Martin Marietta Materials Inc (MLM) 2002 Q2 法說會逐字稿

Good day and welcome to this Martin Marietta Materials, Inc. conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the President and Chief Executive Officer, Mr. Stephen Zelnak. Please go ahead.

Thanks for joining us this afternoon. I have with me Janice Henry, our CFO, Ann Lloyd, our Chief Accounting Officer and Roselyn Bar, our General Counsel.

Second quarter was a very positive one for us as we achieved the highest operating profit for any quarter in our history. For the quarter, net sales increased 1% to $425 million while operating earnings increased 27% to $82 million. The operating margin for the total company improved 400 basis points to 19.3% from 15.3% in the prior year period. Other income for the quarter was $13.7 million, as compared to $7.9 million in the prior year period.

The other income this year is primarily the result of our divestiture of two quarries in Virginia and six quarries in the Columbus, Ohio area. In the prior year period, the other income was attributable to the sale of our refractory business.

Interest expense was down $2.1 million this quarter based on lower rates and reduced debt. Net earnings for the quarter of $1.09 per diluted share compare favourably to $0.82 per share recorded in the prior year period.

For the first half, net sales increased 5%, to $715 million, while operating earnings increased 15% to $77 million. Other income of $13.9 million is $4.7 million greater than the prior year. Earnings per diluted share is $0.88, as compared to the prior year's $0.72.

For the quarter, net sales per aggregates increased 3% to %405 million with pricing at heritage locations up about 2%. Aggregates shipments at our heritage locations increased 1%, with strong performance in the southwest and midwest regions. Total aggregates shipments inclusive of acquisitions and divestitures increased 1% for the quarter.

Operating earnings increased 27% from the prior year period to $81 million, a record for any quarter. The operating margin of 19.9% was up 380 basis points with improvement in the aggregates, asphalt and ready mix concrete product lines.

Year-to-date net sales of $676 million are up 8% compared to the prior year period. Operating profits of $74 million is 12% higher than the prior year. Magnesia Specialties had second quarter sales to $20 million, which was down 25% from the prior year period - based on the sale of the refractory business. Operating earnings of $1.4 million compared favourably to $1 million in the prior year period. Year-to-date net sales of $38 million is down 33%, while operating earnings were $2.9 million, as compared to $780,000 in the prior year period.

We were pleased with the performance of both our aggregates and Magnesia Specialties businesses in the second quarter. Margin increase in aggregates reflects reduced energy cost, along with similar cost reduction benefits of our plants and process improvement projects.

Also, in the prior year period, we were negatively impacted by some unusual events, including the 500-year flood in Houston, and a union work stop at Indianapolis

Our highway business continues to be positive for the company as a whole, with particular strength in South Georgia, Iowa, and the Cincinnati areas. Residential construction remains solid, although with a slightly downward trend. A major point of concern is commercial construction, which continues to weaken.

During the quarter, we completed two important acquisition and divestiture deals. We sold two quarries located in Northern Virginia, near Fredericksburg and Culpeper to Luck Stone company. In turn, we acquired a quarry near Haw River, North Carolina, from Luck Stone.

As a larger transaction, we purchased four quarries in Alabama from Oldcastle Materials, quarries that have been originally filed out of US aggregates. We sold six quarries in Colombus, Ohio, to Oldcastle. The net result of these transactions is that we have improved our strategic position in the areas of focus, and we expect to have a higher return on capital employed with the opportunity for higher profitability versus the assets divested. We expect to continue to selectively acquire as well as divest additional, non-strategic operations.

We were particularly pleased with the performance of the Meridian quarries for the quarter. Earnings from these operations more than doubled from the prior year period based on operational improvements and reduced overhead.

We have been very successful in reducing debt, which is a stated objective. After netting out cash, and cash held in escrow, pending life count [?] exchanges, our debt level at the end of the quarter was approximately $781 million. We are ahead of schedule on debt reduction, which in turn should provide us with the option of buying back our shares at a meaningful level at an earlier time, if we deem that as the appropriate choice.

