basis in March.
But I guess the way we tracked it across your 10 states, I have it down 12% on a trailing 12-month average basis. It's your forward contracts on highways, just federal highways.
But I'm wondering if -- are we missing something? Or is there anything that's gone on that might explain the really sharp decline of January, February this year?
Donald M. James
Ted, I think if you look at the year-over-year change in highway contract awards from the stimulus funding, that accounts for virtually all or maybe more than all of the difference year-over-year. Those stimulus projects are still largely under construction, but the contract awards coming from stimulus money have virtually come to a halt.
Because that -- the contract award part had deadlines, but as you know, there are still many, many stimulus projects under construction.
Ted Grace - Susquehanna Financial Group, LLLP, Research Division
Sure. Do you think there was any impact from the uncertainty on the highway bill and now that we've got the CR signed?
Donald M. James
Absolutely. I think the DOTs are not willing to award new contracts till they see some more certainty in the Federal Highway Program.
We work very closely with the Association of State Highway Transportation Officials and they are, as I indicated, lobbying as hard as we are to convince their congressmen and senators from all of their states that we need to quit quibbling and get something in place that will allow the state DOTs to move forward with the backlog of projects.
Ted Grace - Susquehanna Financial Group, LLLP, Research Division
Okay, that's helpful. And so as you guys kind of look at April and the trends you've noticed that you might be willing to talk about through this month, is it your sense that contract awards are starting to improve on that basis?
And then I was wondering if you could also just talk about pricing that you've seen, March versus April.
Donald M. James
I haven't seen any April contract award data yet, so I really can't comment on that. Pricing, our guidance for pricing for the full year is up 1% to 3%.
That's down a notch from our guidance beginning earlier in the year. And that's really because of 2 or 3 big large projects where we sold some, essentially, by-product or fill product at relatively low prices to some large construction projects, particularly in Virginia.
So it's really on that basis that we ratcheted down our pricing assumption for the full year. But as I said, there is stability in pricing in the sense that we don't have wide swings from -- and price changes from market to market.
And we're optimistic that we'll be able to report price improvement as the year moves forward.
Ted Grace - Susquehanna Financial Group, LLLP, Research Division
Okay, that's really helpful. The last thing I was hoping to ask you or Danny is on the asset sales.
And I know Danny reaffirmed confidence and the slide deck said that you can get $500 million announced by the middle of 2013. Just given the progress you've had to date on that process, should we look for this to come in chunkier transactions?
Will there be more kind of one-off transactions? And any more color you might provide on the process would be super.
Danny R. Shepherd
I think the way I would answer your question, Ted, is some of it would be one-off transactions, but we do have a combination of ready-mixed assets or assets that could be sold in a single transaction. I will add that we are encouraged or we're early in the process, but the interest that we're receiving from interested parties has been very, very encouraging, and hopefully, we'll have something positive to report in the near future.
Operator
Our next question comes from the line of Todd Vencil with Sterne Agee.
L. Todd Vencil - Sterne Agee & Leach Inc., Research Division
I had a handful of questions, but let's stick on that question about mix there for a second and the big projects in Virginia and other places. I mean, is this the kind of thing that you expect to persist for a little while?
This sort of newly -- I think, you described that the volumes of those products is above average.
Donald M. James
I think this is -- the contract awards indicate that private sector construction is well on its way to recovery, office buildings and other large private construction. These sales in Virginia were to large, private construction projects, manufacturing facilities, distribution facilities.
But the kind of material we sold in the first quarter is really sort of a one-off. That's not a routine part of our business.
We'll, in the course of production, put finds aside and then a big project will come along and take several hundred thousand tons for one project. And that's what happened in the first quarter.
I don't see that being a continuing trend, if I'm understanding your question.
L. Todd Vencil - Sterne Agee & Leach Inc., Research Division
No, that was the question. And this -- and thanks to that.
I did have one -- I was going to follow up and ask if that was a private job or a highway job, so it's interesting that it was on the private side. To the extent you can tell, and I'm sure it's probably hard given the lumpiness of the transactions, but can you tell what the price trend on that sort of lower-priced material is?
I mean, is it pretty aggressively bid right now or is the price for that product sort of firm enough?
Donald M. James
Well, it's just a very low-priced product. I mean, it's a fraction of our average selling price.
