Nov 3, 2009
Operator
Good day, ladies and gentlemen, and Welcome to the Third Quarter 2009 Vulcan Materials Earnings Conference Call. My name is [Leslie], I will be your coordinator for today's conference.
At this time, all participants will be in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference.
(Operator Instructions). At this time I would like to turn the call over to your host for today's conference, Mr.
Don James, Chairman and CEO. Please proceed, sir.
Don James
Good morning, Thank you for joining this conference call to discuss Vulcan's third quarter results and our outlook for the remainder of 2009. I am Don James, Chairman and Chief Executive Officer of Vulcan Materials Company.
We certainly appreciate your interest in our company and we hope our remarks and our dialog will be helpful to you. A replay of this conference call will be available later today at our website.
Joining me today is Dan Sansone, our Senior Vice President, Chief Financial Officer as well as Ron McAbee and Danny Shepherd, our Senior Vice President and our Senior Vice Presidents in our Construction Materials Group. Before I begin let me remind you that certain matters discussed in this conference call contain forward-looking statements which are subject to risks and uncertainties.
Descriptions of these risks and uncertainties are detailed in the company's SEC reports, including our most recent report on Form 10-K. I would like to begin my remarks by repeating a statement many of you have heard in prior quarters of this downturn and that is, we continue to enhance our position for significant earnings growth in an economic recovery because our employees continue to run our business in a disciplined and cost efficient manner.
Throughout the recession, the company has rationalized production, reduced operating hours, streamlined the work force and effectively managed spending thereby offsetting some of the cost impact related to lower volumes. Since aggregates demand peaked in 2005, sales volumes have declined almost 45% yet our cash earnings today on every turn of aggregate sold is over 48% greater than it was at the year of our peak demand.
Looking specifically at the third quarter, net earnings were $54 million or $0.43 per diluted share including $0.38 from continuing operations. Although sales volumes in the third quarter were 19% to 29% lower than the prior year for our key product lines overall growth profit margin was 20.9% matching last year's third quarter.
The average freight adjusted unit price for aggregates increased 2.4% in the third quarter reflecting wide variations across our markets. Aggregate shipments declined at 20% compared with the prior years third quarter reducing EBIDTA approximately $69 million from last year.
Extremely wet weather in the quarter contributed to lower shipments in key markets in the Southeast and Mid-Atlantic states. Our plant managers continue to mitigate some of the cost pressures caused by significantly lower volumes.
They maintain production efficiency and reduced cash fixed cost 12% below last years third quarter. Shipments in the asphalt and ready-mixed concrete business declined at 19% and 29% respectively from the prior years third quarter due to the same economic factors affecting aggregates.
Third quarter asphalt earnings improved to slight lower volumes due to a decline in the cost for liquid asphalt and a return to more typical unit margins. Selling administrative and general expenses in the third quarter of 2009 increased $4 million from the prior year’s level.
The year-over-year increase was due to project cost related to the replacement of our legacy IT system. And cost associated with reducing employment levels.
Employment levels across the company at the end of the third quarter are down 19% from a year ago. This reduction and employment across the company is result of a continued focus on adjusting our production levels in our cost structure to match the weak demand environment.
Through the first nine months of 2009 construction activity continued to weaken resulting in a 27% decline in our aggregates volume. This volume decline is reduced to EBIDTA approximately $265 million year-to-date more than offsetting the earnings benefit of effective cost management in a disciplined approach to pricing.
Despite the earnings effect from lower volumes year-to-date, operating cash flows were $355 million up from $278 million in the prior year. Additionally, by the end of the third quarter, we had reduced our total debt by about $700 million.
In summary, our efforts to continue to tightly manage cost and maintain price discipline have offset some of the earnings effect due to lower sales volumes. And we will continue to take the actions necessary to respond to a challenging construction environment.
The factors contributing to a challenging outlook for construction activity or principally we continued weakness in private construction both residential and nonresidential, and the uncertainties surrounding the timing and the amount of a new federal multi-year highway program. Year-to-date data for highway construction activity as well as new contract awards have been buoyed by the last months of safety loop and the beginning of stimulus-related funding.
As of the end of August, the value of construction put in place for streets and highways in the US was up 3% from the prior year. Awards for new highway project for September were up 5% versus the prior year.
Record setting awards from May to August when contract awards exceeded $6 billion each month reflecting good progress made by state transportation agencies and starting shovel ready projects intended to stimulate construction activity and create jobs. Through the end of September the Federal Highway Administration reported a 73% of the $27 billion of funds or portion to the states in March had been obligated for specific projects.
Furthermore approximately 4000 stimulus funded projects were under construction across the US involving $11 billion of stimulus funds. Generally these projects are being awarded at levels below engineer's estimates due in part to lower cost of construction inputs such as diesel fuel, liquid asphalt and steel and to a more competitive bid environment.
This should benefit the industry as additional projects can now be funded and built. The spending patterns for stimulus projects very greatly depending on several factors, including the number of projects that were shovel ready soon after funds were apportioned, the types of construction in the projects being obligated.
And whether the projects are in large urban areas where project planning and execution can be more complicated and time consuming. These factors have contributed to Vulcan-served states generally lagging the rest of the country when it comes to starting construction on stimulus projects.
At the end of September Vulcan-served states has spent less than 7% of stimulus funds or portions of them versus 12% for the rest of the country. These spending patterns have affected aggregate demands in Vulcan-served states the same way.