At this time, I will be pleased to take any questions that you may have.

Today's question and answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the star key followed by the digit '1' on you touchtone phone. Again, that is star, 1, if you would like to ask a question. We will pause a moment to assemble our roster.

We will go first to Arnie Ernstner, CJS Securities.

This is John Riley for Arnie Ernstner. Could you give us volume and pricing by region for the quarter?

I will give you volume, but not pricing. Mideast, which is Virginia, West Virginia and Maryland for us - flat; Carolina, North Carolina - up about 1.5%; the southeast, which is South Carolina, Georgia, Alabama, Florida, Mississippi and Tennessee - up about 0.5%; southwest is very strong - up about 7%; mid America, which is Indiana and Ohio, was down by 14% - heavily affected by rainfall during the quarter and also softening demand in Indiana; midwest was up about 8%; the central division, which is primarily our waterborne, was up about 2.5%; and you heard it increase just a little less than 1%. As you net out the best of your acquisitions, it comes out as the same 1%.

Thank you. How has the current weather in Texas impacted the current quarter?

Weather in Texas, I am sure you have seen and read that it is miserable in south Texas and not particularly good in North Texas either. Dallas was impacted in the second quarter and has continued to be impacted.

The major impact was in the San Antonio area. We were fortunate in that we did not lose any of our major quarry operations to flooding. We had one, small base plant that was impacted. But bigger disruption really is in terms of shipments and inability to produce for a couple of weeks.

It will have a detrimental effect to the third quarter. Expectation is that we will make up a good portion of that volume in the third and fourth quarter. But we have been trying to be pretty cautious in looking at that in respect to the third quarter forecast we laid out.

Are any of your primary states experiencing substantial budget deficits?

How many would you like to discuss? States are, obviously, this way. Last time I looked at some data, you had 45 states that had budgetary issues out of balance. North Carolina, which is obviously important to us, has a budget deficit of about $1.5 billion, and at the same time, the North Carolina highway programme is pretty good as it has expropriated some extra money that was in surplus for this year, and additional money is available for the next two years.

We are not sure what is going to happen here with respect to the budget. It is quite possible that the legislature in North Carolina will go home without passing one, and by law, the governor must back in and balance the budget.

He started that process last week by declaring a reduction of 2,600 jobs, and like you do in politics, 2,400 of them were unoccupied. However, it does have an impact because the departments use those monies, they allocate the monies.

At the end of the day, with highway programme, we think we are going to have a very solid highway programme in North Carolina and the state recognises that as a priority. But things are very tight, and we get fractured legislature down here politically and the house is having difficulty in getting it together. That is the biggest problem out there, but there are a lot of states and virtually all of the states have some degree of problem.

Got you. One last question - on the process [?] of operating margins for the quarter, is this sustainable going forward? Could we expect margins in excess of 19%?

I am going to be reluctant to say, 'count on it.' But is the trend line positive? Yes, I think we are on course, where we are going to get the benefit and the yield out of what we have been working at for the last year or so. We have put in place, say, quite a few projects that are efficiency improvement projects. We have some others that we are currently working on; and I think, particularly given the age of the assets we have acquired, that we are remodelling, we are getting some impressive results in terms of production rates, for the capital we are employing and with that, variable cost reductions.

So I would just say to you that my belief is we are on the positive trend line. Whether it is a straight line - it has never happened in my career. It will bounce up and down.

Thank you.

Sure.

We go next to Armando Lopez, Morgan Stanley. Mr Lopez, please check your mute button.

Looks like we have lost him.

We will go on to Steven Ken, Salomon Smith Barney.

Thanks very much. A good quarter, guys.

Thank you.

The first question I have is related to other income, if you could be a little bit more specific about the profit contribution from the various activities. Was pretty much all the profit recorded in the other income related to the divestiture of those assets, or were there some other things in there?

No, it was related to the divestiture.

Ok. Secondly, Bahamas was certainly an issue that we talked a lot about.

Let me back up on those statements and get back to the fact...

Sure.