That's why I pulled the reported freight-adjusted selling price down to minus 1%. Absent that, we were flat.
We certainly believe we'll have opportunities through the year in our normal product mix, normal geographic mix, that we'll see pricing improvement as the year moves on.
L. Todd Vencil - Sterne Agee & Leach Inc., Research Division
Got it. On that point, last year, around midyear, I guess, there were price increases in Aggregates put through in a lot of places, driven by the increase in diesel cost.
Obviously, diesel’s back up again this year. I mean is there any outlook to kind of go for a second round, if we can think about it that way, this summer?
Donald M. James
Well, certainly, higher diesel costs support higher Aggregate pricing for at least 2 reasons. One is it increases production costs in the plants, and secondly, it increases delivery cost, which shrinks the shipping radius, and therefore, gives an individual quarry typically more pricing power.
The -- our full year -- the big increase in diesel cost occurred second half of last year. And as I -- as we indicated, we think diesel cost increases for full year 2012 will be in the 5% to 10% range, which will be substantially lower increase than we saw last year.
But nevertheless, they're still up. Most of our cost elements are down.
Our labor productivity is better. Our energy, our electricity consumption and energy conversion is better.
So we're doing -- our guys in the plants are doing a super job on cost management and cost control. The one place we have higher cost is in diesel fuel.
I believe it was up 11% in the quarter over last year's first quarter. But we're offsetting that with other productivities.
So if we get some moderation in diesel fuel cost, it will certainly help us as the year moves forward.
L. Todd Vencil - Sterne Agee & Leach Inc., Research Division
Got it. On the activity in D.C.
with the conference committee around the highway bill, can you kind of walk us through what you're hearing? I mean obviously, there's -- in terms of the annual funding level, I guess the House and the Senate have been pretty close to one another barring recent...
Donald M. James
Which is stable, stable to up slightly.
L. Todd Vencil - Sterne Agee & Leach Inc., Research Division
Right. But there's been a spread there on -- in terms of the duration and in terms of how to pay for it.
Do you have any -- is there any conversation as to how they might bridge the gaps there?
Donald M. James
Well, as you know, the Senate, the Senate EPW Committee reported its bill out 18 to 0, all Democrats, all Republicans fully aligned. It had offsets from other spending cuts of $12 billion plus or minus, which funded, in addition to the regular Highway Trust Fund and the receipts in the Highway Trust Fund, it fully funded the Senate bill through the end of FY '13.
The House bill, really wasn't a bill. It was something that was passed by leadership in order to get to a conference committee.
There is no funding mechanism per se in the House side. The -- I think as we read the tea leaves, you have a lot of Democrats, in both the House and the Senate, willing to support the Senate bill.
You've got Senate Republicans, by and large, supporting the Senate bill, and you have a substantial portion of House Republicans, including all the leadership who, I think, will coalesce around the Senate bill. The problem, of course, are the same group that's opposed to a lot of other things in the House.
But our view is that the leadership in both House and the Senate is committed to getting this thing passed so it is not an issue in the election. And in order to do that, they need to do it by June 30.
And they seem to be fully committed to doing that. You've got the Keystone Pipeline in the House bill that's not in the Senate bill.
We don't know where that goes, but that's really not relevant, of course, to highway funding, at least directly. So we're probably more optimistic today than we've been in several years that something is about to happen with respect to a formal highway bill, albeit, probably only through the end of FY '13 at this point.
Operator
Our next question comes from the line of Garik Shmois with Longbow Research.
Garik S. Shmois - Longbow Research LLC
First question is for John. I was wondering if you could identify how much of the $25 million in the Profit Enhancement program for 2012 has been realized so far.
Maybe it's a little bit too early to see the full benefit, obviously, but can you identify how much was in the first quarter numbers?
John R. McPherson
It is a bit early to figure out exactly how much of the first quarter and to hit the first quarter numbers, but let me answer you this way. We are well on track to the $25 million target for the current year.
A number of those actions have not only been identified but are already put into place. The only thing that's slightly difficult in the first quarter is tracking how much each one has hit the P&L so far.
That will become much easier in the second quarter. And that's simply a function of things like renegotiating vendor contracts or certain other internal practice changes that take some time to flow through our operations and hit the P&L.
It's a timing question, that's all. But we are very much on track for the big goals that we've set.