In Illinois, for example, by the end of the third quarter payments to contractors for work performed on stimulus related projects reached 27% of the total apportioned to the state easily exceeding US average of 9%. Correspondingly, our shipments in Illinois were much stronger than most of our other markets declining less than 10% from a prior year's third quarter.
There is a similar story in Tennessee, payments to contractors at the end of the third quarter were 15% of the total apportioned. And our shipments declined less than 15% despite significant wet weather.
Both Illinois and Tennessee have obligated, the majority of their funds for payment improvement type projects which require less planning and time to execute. In contrast, our aggregates volumes in Florida were down approximately 23% excluding the panhandle where stimulus-related projects have been easier to get underway due to project types and to less congestion.
A government report issued in September cited that lane additions accounted for 40% of the funds obligated to Florida as compared to the national average of 16%. Generally, these widening projects require more lead time prior to construction.
As a result Florida has spent less than 1% of stimulus funds or portion for highways despite having already obligated 73% through the end of the third quarter. The varied pace of progress made by individual states, makes it challenging to predict the overall timing of the demand stimulus funding will provide.
I'd say will provide because the stimulus dollars of 100% federal funds with no requirement for states to provide matching funds. Stimulus dollars for highways will get spend, it's just a matter of timing.
This varied timing of spending a stimulus funds along with the uncertainty created by the failure of congress to pass an extension of safety eluded by September 30 for the traditional multiyear highway programs. And very wet weather in a number of our markets in October have called significant uncertainty in our outlook for highway construction activity in the fourth quarter.
Despite this challenging construction demand environment, we believe the cost management actions we have taken along with our disciplined approach of pricing and the improved liquidity and financial flexibility we have achieved will enable us to participate fully in the economic recovery. Plant operating cost and overhead expenses were being tightly managed, we continued to adjust our cost structure to match the weak demand environment.
As we have throughout this downturn, we continue to manage controllable cost aggressively and the focus on cash margins and cash earnings. Additionally we expect higher selling prices were aggregates in 2009 to partially offset the earnings effect of lower volumes.
Through the first nine months of this year, aggregate pricing is up approximately 3% and we do not expect the rest of the year to deviate much from those results. We still expect full-year SAG expense to be lower in 2009 as the earnings effect of our culture induction efforts more than offset cost related to the replacement of legacy IT systems.
As discussed previously, we have a major project underway to implement new integrated systems in processes to replace our legacy systems. Along with the legacy system replacement, we are also redesigning related administrative support functions to reduce cost and improve service.
After a thorough project design and implementation planning stage, the Vulcan team is now focused on rolling implementation at our business units over the next two years or so. During the third quarter, we installed our new system at the cooperate office and in the first of our non-operating divisions.
The most significant spending will occur in 2009 and 2010 with net expense reductions occurring thereafter. We expect $10 million of additional SAG cost related to this project in 2009 as compared to 2008, $6.5 million of which has already been expensed through the end of the third quarter.
As I said the project is proceeding as planned. Total cost of this project will peak in 2009 as design and development work is completed and implementation will continue in 2010.
Interest expense for the full year is expected to be approximately $175 million both based on the current level of interest rates. And finally we now expect capital spending to be about a $140 million in 2009.
In closing, I'd like to reiterate our confidence in future sales and earnings growth for Vulcan this confidence comes from our successful strategy to continue strengthening our aggregates focus business which has the compelling advantage of great locations in majoring US markets that are expected to experience above average growth and aggregates demand for years into the future. The current economy is weak but the economic stimulus plan will help drive earnings growth at Vulcan over the next several quarters.
Approximately $50 billion to $60 billion of stimulus related construction project has been identified that could use our products including the $27 billion for highways we talked about. The key determinant of highway construction spending for years to come is of course the multiyear federal highway built which represents a substantial growth opportunity for Vulcan.
Given the failure of Congress in late September and again in October to pass a fully funded extension of safety loop, the timing and amount of transportation construction activity from the regular multiyear federal highway program is uncertain. Unemployment and the construction industry was 17.1% at the end of September compared to 9.8% general economy.
Construction industry unemployment is higher than any other industry in the United States. The delay in dealing with the next multiyear highway bill can only add to unemployment in the construction industry.
Unfortunately, the focus of leadership in both houses and the administration is currently on other priorities. The pressure of very and rising unemployment in the construction industry is a message Congress needs to hear and to feel.
We along with many businesses, industry, and labor Groups are urging Congress to act promptly to sustain momentum, started by the 27 billion provided for highways and bridges, with the economic stimulus plan by dealing efficiently with the next multi-year Surface Transportation program. We are the clear leader in the US aggregates industry, and are well positioned for significant participation in the economic recovery, and then increase public infrastructure program.
We certainly thank you again for your interest in Vulcan. Now as our operator will give the required instructions, we'll be happy to respond to your questions.
Operator
(Operator Instructions). And our first question comes from the line of Timna Tanners with UBS.
Please proceed.
Timna Tanners
Was wondering if you could please give us some more color on what you are seeing state wise with regard to the state budgets, and specifically the outlook that you might be seeing a little further out for those states. I guess California, Florida, and Texas mostly.
Don James
I think the news is very good in both California and Texas at the state level, both have initiated large infrastructure programs, state funded infrastructure programs. Illinois certainly is doing the same thing, in all cases I think they are being financed in part at least by bond issues, but those have been underway.