We do have other income and other expense on a recurring basis. We have net out other income and expenses for this particular quarter. The other income we have recorded in this quarter relates to the divestitures.

You have to go back and look at the history. We always look at some other income.

Right. Ok. The Bahamas facility, which we have certainly talked a lot about over the last several months, and I was wondering if you could give us a little bit of update on that. I know the last time we talked, it was starting to look better and going according to plan, but can you sort of give us an update on how that actually performed in the quarter?

Improvement certainly is still not where we expect it to be. It does not go forward. Production rates - we had two months during the quarter where we wrapped up 400,000 tons of production, which was the target. So we are getting production out of there now at much higher rates.

We are still trying to put together stockpiles of dry materials. That is going slower than we had hoped, primarily because we are still doing some digging in the ship channel basin down there - more than we would really like to be doing. But the trend line is positive there. I think we are over the hump.

The key issue there is the market for base material. We have got very good markets for concrete stone. With the general softening of the economy, the market for base material was sort of governing factors to what we would be able of producing down there.

So I think for the next, probably the next six to 12 months, that would be the key issue, and we will get our stockpile of what we call 'surge material' - the sharp rock that we will stack up and let it grind, and dry material to process. So we expect the costs to continue to come down in the remainder of this year and as we go into 2003, certainly they should come down more. Some positive trend line there too.

OK. But relative to your expectations, Bahamas pretty much came in as you expected this quarter?

Well, a little bit below, relative to my expectations.

Ok. Thirdly, fuel - if you could quantify the impact of fuel that had on you this quarter.

Sure. You have a couple of components to that. Perhaps it is better to talk about the overall petroleum energy costs and I will break it up for you.

The diesel fuel component of it, a little over $2 million worth of cost reduction versus Q2 prior year and in other things, we are using petroleum based liquid asphalt, natural gas, roughly measuring a cost reduction there. So if you add it up, you are in the $3.8 - $3.9 million range.

And how have you seen that turning out so far this quarter? Similar?

Diesel fuel continues to bounce around. It was higher in the second quarter, continues to be higher than it was in the first quarter. But certainly relative to the big spike we had last year and the year before it is well behaved.

Liquid asphalt prices have gone up, but seemed to have stabilised and backed off slightly in the last 60 days or so.

Great. Thanks very much.

Sure.

We go next to David Weaver, Lake Mason.

Good afternoon. In terms of the quarries that you acquired and sold, did they pretty much wash in terms of volume, or did you pick up or lose what you would call capacity for the full year?

Actually we gave up some volume in...I will take you through the equation there because I tried to explain it in my remarks, but it is very difficult to do in short remarks.

If you take the Virginia quarries, we gave up two quarries, which were not strategic to us. In turn, we acquired a North Carolina quarry. The difference in volume there is that we gave up roughly three quarters of a million tons

With respect to the Alabama quarries purchase versus the Columbus, Ohio quarries sold - on a full year basis, remember, we are doing this sort of in the mid year in Virginia, numbers before year two - on a full year basis, we would give up some where in the neighbourhood of 1.5 million to 2 million tons.

And the other part of that is the expectation is that we will make somewhere, or better profits on less than half capital employed and significantly strengthen our strategic position in the areas where we have considerable interest.

Ok.

We are very pleased with the deals, and hopefully the people on the other end are.

Ok. Several of the homebuilders have indicated that mid last year, they slowed down their residential development process. That is where a lot of the stone goes, but it re-accelerated this year. Did you happen to see that trend in your business?

We are seeing some more subdivision development, which we have talked about before. For a while they were living off the inventory, and it does appear that we are at a point where their inventories have diminished. As I am sure you would have noticed, mortgage rates are at a very low level, that is 6.25% on a 30-year mortgage rate. So with those kinds of rates, you would expect home building would continue to be pretty strong.

So I think we have got some possibility of some positive in the demand there, although the dollar figures for home building are tapering slightly. We may get the backside of that opportunity for our aggregate, and we may see a little bit more demand than the dollar figures would indicate as they develop in subdivision. So, could be a plus. We do not know yet.