Garik S. Shmois - Longbow Research LLC
Okay. So we should see maybe a more concrete number after the second quarter?
John R. McPherson
I think so. And I think with each quarter succeeding that also.
Garik S. Shmois - Longbow Research LLC
Great. And then just my last question, just for clarification.
The $6 million in asset gains, is that part of the $29 million that you had identified as part of your EBITDA?
Donald M. James
It is.
John R. McPherson
Yes, it is.
Donald M. James
That is a -- that's the sale of a parcel of the California real estate. We have another parcel of California real estate for about $23 million in gain, which accounts for the $29 million that's in the $500 million of EBITDA for the year.
But those are outside the Planned Assets Sales group because those things were well underway last year.
Garik S. Shmois - Longbow Research LLC
Yes, that makes sense. And then, I guess just looking at the cash flow statement, there was about $17.9 million in net gain of sale property.
Can you just provide a bit more color what that was?
Daniel Sansone
Garik, the biggest piece of that is the cash payment we received on the earn-out from the sale of our chemicals business. That was about $12 million or $13 million that came in the first quarter.
Under the accounting rules, the payment of that earn-out gets categorized on the cash flow statement as cash proceeds from the sale of the business even though we actually sold the business in 2005. We have one more year under that earn-out, so there should hopefully be a payment in the first quarter of 2013, then that will go way.
Garik S. Shmois - Longbow Research LLC
Great.
Donald M. James
And that flows through discontinued operations.
Daniel Sansone
The income effect of it flows through discontinued ops.
Donald M. James
It's not in our continuing ops.
Operator
Our next question comes from the line of Rodny Nacier with KeyBanc Capital Markets.
Rodny Nacier - KeyBanc Capital Markets Inc., Research Division
Thanks for the update on the federal funding picture. Looking more at the local level, muni bond issues across the state, they increased about 60% in the first quarter.
And that was up 100% for transportation. From your perspective, are those capital raises offsetting declines in other revenue sources?
Or are they adding to state and local budgets? And when could we see that start to trickle through to your business?
Donald M. James
Well, I think the way many state and local governments, but particularly states, are now funding really critical highway needs are through bond issues. California, obviously, has been doing that for several years now.
And as I indicated, our volumes for going into highway construction in California have been strong for several consecutive quarters. As you go state-by-state, I think we are seeing states, in many cases, not all, but in many cases, stepping up to address the lack of certainty in federal funding, and they are doing that through municipal bond issues.
As you know, 100% of the proceeds of bond issues have to go to capital projects. They can't be used for operating.
So it's virtually all construction. Every dollar from bond issues goes into some form of capital project, the vast majority of that being construction, whether it's highways or water and sewer or transit or public buildings.
But that's a very positive sign. Whether -- and I -- you probably see the Rockefeller numbers, but state and local tax receipts, I think, are now back to where they were at the peak of the last cycle, which is helping.
That’s certainly -- not every state and local government is that way, but on balance, on average, that's improving. And I think we'll probably see a slightly larger proportion of highway work being funded by state and local sources than we have seen over the last 3 or 4 years.
Rodny Nacier - KeyBanc Capital Markets Inc., Research Division
Okay. And I mean with some of the strength then that we're seeing just from the state and local funding sources, did it diminish, in your perspective, the lack of agreement coming out of D.C.
around the federal funding picture?
Donald M. James
Yes. I think on balance, a driver for many states is that they have needs.
And there's not enough money coming out of the federal program to meet those needs, and the states are coming up with their own funding mechanisms, and it's all over the board to try to address the infrastructure needs in those locations, particularly highway congestion and poor highway conditions.
Rodny Nacier - KeyBanc Capital Markets Inc., Research Division
And you mentioned California. And we've seen for several quarters now, you've had some strength in that state.
Focusing on your Asphalt business, which I believe is mostly in California as well, you're expecting modest volume growth this year and volumes only grew modestly last year. When can we start to see perhaps some acceleration in demand for your Asphalt business out of California, given some of the strength we've seen on the Aggregates side?
Donald M. James
Well, our Asphalt business in California has continued to grow. It hasn't grown as fast as our Aggregates business, but certainly, it has been growing over time.
But the big, as you point out, the big jump in demand has been in Aggregates and -- but a corresponding growth in Asphalt. We have a very good Asphalt business in California.