Florida has the governor, Florida has talked about from time-to-time, state level infrastructure programs in Florida as an employment boost for the construction industry, that is not yet turned into a formal program, but we are encouraged I think by what's happening in several key states. Overall of course state tax revenues are weak, there is no question about that.
However, many of our key states, seen to be very focused on providing additional incremental funding for public infrastructure projects including highways, as it remains to shore up their local economies and build something that’s going to be add to economic efficiency for the long-term.
Timna Tanners
Okay. Great.
Either you give a fourth quarter guidance or just a little more quantifiable I mean I get the sense of what you are saying in terms of price, but I kind of miss the volume side. Also on 2010 I know you have talked about that in the past, do you have any more detail on the outlook that you can provide?
Don James
For the fourth quarter the combination of the fact that it is the fourth quarter that we don’t have a viable expansion of the multi-year federal highway bill, that the stimulus spending is [spoty] and in our state is behind the rest of the country for the reason that I tried to outline, trying to quantify the fourth quarter volume is re-concluded the range that we would have to give you to be comfortable with it would be virtually meaningless, and we decided that you guys could estimate that as well as we could. So you know that’s the reason you don’t have an explicit fourth quarter volume guidance it all depends on weather and whether the stimulus projects go begin to move in '09 or carry over to '10, and obviously there is no bright use on non-res construction.
Residential construction we see improving in 2010, whether there is any improvement in the fourth quarter is speculation at this point. As we look at 2010 to get to the second part of your question.
We think residential will improve, its coming off a very low base. We think private non-res, particularly retail has got some more pain, if we get an extension, a workable extension of the multi-year highway bill or even more optimistically were we able to get the multiyear bill in time for the 2010 construction season, it would be very positive.
The stimulus projects 2010 will be a very big year for stimulus projects. So there are different pieces moving in different directions, but without being able to quantify it, I think we are cautiously optimistic for some volume growth and earnings growth in 2010.
If you look back at long-term highway construction or public infrastructure construction activity in US, it is a very stable upward growth, there are a few slight dips and if you look at the timing of those dips, they correspond to the limbo that has inevitably occurred in the re-authorization of the six year highway bills. So there is a dip in contract awards and [ultimate] construction put in place and then strong recovery, even though the overall trend is very stable, the little dips occurred by every five or six years depending on the timing of the highway bill.
And I think we are obviously seeing that same thing today. So, '010 outlook and public infrastructure and highways will be a larger share of our total shipments in 2010, than certainly they have been in the recent past.
But we think we'll get the stimulus spending and if we get some resolution of the multiyear highway bill, we'll get a hopefully a boost from that. If we don’t get that, then there is a lot of uncertainty as to certainly the first part of 2010.
Timna Tanners
Okay, great. Thank you very much.
Operator
And our next question comes from the line of Jack Kasprzak with BB&T. Please proceed.
Jack Kasprzak
Thanks, good morning Don. I was just going to ask on the subject of public works construction.
You have the stimulus issue which you guys have done I think a good job of outlining what you are seeing and kind of have the moneys flowing through the pipeline or at least not flowing through as the case may be but, in the last few months with the highway bill expiring and more uncertainty over what's going to happen with the new bill. Have you basically just seen states continue to pull back in effects so the net impact of the stimulus is just far more muted than in otherwise would have been?
Don James
I think that’s generally correct. The timing of the stimulus I think is understandable and the relationship of states that have spent a fair proportion of that to our aggregate shipments is pretty tight correlation there and in states that hadn’t spent it you don’t see it in states that have begun to spend it like Illinois and Texas, you do see it showing up in our shipments.
So, that’s moving along, I think it is the uncertainty about the particular highway bill, that is causing some states perhaps many states some being more vocal than others to say, Hey we can’t go out with new contract awards until the visibility of funding is clear. And we are on hold or other vendor roll out that the stimulus project.
We have some wonderful allies in this fight. You may know about a group called Building America's Future that’s headed by Ed Rendell or Governor of Pennsylvania, Arnold Schwarzenegger the Governor of California, and Michael Bloomberg, the Mayor of New York who are pushing Congress to get on with it.
In a press release we saw the last day or two Governor Rendell is quoted as saying to Senator Dick Durbin from Illinois that you know let's go, let's go, let's move and let's get this thing going we need to do it now and lets front load the highway trust volume and gets projects out because we are losing jobs faster than we are creating or saving them. I note with some degree of optimism whether it will happen or not that for the first time Senator Reid is actually talking about scheduling over time for the formal extension of the federal highway bill that’s been the problem, they have gotten down to the end of the exploration periods and tried to do things by unanimous consent, and given the range of politics in the Senate and in particular its hard to get a 100 senators to sign on because you have got a few on the far right who don’t want to spend any money and you have got a few on the far left who don’t want to build roads, and but there is a huge block in the center of both Houses that is strongly in favor of a new robust highway bill, the problem is with the other priorities that have gone own in congress getting to the floor to get a vote has not happened.
And so with people like Governor Rendell who is a democrat, Governor Schwarzenegger who us a republican and Mayor Bloomberg who is in the middle I guess. There are some significant voices trying to make the same case that we and our trade associations and organized labor are trying to make is, get it done and in the words in Governor lets go, lets move, we are loosing jobs by this partisan bickering that’s really focused on the extremes on both ends of the political spectrum.
So I have vented my frustration, sorry.