One last thing - if you go us a free cash flow of the year?

Sure. We are somewhere between $80 and $100 million after taking everything out, including dividends; and on top of that, we have got the cash flow coming in from the Daouzeska [?] operations, which is going to add another $70 million or so. So, we will be very positive in that regard.

Our term debt, if you recall, is at $700 million dollars and we are going to be pushing down on that very quickly. One of our objectives is to get down to the term debt level. At that point in time, we have all our options open and even possibly before that, depending on what we think is appropriate. We are on a very good pathway with respect to debt reduction, very strong and positive free cash flow.

I take it from your comments that you have not been active in buying back shares.

Not as this point, but certainly watching it very carefully.

Ok, that is all I have, thanks.

Sure.

We go next to Robert Marshall, [Warco VS].

Could you give us a little more detail on how exactly you picked up 380 basis points on relatively flat volume? Was it a wind down of the capacity expansion projects?

First of all, let us just deal with the non-amortised goodwill so that everyone has got that. That was $6.0 million for us. Beyond that I have already cited the energy savings, which were about $3.7 million to $3.8 million - a nice piece of it. We are getting the benefit of process improvement and of capital deployed, and I have cited the benefit of the Meridian acquisition in the second quarter. I indicated in the prepared remarks that we had more than doubled profits in Meridian - so one nice piece of it is in fact the Meridian piece, which was very solidly accreted.

Ok. Second question: you mentioned in [tandem] with your guidance for the full year that it is inclusive of other income. Do you anticipate..., or are there any other sales build on to that guidance in the second half of the year?

No.

Ok. All right, thank you very much.

Sure.

We will go next to Tripp [?] Rogers, UBS Warburg.

[Tripp] Rogers: Hi, good quarter.

Thank you.

[Tripp] Rogers: Stephen, it looks like the highway award numbers that come out of North Carolina is down quite a bit to the first half. I know that it has a bit of a tough competition [?]. Is there anything you have seen in the first half that suggests that the second half awards in the state might be slightly sluggish?

I think this is basically based on the overall financial situation of the state. But, there is quite a hefty backlog out there with major projects. If you go back one year and look at the prior year and remember that these project deploy [?] out, the big ones over a 24 to 36 month period typically, there is a pretty good-sized backlog. Most of the contractors we deal with have nice [?] backlogs. Their problem is that they do not have the commercial backlogs, which is where the real softness is. North Carolina has been a very robust commercial builder, as has all of the Southeast. So, I do not think that is the bigger point of concern right now. A lot of award work is taken place in areas where we are quite active and have strong positions. There is a significant amount of work in central North Carolina in the Greensboro area and down towards Charlotte, and that really plays to our strength. If you recall, there was research work lead by the state in special lettings at the end of last year with about $170 million dollars of additional monies put out. That has pumped up the highway sector, and is work that will be done this year. That will make the second half better than it otherwise would have been. So I feel reasonably good about North Carolina at this point.

[Tripp] Rogers: Last quarter you were also pretty optimistic about Texas and Georgia. Does the same hold true today?

I think Texas is going to do fine. The concern there, again, is the commercial sector. The concrete [?] people in Texas are certainly seeing diminishment in commercial backlogs. If you read the reports you can see that Dallas has a very high vacancy rate. They have been impacted by the demise of telecom; I guess that is the way to put it. That is going to continue, and Dallas will not be as robust as it was last year. Overall, we are going to have a very good year in Texas.

We are presently adding capacity in South Georgia. I just signed off on two new portable plants yesterday to go to that area and supplement capacity, and also signed off on another portable plant two weeks ago to go down there, as well as on a major capacity expansion - a new secondary plant in one of large quarries. So, we are adding capacity just as quickly as we can in order to meet the demand, which is going to go on in South Georgia for the next three years, clearly. What is happening there is that with all the problems in Atlanta money is getting shifted to other parts of the state, which historically have not received their fair share. That plays to our strength, and it is where we have a very strong position. It also plays to our long-haul strategy, where we have positions in both transportation and materials likewise.