I don't -- we're not projecting a large growth in volume in California this year, but we certainly believe that we will improve our material margins there as our pricing for asphalt mix begins to catch up with the higher costs of liquid asphalt that we have incurred over the past 9 months or so.
Rodny Nacier - KeyBanc Capital Markets Inc., Research Division
Okay. And I have one last question, then I'll jump back in queue.
The $500 million EBITDA number, would that compare to the $46 million adjusted this quarter or the $42 million GAAP?
Donald M. James
I think the $40 million -- yes, if you take the $46 million and add back the $6 million real estate gain, that's in the $500 million.
Daniel Sansone
Yes.
Operator
Our next question comes from the line of Trey Grooms with Stephens, Inc.
Trey Grooms - Stephens Inc., Research Division
A couple of questions. On Asphalt, your guidance is looking for improved profitability there.
Are the price increases in place now to kind of start to kind of catch up with what we've seen in liquid asphalt? Or how quickly should we expect to see kind of pricing catch up there with those costs?
Donald M. James
Well, we, certainly, as we are bidding work and as we have bid work over the last quarter or 2, are certainly taking into account the much higher cost of liquid asphalt. So I think the basic answer to your question is yes, those price increases are in place.
Obviously, a lot of asphalt is actually shipped months after it is bid and quoted just because of the sequencing and the duration of large highway projects. But we are, as you know, and Trey, you've followed us for a long time, our material margins in Asphalt tend to shrink as liquid asphalt prices move up.
And then as they turn down, our margin, material margins, tend to grow because there's a lag in -- we're paying essentially spot prices for liquid asphalt and we are contracting, in advance, prices for asphalt mix.
Trey Grooms - Stephens Inc., Research Division
Sure, yes. I was just kind of trying to -- for modeling purposes, trying to figure out the best way to kind of approach the -- how that will roll out.
Donald M. James
Well, I think if you look at our full year guidance for our Asphalt business, it's probably -- it just probably takes all that into account, the ebbs and flows of liquid asphalt versus our settling price.
Trey Grooms - Stephens Inc., Research Division
Okay. And then volumes, Aggregate shipments up 10% in the first quarter.
You moved the full year guidance up some, a couple of percentage points I believe, but is it safe to kind of look at 1Q as being, okay, this is a big quarter, there definitely was some weather impact, but as we kind of look into 2Q, you expect improvements but not the type that we saw in the first quarter. And is that going to kind of roll off as the year kind of progresses?
Or is that kind of a quick kind of pullback in 2Q as far as the rate of growth?
Donald M. James
Well, let me answer it this way. The first quarter is so much more weather sensitive than Q2 and Q3, and to some extent, more weather sensitive than Q4.
We can't quantify what the -- how many tons were sold in the first quarter because of good weather. I mean that's -- we just -- that's really impossible for us to do.
We know there was a weather effect. The second fact is that the number of tons in the first quarter is substantially less than the number of tons sold in Q2 and Q3.
So a lot fewer tons can account for a 10% bump, whereas when you go in Q2 and Q3, you can have the same earnings impact on a much lower percentage increase in shipments, if you're following where I'm trying to go.
Trey Grooms - Stephens Inc., Research Division
Absolutely.
Donald M. James
And so our full year guidance is 2% to 4% increase in Aggregates shipments, including the 10% we got in the first quarter. But the earnings effect is -- since the tonnage is so much higher in Q2 and Q3, and the leverage we get from even a 2% to 4% volume gain is very significant for us.
As you saw, literally, almost 100% of our revenue increase flowed through in gross profit. That's a combination of a lot of things, but we have a lot of leverage to volume and we're looking forward to enjoying that as the year moves forward.
Trey Grooms - Stephens Inc., Research Division
Sure, okay. And my last question is, Don, if I heard you right, I think you said more than half of the -- half of your markets, I guess, realized the price improvements in the quarter.
Can you talk, number one, just specifically where you're seeing the most strength? If I missed it, I apologize.
And then secondly, is -- you saw more than half with improvements, but your pricing was down a little bit. And you pointed to the Virginia, the more fill material with that large project or projects.
But is that -- the strength in those more than half, is that just offsetting the Virginia fill material more or are you -- or is there some markets that are actually seeing some softness in price?
Donald M. James
Well, I think our pricing in Virginia was down. It was in the top 1 or 2 markets in the average selling price being lower, and that was all driven by those sales of what I'll call non-spec product.