Jack Kasprzak
No, I think a lot of us probably share that frustration. I was going to ask you about pricing, you guys mentioned in the West they were down and Florida they were down, other markets still up but from here, how can we be confident that aggregates pricing in general will come under additional pressure given that, obviously commercial construction weakens from here, the uncertainty what is today in uncertain situation over the highway bill other than just that aggregates prices have never gone down in the past.
Don James
Well, I can't give you absolute confidence because it’s a competitive market and we work very hard to, as I've said in my script, be disciplined about pricing. Clearly, Florida and California are under the most pressure, prices there are down are sort of mid-single digits compared to last year other parts of the country, other divisions which are multi state operations.
The pricing there ranges from 10% year-over-year some in the 5%, 6% and 7% increase, some in the 2% to 3% increase. So it’s a different story for market-to-market and I think part of what's happening is the markets where the stimulus money both highways and other forms of stimulus like core engineering work where that’s rolling out, you see better pricing than Florida where the stimulus money basically not a dollar of it is were spent through September 30.
So a little bit of backlog and a little bit visibility of demand in the future will certainly help with pricing but when I have said I felt the fourth quarter pricing would probably remain consistent with the year-to-date pricing that’s just because what's in the pipeline.
Operator
And our next question comes from the line of John Baugh with Stifel Nicolaus. Please proceed.
John Baugh
Good morning, I was following up on the SAFETEA-LU extension issue and I am curious as to whether there is anyway for you all. October is in the books to look at the incoming rate of state projects in the month of October, which I think is the first month from month-to-month extension versus September or August when we were under the deal bill still can you quantify in other words any impact that you are seeing from this limbo space?
Don James
I can't put any kind of precise percentages or dollars on it directionally. We know that at September 30 without a workable extension of the highway bill, many states became very cautious and highway contractors became very cautious so if you have some stimulus work in your backlog trying to do it in cold wet weather at higher cost versus letting it roll over to the spring construction season becomes a more attractive option when you don’t see the visibility of any work coming behind it from the new multiyear highway bill or an extension of that.
So I think a point we are trying to make here is that the delay in the highway bill is pushing demand into 2010 not only for projects that would be funded by the multiyear highway bill but also perhaps some of the stimulus projects will get into 2010 unless we have just very good weather in the fourth quarter which we haven’t had in October as you know if you followed the range particularly in this part of the country.
John Baugh
And you have mentioned the [book readers] has talked about scheduling full time.
Don James
And that’s real time. We are monitoring this on an hour-by-hour, because it's important.
John Baugh
Yeah. Did he mention a date or a time or…?
Don James
He said this week.
John Baugh
This week, okay. We'll stay tuned.
Thank you very much.
Don James
Well, I think that’s an important point that watch the status of this federal highway bill because it will certainly influence long-term demand but it will own the margin influence near-term demand as well through just sort of the psychological aspects of visibility of feature demand.
John Baugh
But, Don, what's realistically the best that we can expect out of this and we are not expecting to get a six year bill I don’t think until last…
Don James
No, I don’t think this. The current continuing resolution last through December the 18.
If Congress actually does a formal extension and there is without bugging you down into mind-numbing detail about the recession numbers including that back in the bill and all of that. If we get a formal extension, whether its six months or whatever time period between now and December the 18, then it will be retroactive and it will provide the state DOTs, therefore with not only more visibility but also an absolute higher level of funding and contract authority.
And so that’s where the positive kick comes in. Who knows, but as I try to say in my remarks, the pressure of unemployment will be a factor here as well as just the large consensus in both houses of Congress who are strongly in favor of the robust surface transportation program both highways and transit.
And its just a matter of getting it in front of them, and like you point out, its probably going to be another relatively short-term extension but if we solve all of the recession issues in this extension then it will greatly enhance the ability of the states to go ahead and put projects out for bid.
John Baugh
Great. Thank you.
Operator
And our next question comes from the line of Mike Betts with JPMorgan. Please proceed.
Mike Betts
I had three questions, two of which probably very short answers probably the longer one is if I could just return to this pricing issue and ask when you were talking about the mid-single digits declined in Florida and California, is any of that mix or is that your estimates have underlying and may be you could talk a bit more about what's causing it and whether I think there was some appeal in the Lake Belt that was due to the result in October? Did that get postponed again where are we with that?
Don James
Okay. Let me start with the latter and the Lake Belt case was argued in the United States Court of Appeals for the 11th circuit which sits in Atlanta or headquartered in Atlanta, at late last month, late October.
It is now within the jurisdiction of the court, the appeals court to affirm or overrule or modify the lower court ruling which is you know has basically stopped mining in the Lake Belt. The second track is that the army core of the engineers is past I think its stated day before issuing the new manning permits, which would be different than the permits the old permits that are under attack and other subject of the litigation.
So the things to watch will be the new army core permit and the ultimate ruling of the [appeal] of court, some people have suggested that if the core issues new permits then the existing litigation becomes moved and we may never get a that opinion of the 11th circuit. I think when you get out of the legal technicalities and look at the reality that this is likely to still be an issue months from now, in one form or another, either on the permitting side or with the Federal court, but at this point that’s where we are, we are waiting on the core for new permit and we are waiting on the court of appeals for a decision.
Pricing in Florida and California, they are both down in the 4% to 5% range, some of that is mix some is absolute price levels on some products, some is result our pricing guidance is freight adjusted. So, if we happen to move materials longer distances then that higher freight cost will be a adjustment down more than our reported price adjusted prices.