[Tripp] Rogers: Ok, thanks a lot.

Sure.

We go next to Jack Kasprzac, BBNT Capital Markets.

Thanks. Hi Steve. On the SG&A line, could you give us a bogey as a percentage of sales where you think that might be for the full year this year?

Probably around 7%-ish, or a little bit higher. We are going to be up a little this year based on the overhang. Remember that we did not buy Meridian until the second quarter of last year. We also have some impact on SG&A from items we have discussed relating to the benefits side of the equation. I will tell you that one of the key reasons for the performance of Meridian, additional to the operational improvement, was a significant overhead reduction quarter-on-quarter of about 40% compared to the second quarter of last year. I think we have that done that job pretty well.

On a more normalised basis, looking out to 2003, what would you think SG&A dollar amount would increase by[?]?

I do not know the dollar amount yet. We will have to see what our sales forecast looks like, which will have some impact on how we handle the SG&A. Still, the expectation would be that we would keep in the 7-percentage range. That, I think, is a reasonable level for a company like ours, and certainly is quite competitive with other all-up numbers that companies in our industry have, particularly if you grab it from all the lines where they have SG&A since people account for it in different ways.

Sure, ok. On the US Aggregates operations that you acquired - that was a company that was in some financial distress, as we all know. Could you talk about whether there is a lot of investment to do there to upgrade them, as well as opportunities in the long term, as far as cost reduction and production enhancement is concerned, in those operations in particular?

We will have very little capital investment to make there. I will just simply leave it at that, as we have a number of things going on that are [product] to the bankruptcy proceeding, and which enable us to position ourselves so that we are going to need very little capital investment. We are going to be set up to run very well and very efficiently on those locations. The expectation is that we have some cost reduction opportunities at those locations. We would therefore expect to improve them over where they are. I will also say to you that the Alabama market is fairly soft. It will probably be 2003 before we see any drift [?] in demand, but when the volumes pick up we should benefit greatly due to the positioning we have. The key to that acquisition was that we had one strategic gap in our system - by rail, from North Carolina all the way to Texas. It was that gap right down the centre of Alabama. We now have the capability of running unit trains on CSX down to south Alabama. One goes down into the panhandle area of Florida. It has improved our position significantly. It yields cost reduction, and as things turn up, I think we are in a great position.

Ok, thanks a lot.

Sure.

We go next to Armando Lopez, Morgan Stanley.

Just a quick question. You did a solid job of improving the margins in the Aggregates business. Based on the way in which I read the press releases it sounds like you are looking for aggregate volume to be flat to up, maybe modestly, for the duration of the year. So, if you have up margins and EBIT flattish volumes, is there something else offsetting that, which results in flat EPS in the third quarter?

Texas. I do not know if you were on the call at that point, but our caution [?] in the third quarter more than anything else is related to the flood impact and heavy rain in Texas. It is not so much flood impact, but a couple of weeks of shutdown of the business, relatively low volumes and very little production, along with one small location that we did loose to the flooding and had to restore. I also mentioned the Dallas market, which has been impacted by rain. Dallas has softened up considerably with commercial markets. The real risk and reason why we are cautious is summed up in commercial construction.

Based on what you are seeing, what are you expecting for, say, highway construction for the year?

Well, we think it is going to be up modestly - low single-digit figures.

You are not seeing any improvement on the commercial side? Would you expect to see some improvement there, and when would be the earliest you would expect to see such improvement?

In my personal view I do not think you will see improvement in commercial construction this year. I believe that the earliest time we will see that is in 2003. It could be in the first half or it could be in the second half. There is a lot of overhang out there right now, and it is really unusual in the way that it has happened, since, if you go back a couple of years, things were pretty much in balance. What has happened is that the demand side of the equation has dropped sharply with dot.com and telecom not needing the space they once did. It is therefore quite hard to determine how long it is going to take to work off that overhang. We talk to our concrete customers, who are probably quite a good judge on that, and most of our major concrete companies are off this year 10-20% in terms of volume. In terms of the backlogs that they have these have not stabilised, and are still tapering. Our view is that we are not out of the bottom yet on commercial. Hopefully we will get there in the next few months.