I think there are 2 points, Trey. One is that the range of increase and decrease is narrowing, meaning there's more stability in pricing, both up and down, across most of our markets, which, on balance, at this point in the cycle, we think is a good thing.
Clearly, if we -- if you factor out Virginia and get to neutral, we had as much downside in pricing across some markets as we had in upside. But we think coming out of the first quarter, for us to get to the full year 1 to 3 price improvement, we're going to see price improvement across many of our markets, the majority of our markets.
But still, it's an ebb and flow from quarter-to-quarter, really month-to-month, on what is shipped. And there are thousands of individual pricing decisions that are made every quarter.
We're confident that pricing, overall, will move up instead of down. But there's still -- we need some additional volume growth before we start seeing a significant real price growth.
And hopefully, that's coming with improved private sector construction as we look at these contract awards.
Operator
Our next question comes from the line of Mike Betts with Jefferies.
Michael Betts - Jefferies & Company, Inc., Research Division
I've got a number of questions, if I could. I'll try and limit it, but the first one, just a follow-on from that last answer.
I'm looking at the CEMEX numbers today. They reported a 6% increase in Aggregate prices, Q1-on-Q1 last year.
I mean, I gather or presume you don't want to give us the detailed pricing by state, but from when you look at that, can you see any reason why they should be so different given they're very California and Florida biased as well?
Donald M. James
Mike, I haven't studied their release yet, but I don't have an answer to your question.
Michael Betts - Jefferies & Company, Inc., Research Division
Okay, no worries. My second question, just on the operating leverage, which obviously was very good in Q1 on the Aggregates business, as you said, almost 100%, was any of that benefiting from the fact that some of the stone that was more than 12 months in inventory, some of this base fill, you were able to put through the books at almost nothing?
Was that a factor at all in that very high operating leverage in Q1?
Daniel Sansone
Mike, this is Dan. No, that -- the level of that was consistent with prior periods.
That has not been -- that was not an issue for us as volumes were declining because we managed our inventories and production rates down accordingly, and we do not expect that to be a distortive impact on the uptick either.
Michael Betts - Jefferies & Company, Inc., Research Division
Okay. Thank you for that.
And then just maybe a final one on Cement, that nobody's talked about yet. I realize it's small, but it was a very good result in Q1.
The volumes were particularly high. Were there any exceptionals or one-offs in that?
Donald M. James
I'll let Danny Shepherd take that.
Danny R. Shepherd
Yes. Actually, our sales volumes were up, Mike.
But at the same time, we had a good quarter from a cost point of view. And we anticipate our Cement business this year showing improvement, a slight improvement.
Michael Betts - Jefferies & Company, Inc., Research Division
Was the plant down for maintenance last year and not down for maintenance this year, for example?
Danny R. Shepherd
It was down partially in the first quarter of last year. This year, we didn't have an outage.
But we believe our kilns are well maintained and we’re pleased that we didn't have to take an outage in the first quarter.
Donald M. James
We have built in an outage in our full year projection.
Danny R. Shepherd
We have.
Operator
Our next question comes from the line of Kathryn Thompson with Thompson Research Group.
Kathryn I. Thompson - Thompson Research Group, LLC.
Just really one question for today related to your Aggregate margins. Once again, just trying to get a better understanding of how much did volume versus pricing versus cost cutting impact the quarter.
I know you addressed some on the cost-cutting side earlier in the call, but maybe a better understanding of what, for the second quarter in a row, is helping to drive margin improvement.
Donald M. James
It is in the operating leverage of our business. That is being able to run our plants at higher volumes really has a significant impact on our productivity, labor productivity, energy productivity.
Obviously, selling prices didn't have a positive effect on Aggregates earnings, but costs and so much of cost is tied to volume. I think the volume increase was the real driver for our improved -- and the flow-through of revenue to gross profit.
Daniel Sansone
Kathryn, let me try to just provide a little more color on that. If you look at our variable costs of production in the quarter, they declined as compared -- on a unit basis as compared to our variable costs of production in the first quarter of last year.
And as Don mentioned, that was predominantly labor efficiency offsetting diesel fuel. Our cash period costs, and period costs in our way of -- in our terminology is your fixed costs.