But, so it’s a combination of a lot of factors, but competition is significant in those markets because volumes there have been hit hardest, longest primarily related to the drop in residential construction and now related to particularly to retail. But there is as we said earlier in the call, there is a lot of public infrastructure rolling out in all of those in California and Florida very little of it has appeared so far some in California almost none in Florida and Innovation California has got its own state level infrastructure program.
So, infrastructure is taking up the slack from the private sector construction, but both of those states are certainly subject to the issues with the six year highway bill, because they are huge recipients of those dollars, California being the largest recipient not only of stimulus dollars, but also of six year highway dollars and Florida is third out of the fifty states. So, I think you need to watch what happens with infrastructure spending and its potential impact on price and volume in those markets as well as all of our others.
Mike Betts
Okay, thanks for that. Don just one follow-up, the cement companies are talking about maybe trying to delay any price increase in 2010, that’s the mid year when they hope that volumes maybe picking up.
Is there any talk of the aggregates industry doing the same?
Don James
Our pricing as you know is job specific, market specific and we will price each jobs separately and when we report to you it’s a roll up of a lot of different pricing decisions and not some generalized across the board price increase or aggregate.
Mike Betts
Okay. Thank you for that.
And then two very quick questions hopefully for Dan. Dan just could you on the tax situation I am sure you probably will explain a much pretty clearly in the or more detail in 10-Q, but when we are looking at the fourth quarter I mean what sort of, I know it’s a very small court, but what sort of tax are we going to see a credit I guess for year should we assume that credit is pretty similar to what it is after nine months?
Dan Sansone
That’s correct. That’s the way to think about it.
Mike Betts
Okay. Thank you for that and then the last question from me.
In the P&L, Dan the other income line which was positive? Was there anything specific in there the 2.756?
Dan Sansone
Yeah, there were two transactions. One was wept over from the divestiture of some of the assets that were required in the Florida Rock transaction on one of those divestitures there was a dispute with the purchaser over certain issues that dispute was resolved to our favor that was about $3 million of the year-over-year increase and then we had a with the Florida Rock acquisition, we acquired a very small co-handling business up on the Mississippi river and we sold that operation as well and had a $2 million and $2.5 million gain on that.
So, there is just a couple of small things. Everything else excludes of those two items is small items in the ordinary course of business.
Mike Betts
Thanks great thank you very much to both of you.
Operator
And our next question comes from the line of Kathryn Thompson with Thompson Research Group.
Kathryn Thompson
Hi, thank you for taking my questions. You noted in the quarter-end release that you under produced demand in the quarter is this something that we can expect going forward and how should we think about that and part and parcel with that question, do you have any target inventory reduction goals over the next 6 months to 12 months.
Don James
Kathryn our goal is to match our production and inventory levels to demand. We are obviously from a GAAP standpoint, when we are producing inventory and building inventory it is more positive to GAAP earnings, but less positive to cash earnings.
So as I proud to say, we believe that you manage your business for cash and not so much for GAAP earnings. The point I think is that when we start seeing demand recovering, we will be in a position to start producing heavily which will certainly improve our GAAP earnings.
So we aren’t. we don’t have an artificial inventory level, because and I know you all are sick of hearing me say this, it is very it is a quarry-by-quarry, product-by-product decision as to put inventories we need and need to produce and not produce.
And so if I said here and talked to our division Presidents and Senior Vice Presidents and said I want everybody to reduce inventories by 7.3% in the quarter, they would all think I had lost my mind because I would have. So, it is a function of management at the division and local level to say we need this many turns of Asphalt stone over the next X number of months, and we don’t need anymore base.
And so they are adjusting their operating hours, their plant setup in order to achieve that and with the exercise of what I think is very good judgment with the combination of the sales and operating people working together on a plant-by-plant basis, the inventory reduction you see is a rollup of 100s of individual decisions and they all know what, this is not news to our sales and operations group, this is something that we do all the time, its just now with demand being as weak as it has been. We are, the net effect of this is that we are reducing inventory rather than building it at this point.
Hopefully as we see some more visibility of these projects in 2010, we'll start producing at higher rates than we are shipping in the short-term and we'll see the benefit of that in our GAAP earnings, but that’s the process which is probably not terribly helpful to you all who are building models and need to deal with the overall inventory levels, but it’s a lot of different decisions.
Kathryn Thompson
Sure that makes sense. And just to summarize you're all managing around the base inventory which understandably is built somewhat because of the type of mix of projects stimulus.
With that said with any recovery of demand in volumes, its going to be just another boost to GAAP earnings?
Don James
Yes. Absolutely, absolutely and you did the math in your models but large strongest earnings performance is when we are learning hard and building inventories.
From a cash standpoint, we aren’t doing that just to boost GAAP earnings, we are looking for those longer term cash management and cash earnings management.
Kathryn Thompson
Great. And then I was wondering if you can give a little bit more color on overall volume trends by regions since the quarter end, just relatively speaking no specific.
What do you see overall from the trend basis regionally?
Don James
Well, I think as I try to point out the extremes on both ends or where stimulus dollars have been flowing and where stimulus dollars have not been flowing. And as I indicated in our remarks we are down on both ends but we are relatively stronger in the states where the stimulus dollars have started flowing and we are relatively weaker in the states where they have not.
But overall I think I am mildly encouraged by the following statistics which has at least a couple of explanations. Our volumes in Q1 were down about 30%, our volumes in Q2 were down about 30%, our volumes in Q3 are down 20% now.