All right, thank you.

Sure.

We will go next to Bob Bridges, Sterling Capital Management.

Stephen, can you give us an update, from what you are hearing from your industry contacts and others, on how things are progressing in Washington with your replacement TEA-21 legislation? I thought I saw a headline that said that a Senate subcommittee might be voting today or tomorrow on preparations. Can you comment on that?

The Senate Transportation Committee came out with a full restoration up to last year's level of $31.8 billion. You probably know that the House of Representatives has been towing the line with President Bush, which was $27.7 billion. I think it is $27.6 billion as they have sought to cut funds across the board. The debate will come between the House and the Senate. The Senate Appropriations Committee has to pass the bill. We are not quite sure what they are going to do. Senator Byrd is certainly a strong advocate for infrastructure and highway construction. We think his numbers are on the higher side rather than on lower. My guess and personal view is that the final numbers will wind up somewhere between $28 billion and $29 billion. Anything over $29 billion will be a huge plus. But, at that level, if you take the flow of spending that goes with that, which is about 25% of the money spent in the first, roughly 47% in the second year, and then the rest of it in years three to seven, you would have positive spending in the financial year 2003 at the $27.6 billion to $27.7 billion level and probably be up by two to three percent. It looks like positive spending is pretty much locked in at this point. The question is: can it go up some more?

Ok, that is very helpful. Thank you.

Sure.

Also, I think you made a comment in last quarter's conference - or it might have been at the Bahamas presentation, I cannot quite recall where you said it - talking about the infrastructure build-out for the long haul network and how that is substantially complete. I just wanted to have a comment on the right way to think about capital spending over the medium term, looking three to five years out, and how that is going to relate to what the spend is going to be over the three to five years. Do you see it accelerating or attaining levels relative to sales or any other metric you want to use?

We do actually run it and look at it relative to sales, EBIT and EBITDA projections. If you were comparing it to any of those over a five-year plan, the expectation is that it is coming down as a percentage of.... Obviously, we do not know exactly where the earnings numbers are going to be for sales, but the expectation is that we are going to spend considerably less capital than we have in the last five years, relative to the size of our business. We have indicated that we have gone through a process of putting in place a network that we think is pretty powerful. There are some people who disagree with us. We will find out. I would suggest to you the fact that we have up volume in the second quarter, and the other people I have looked at had pretty substantial down volumes in most cases. There might be an element of that in it, based on transportation choices and also product type options. We think there is some real power in it.

Capex last year was, as I recall, $194 million. We are looking at capex this year, excluding newly acquired properties, in the $125 million to $130 million range. For the next five-year period I do not see any particular reason why it is going to be different relative to what we have today. We think we are going to be much more of a significant cash generator. We put a lot in place, and as the economy picks up we are going to have capacity in places where we will have impact. We are going to have very efficient capacity in those impact spots, and we expect to do some harvesting and reap the benefits there.

Not different in absolute dollars or in relative percentage of those metrics?

It is absolute dollars we are talking about. If you go through the last two years, we were at $171 million and $194 million. We are talking about capex over the next five years that is in the $125 million to $135 million range based on what we see today.

Great. Great quarter. Appreciate it, thank you.

Sure.

It appears that there are no further questions. At this time I would like to turn the call back over to Mr Zelnik for any closing remarks.

Ok. Thanks for joining us. As I said, we were pleased with the quarter. We think we are on a very positive trend line with respect to our operations and the efficiencies we are putting in place. Again, I would suggest to you that we have put a lot of time and effort into the transportation and product type options. We are beginning to see some shipping of customers related to that in the direction of Martin Marietta. We would expect to be able to offer those customers some additional value going forward based on what we put in place.

So, we thank you for joining us and look forward to talking to you a little bit later.

Thank you for joining today's conference. You may disconnect at this time.