Those -- the spending at the cash period costs level was flat year-over-year, so we've got 10% additional volume. So that same level of cash spending is being spread over more tons.
And if you look at the supplemental schedules, you'll see that our depreciation expense in the various business segments is declining as well. So the dollars of non-cash fixed expense are being -- are not only declining, but being spread over a larger amount of tons.
I should also point out that in the quarter, we also reduced our units of Aggregates inventory as well by several million tons. So we got this level of operating leverage on a level of production that was less, that increased less than the increase in the level of sales.
So again, I think it's a further illustration of both the disciplined working capital management by our operating guys and the inherent profitability of this business as it comes into recovery.
Kathryn I. Thompson - Thompson Research Group, LLC.
Of that inventory that was reduced, could you describe, is it more base-type rock or other...
Daniel Sansone
It would be across the board. It would represent the full array of product mix in kind of normal production splits.
No single category jumped out.
Kathryn I. Thompson - Thompson Research Group, LLC.
Okay. And also in terms of weather certainly has helped the last couple of quarters, how much do you think mild weather has pulled forward demand and what are trends then as we've gone into April?
And would that give any indication of a pull forward of demand?
Donald M. James
Kathryn, I don't think we have good metrics on that. It is -- we do believe there was a weather effect in the fourth quarter last year and the first quarter this year.
I don't think -- it's too early to say whether it's going to have a chilling effect on second quarter volume at this point. We don't think so because we think the underlying demand is improving, particularly in the private sector.
And that's really the reason that volumes are moving up.
Operator
Our next question comes from the line of Keith Hughes with SunTrust.
Judy Merrick
Actually, this is Judy Merrick for Keith. And just to clarify on your EBITDA guidance, you talked about that all excluding the gains from the asset sales.
Will you give us any information on the impact of the EBITDA contribution from these asset sales? Or what sort of matter -- the mix of what's real estate and what's not going forward?
Donald M. James
The EBITDA contribution from asset sales would vary greatly depending upon what we sell. And so for -- and as Danny Shepherd and others have talked about previously, we have a large portfolio of assets that we would be willing to sell.
We are really looking for the right buyer at the right price. You saw that our ready-mixed business in the quarter, I think, operated at a $12 million loss.
So if we sell ready-mixed assets, we could get a double pickup on EBITDA. That is by avoiding loss, as well as if we have a gain on sale.
So it's too early for us to give you predictions as to that, but we will certainly give you, as transactions close, we will give you the specifics of the EBITDA and EPS impact of those transactions, as we do with our routine real estate transactions.
Operator
Our next question comes from the line of Brent Thielman with D.A. Davidson.
Brent Thielman - D.A. Davidson & Co., Research Division
Just quickly on California as a follow-up to a previous question. But how much of that improvement you're seeing as there is being driven by highway sort of infrastructure work versus private sector activities?
Donald M. James
I think most of it is highways. But our volumes in California are up substantially and have been for the last year or so, and it's largely highways.
Brent Thielman - D.A. Davidson & Co., Research Division
Okay. So still waiting for that next leg on the private sector?
Donald M. James
Yes.
Brent Thielman - D.A. Davidson & Co., Research Division
Okay. And then I apologize if you've answered this before.
But on the portfolio of sort of Planned Asset Sales that you have, when that's completed, should that change how we sort of currently think about your more key states and exposure?
Donald M. James
To the extent we sell ready-mixed assets, it could reduce the revenue from large states. If, for example, we sold some Concrete assets in California, since Concrete sells for a much higher unit price than Aggregates, yes, it could change the revenue.
But that's really not important as to our market presence and our market penetration. We would continue to sell Aggregates to Concrete if we sold the Concrete.
And our profitability per dollar revenue would be enhanced, if that gets to your question.
Brent Thielman - D.A. Davidson & Co., Research Division
That's what I needed.
Operator
I will now turn the call back over to Don James for any closing remarks.
Donald M. James
Well, thank you very much for joining us today. We appreciate your interest in Vulcan.
As I indicated, we look forward to updating you with our progress in our earnings improvement as we go forward, and particularly, to updating you with respect to our Profit Enhancement Plan, as well as our Planned Asset Sales as we move forward through the course of the year. Thank you so much and have a good day.
Operator
Thank you for your participation in today's conference. This concludes the presentation.
Everyone may now disconnect and have a great day.