Should we be feeling good, by the fact that our volumes are only down 20%? No, but I think it is some obviously the comparisons are getting easier which is part of it as we started down pretty hard last year and the second half after the whole Lehman Brothers and the collapse of the credit markets.
But clearly we think we have bottomed out in the housing market. And there is upside, they are private [non-res] as I've said particularly retail as more pain to go and the rail plan, and things like railroad ballast is good, blue gas stone is good but those are relatively small percentages of our total shipments.
The thing that is going to drive demand is going to be, for the next 12 months at least in addition to some recovery in housing which is coming off a low base is going to be public infrastructure. The stimulus dollars are going to be spend so that’s not a mystery the real question is are we going to get some resolution of the multiyear federal highway bill that allows DOTs to move forward with their planned construction projects and that’s really the most important factor right now and longer term demand.
Kathryn Thompson
Okay great and just a final question to clarify that much of your res and non-res public standing historically, your public spending has been about 50% of your in market sales. I would imagine in today's market that’s closer, its approaching 60% I wanted to see if do you agree with that assessment and could you see that number, maintaining or even going higher into fiscal '10?
Don James
I think it will go higher in fiscal '10 or calendar '10 for us.
Kathryn Thompson
Okay.
Don James
Clearly it's increasing, it's probably been 5% to 10% shift year-to-date from the private to public funding, we are publicly funded projects. Historically, we are in the 52% to 53% range over relatively long period of time.
The private side spiked up in 2004, 2005. We'll see a spike in 2010.
In the public side I can't tell you whether that’s going to be 60% at this point or not but it's certainly moving in that direction.
Operator
And our next question comes from the line of Garik Shmois with Longbow Research. Please proceed.
Garik Shmois
Couple of questions. First one is, if you could talk about transportation costs and what we have seen, of course there is a natural competitive barrier given that aggregates are expensive to ship longer distances but with such grown demand outside the stimulus.
Can you talk about how you anticipate your transportation costs to change with stimulus projects meaning are you looking to ship longer distances to win incremental volumes?
Don James
I think, point one is that in the vast majority of our markets. We aren’t doing the transportation, our customers do it but that doesn’t mean it is not a significant element of delivered cost as you know.
We do provide, we have ships that we move material from our off shore quarries to the US. We have an extensive fleet of rail cars and rail distribution and we have boats and barges that move on the inland waterways.
Plus or minus 15% of our volume moves through these longer term transportation things where most of which we do provide the transportation. But the other 85% most of that is transportation is handled by truck by our customers.
That being said I think in this environment you would be correct that people are willing to move material longer distances in order to compete for projects. We have seen some customers that have historically bought aggregate from us because we are the most cost efficient source given transportation cost in order to keep their own plans busy or hauling aggregate much longer distances to supply their own downstream plans asphalt and concrete as opposed to buying it from us.
And that sort of go in back and forth. Anecdotally, we hear that once they realized what the started seeing the impact of these higher transportation cost on their P&L, sometimes are coming back.
So there is a lot of things moving around but clearly the length of distance is people are willing to move material is greater today than it was at the time when demand was much stronger.
Garik Shmois
Okay thanks and just one more question, I know we are going towards the end of the call, can you Don provide average cost for liquid asphalt during the quarter?
Don James
I think we paid about a little over $400 a ton, may be $405, $406 or something in that range and that’s a blend of a lot of different prices, in a lot of different markets from a lot of different sources so its I think our average is about $406 for the quarter.
Garik Shmois
Okay and the trend that you are seeing as you move through the quarter and may be after the quarter, and liquid asphalt is staying pretty steady?
Don James
Its been steady through the quarter and around just by a couple of bucks and that compares to about 673 in third quarter of last year so when we say that we have made more money on lower volumes in asphalt a part of it is the input cost liquid asphalt.
Operator
And out next question comes from the line of Keith Johnson with Morgan Keegan.
Keith Johnson
Just one quick question on the pricing, I appreciate the information you are going to give us on the available color on the ranges you are seeing in the market either down 5 or up in some markets? We go back three months ago kind of mid summer coming through the early part of the summer, what kind of ranges we think then and just trying to give an idea of how much they may have lined or may not have lined as we worked away at the end of the year.
Don James
Since mid-summer. I don’t think you would see any material difference in those ranges.
Keith Johnson
And that was as well if California and Florida down about 5% as we were year-over-year kind of mid summer?
Don James
Right, on a mix adjusted basis that be about right.
Keith Johnson
Okay. That’s really all I had.
Thanks for the color.
Operator
And our next question comes from the line of Ted Grace with Avondale Partners. Please proceed.
Ted Grace
Hey Don. Would you be willing to take a stab at weather impact on 3Q volumes and maybe a further more take a stab at how weather is impacting 4Q volumes today?
Would you be wanting to quantify that or try to quantify?
Don James
No. So the question was weather impact on Q3 and quarter today Q4?
Ted Grace
Yeah, I mean you've talked a lot about how weather was and you can look at all the data know but any willingness to take a stab at what that?
Don James
The problem in a weak demand environment, its really, we count rain days and wet days and we monitor shipments on wet days and we know that shipments are much, much, much lower on wet days and days following substantial rainfalls, and they are in better weather. So, the fact that there is a correlation of shipments to rain days and of course there are rain days particularly in the Southeast and Mid Atlantic states every year, but I don’t believe we have ever seen a September or October like the ones we have had in this part of the world and I think you are unnatural so, you know what you we are talking about.
Ted Grace
We are feeling.
Don James
Yeah. Flooding all sorts of things, but at the end of the day overall demand is weak and so but I don’t have a reliable way to tell you I guess we could go back and say the normal number of rain days in Nashville for example is in a month would be six and this year we have had 15 or 18 and therefore shipments, but to get into that count of detail is there is a lot of speculation and I think from our standpoint we know it hurts, we can see it on a daily shipping basis.
Sometimes you make it up in the quarter, sometimes you don’t. So, it's just hard and sometimes it shifts volumes from one quarter to another.
It rarely extinguishes the volume, it just moves it. Whatever volume is out there is determined by the economy and the publicly funded infrastructure and weather is just a timing issue.
Ted Grace
Okay. So coming out at it little differently and without quantifying it, how much of that volume would you expect to get captured in the fourth quarter?
That’s only you have seen a lot of reports that states are trying to sustain their construction kind of beyond the normal seasonality and assuming it was [trend] in weather is it reasonable to assume that you are going to at least lose capture a substantial amount of that volume in the fourth quarter that we lost in the third quarter?
Don James
Ted, it all depends on the whether if we have a warm October and a warm December like we have in some year, we’ll capture some of it. If the sun shining today and its beautiful and I am sure people are on construction jobs, but directionally whether we capture some of the delayed shipments from bad weather will be determined on what the weather is over the next two months and, I don’t have a clue.
Ted Grace
Okay. And my next question would follow on Jack's question on kind of public spending and if you look at the numbers at [asphalt] it would suggest that at the end of September there is about $8 billion of remaining authorized contract authority outstanding.
We probably had $2.8 billion in October, which is net of the recession and another $4.2 billion that’s through at the December 18th, timeframe so well we appreciate that states don’t have great visibility on the next highway bill. The fact of the matter is they probably have the better of $15 billion, plus or minus that has been authorized which would equate when you factor on seasonality probably six plus months of activity so why do you think in light of that locked in funding, states are reluctant to spend?
Don James
I will paraphrase to you the statements made by the director of the Alabama DLT owned, on or about October the 1st which appeared on front page of the Birmingham News saying that, and as you know the way highway funding works you’ve got contract authority, but at the end of the day if you build something if the state builds something and spends its money has got to be reimbursed by the Federal highway administration, and given the other issues with cash flows in state budgets, DLT directors are very cautious about going ahead even though they have got contract authority. And spending the money now and applying for reimbursement, if they aren’t sure that there is going to be enough money in the Highway Trust Fund to reimburse them promptly when they submit the bill.
That is the psychological problem with what's going on right now with multiyear highway bill is that, one can make the kind of analysis you have made which at the end of the day maybe rational. The last thing a DLT Director wants to do is have to walk into the Governors office and say, whops we've over spent and there is no money in the Highway Trust Fund reimburses at this time.
So, there is a big psychological factor that runs through those periods when we don’t have a multiyear highway authorization and we don’t even have a viable extension of the multiyear. So, I think it’s a challenge to one of those two things gets resolved.
Ted Grace
Okay. Well, that’s very helpful.
Operator
And our next question comes from the line of Trey Grooms with Stephens. Please proceed.
Trey Grooms
Good morning, Don. Couple of quick questions on, well, one on Asphalt and concrete.
So, the margins looks like they look like they are stabilizing in coming this 8% to 9% range. Is this a level that we could expect over the near-term?
And then, also if we do see demand improve in 2010, or when it does improve, where can do you see these margins going once we do get some demand return?
Don James
As you know that you look while our the cost of liquid asphalt is down, our average selling price per tonne of asphalt mix is also down, but our margin per tonne is up having recovered back to more normalized levels. So, that’s the way to think about the asphalt mix business, is the movement and selling price of mix, input cost of liquid asphalt and so what we have done is to move from very depressed margins when liquid asphalts spiked up to get back to more normalized margins.
If demand and certainly our overall earnings in asphalt will respond very nicely to recovery and demand from the infrastructure and infrastructure is obviously a much larger component as the demand for asphalt than it is for concrete. So, we will certainly see asphalt shipments respond very directly to the highway piece of public infrastructure, both the stimulus as well as the normal highway program.
And margins will fluctuate around, it depends on what happen to liquid asphalt, if we get in a period in which we have got growing demand for asphalt mix and stable or declining liquid asphalt prices, that margin we have had periods in which we have had very, very robust margins. So the answer is yes it is the margin per tonne is better with higher volumes just because we can spread our fixed cost and we are more efficient on the production side but the margin per ton, while that’s influenced by total demand is also heavily influenced by the cost for liquid asphalt.
Trey Grooms
The demand part of it is more, I was trying to get out and I know you have talked about incremental margin on aggregates as demand returns, I am just trying to get a feel for that and understanding movements in liquid asphalt that you can control.
Don James
I would say there is a lot more upside in our margin recovery with volume in aggregates and off course we run our own aggregates at market prices through our asphalts so whenever we sell a ton of asphalt we have just sold about 0.95 tonnes of aggregates at market price. So we get the benefit of that so the double effect.
But we have got tremendous leverage on aggregate volume of which I think is far greater than our leverage owned asphalt volume with assuming a constant liquid asphalt price. But the beauty of the asphalt again and is that we get the leverage of the aggregates is running through that plus some incremental leverage just on the asphalt business itself.
Trey Grooms
Since we are kind of on this subject to volume and I know there is a lot of uncertainty going into 2010 which is understandable but the stimulus seems to be kind of the most certain things that you guys have going into 2010 at this point.
Don James
Absolutely
Trey Grooms
And you guys in the past have kind of taken a stab at what you thought what stimulus kind of related volume could look like? So where we stand right now and kind of what's flowed through in '09 and what could have been delayed going into 2010?
Can you kind of give us an update on what your thoughts are as far as stimulus related volume and how that could look in '10?
Don James
I think given where many or most of our states are in the timing of stimulus spending through September 30, we are probably behind where we thought we would be, but marginally. A lot depends on whether some of these projects can really get going in the remainder of the fourth quarter and as I've said earlier that’s very heavily weather dependant.
I expect 2010 is going to be a by far the largest year of the stimulus spending because of the carry over of some of the '09 plus just the timing that states are required to do in 2010 as well as some hide us in other federally funded highway projects certainly in the near-term. We initially said, I think 35 to 45 million tonnes from the total stimulus including highways and the other infrastructure.
We are seeing some of that other infrastructure going primarily core of engineered work but most of that other public infrastructure which is 30, 32 billion, 33 billion is probably going to be longer coming out second half of '010 into '011 may be some even in early '12. The highway will go faster.
I guess if there is an upside to volume in '010 from what we have previously indicated it would be a deferral from '09 and it would be the fact that many of these projects are coming in at 15 plus or minus percent below the engineering estimates which means there often would be more projects bid out of the same package of stimulus money and there may be more aggregate purchased. Our aggregate price as we have said is up about 3% whereas liquid asphalt is way down, diesel is down, steel is down, so we hopefully will get a larger, slightly larger share of the total stimulus dollars today than we thought we would get back when it was originally passed to put our number on that at this point I can’t do, Trey.
Trey Grooms
All right. That’s still helpful.
One question on price, you said California and Florida down 4% to 5%. Are those if I heard you right, those are the worst hit markets you really don’t have any of that are down anymore than that at this point?
Don James
That’s correct.
Trey Grooms
Okay. And then on upside though you said that there are some markets with pricing up 10%, some 7% can you talk a little bit about more about those markets better seeing relative strength and what markets are those specifically?
Don James
Well, the Gulf Coast is been strong, remain strong. Some of the mid in South Atlantic states are strong so
Trey Grooms
Not much timing that’s basically what you have been seeing I guess.
Don James
Yeah I mean there is not a whole lot of change here in pricing, it’s the places where pricing has been relatively stronger, remained relatively stronger, the places where its been relatively weak, that it’s the pricing issues for example in Florida and California aren’t new they have been there all year. They continue, and the flip side the places we have had good pricing continue.
So there is not really a story here in Q3 about relatively price changes. Does that makes any sense?
Trey Grooms
Sure absolutely and then just to touch. And this is my last questions, just to touch on the cement business just for a second and looks like you made a little bit of money there in the quarter, despite pricing begin down?
Can you talk about what you have got going on there I mean what's behind that improvement? And then also give us an update on the new Newberry plant expansion?
Don James
We will have the expansion completed and in service fully in the first quarter. We will probably run that plant on a what we will call a campaign basis and instead of as you know if you follow large continuous process plants often times what you do is run them hard and then you take them down for a maintenance outage and you bring in a whole bunch of outside contractors and they work 24x7 and your cost goes spiraling up and you get it fixed and you bring it back online.
The addition of the second line will allow us to do our maintenance work with our internal employees, so we can do it far less expensively and hopefully far more efficiently and manage our cost structure that way until there is enough recovery and demand to go back to the normal operating mode, we of course wouldn’t be able to do that without the second line. At some point, we are continuing to look for what our best strategy is for our cement business in terms of markets that we can reasonably serve and what we need to be doing there.
And that process continues certainly we are not satisfied as you could well imagine with our cement business at this point, but it’s a function of really weak market demand right now. The issue with your second question about cement was pricing or?
Trey Grooms
No, initially just asked you, pricing was down in the quarter, I was really just asking more on you guys made a little bit of money in that business in the quarter, despite the fact that pricing was down, whereas last several quarters you have lost money in that business. So, I wondering…
Don James
Well, probably the biggest change, Trey, is the energy cost. Coal is down or other energy cost are down, so that’s really, its our energy cost input and a very healthy focus on managing our controllable cost at the plant, but if you had to identify the largest single component of the earnings improvement it’ll be lower energy cost.
Trey Grooms
Okay. Thanks, Don.
That’s all I have got.
Operator
That concludes our call. I will like to turn the call over to Don for closing remarks.
Don James
Well, thank you very much for being with us today. These are tough times, those of my colleagues who have been in this industry for a very long time, repeatedly say they have never anything like this in terms of the volume drop, I reiterate my appreciation to our employees for working very hard to make the best of a difficult situation.
And I think our numbers reflect that they are doing a very good job, as we have said number of times before a little volume recovery in our business is going to go a long way. The chief issue for us is to identify and to the extent we have some ability to influence that volume recovery.
We are actively pursuing that. Thank you we look forward to talking with you again and at conclusion of 2009 in our fourth quarter earnings conference call.
Thank you very much.
Operator
Thank you for your participation in today's conference. This concludes the presentation you may now disconnect and everyone have a wonderful day.