Martin Marietta Materials Inc (MLM) 2002 Q3 法說會逐字稿

Good day and welcome to this Martin Marietta Materials Incorporated conference call.

Today's call is being recorded.

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

Thanks for joining us this afternoon.

I have with me Janice Henry, Chief Financial Officer and Ann Lloyd, our Chief Accounting Officer.

The third quarter was a sharp contrast to the record results we posted in the second quarter.

Demand for our aggregates products was well below our expectations with a resulting shipments volume decline of 1% for the quarter for our Heritage locations.

During the quarter, we experienced a notable decline in commercial construction demand. We also saw a slowdown in highway construction as the state struggled with budget shortfalls. In addition, the 11 hurricanes and tropical storms during the quarter negatively effected shipments in operations.

For the quarter, sales for the company were $429 million, a 2% decline from the prior year period. While earnings from operations were $68.7 million was down $11 million.

Earnings per share was 80 cents as compared to 95 cents in the prior year period. Reduced shipments in production coupled with very wet operating conditions accounted for the variance .

Year to date sales of $1.14 billion were 2% above the prior year period while operating earnings of $146 million was essentially the same.

Year to date other income is $5.4 million positive, all related to the sale of Ohio and Virginia quarries in the second quarter. Interest expense decreased $2.4 million or 7% primarily as a result of debt reduction. Year to date net earnings are $81.7 million, or $1.67 per share. As compared to $80.3 million or $1.68 per share in the prior year period.

For the third quarter, aggregate sales of $411 million were down 1% from the prior year period while earnings from operations were $67 million compared with $79 million. The decline in earnings is a result of the weak demand in our Southeast markets. Specifically North Carolina, South Carolina and parts of Georgia, where we typically generate above-average margins. We also produced less than optimum levels to control inventory based on the decline in demand.

After a strong performance in the second quarter, the Meridian locations performed below expectation, primarily as a result of a significant decline in demand in Dallas/Ft. Worth, coupled with wet weather in the area. Reduced demand from our Minnesota and Wyoming operations also effected Meridian's results.

In addition, the 11 major storms that hit the U.S. in the third quarter reduced operating efficiency. Year to date sales for aggregates of $1.1 billion exceeded the prior year period by 4%, primarily due to acquisitions, while operating earnings of $141 million were down 2%.

For the quarter, the average selling price at Heritage aggregates operations increased about 2% while shipments volume was down 1%. Inclusive of acquisitions and divestitures, the average selling price increased 3% while shipments volume decreased 4%.

Year to date, the average selling price for Heritage locations is up 2% while volume is down about 1/2 of 1%. Our scaled down Magnesia Specialties business performed well even in a tough economy.

For the quarter, sales of $18 million were down 19% compared to the prior year period. While earnings from operations of $1.3 million were up significantly from the $800,000 recorded last year. Year to date sales of $56 million decreased 29%, primarily due to the sale of refractory assets in 2001. Earnings from operations of $4.2 million are more than doubled the prior year period.

During the quarter, we continue to focus on debt reduction. When taking into account our positive net cash position and like kind exchange funds and escrow accounts, our effective debt to capitalization ratio is down to 41% from a high of 52% following the purchase of Meridian in April of 2001. We expect to continue to reduce debt and the debt to capitalization ratio.

We continue to put in place significant investments in processing improvement at our plants. Through plant productivity improvement projects and right-sizing of mobile equipment for optimum efficiency.

The reduced production mode in the third quarter, coupled with the significant weather impediments, masked the improvements which were more visible in our second quarter results.

We plan to continue in this process improvement mode to improve the productivity and in most cases increase the capacity potential of our plants.

We have made significant progress in recent months in acquiring new customers for our offshore operations at our recapitalized Bahamas plant and Nova Scotia quarry.

Newly acquired customers are expected to purchase over 2 million tons of our high quality offshore granite and limestone products in Florida, other southeastern and gulf coast states and the Caribbean. We expect to continue to add business to these locations in 2003.

During the quarter, we acquired an asphalt plant that serves the western sector of San Antonio. This is an excellent strategic fit with our aggregates in asphalt operations in the area. We also purchased a small sand and gravel facility at Courville, Texas, which is northeast of San Antonio. These acquisitions further increase our presence in Texas.

Results from aggregates operations acquired in Alabama and North Carolina during the second quarter have been very positive. We have improved productivity and lowered costs at all of the acquired plants in these areas.

For the full year 2003, we expect these locations to earn more than the divested locations in Ohio and Virginia on less than 50% of the invested capital.

During the quarter, we sold several small rural quarries in Iowa which did not meet our investment criteria. Year to date, we have sold for over $100 million marginally performing assets which were not strategic to our business.

We also moved ahead on the development of our structural composites business during the quarter. We bid on approximately $10 million in composite rail car components and expect to compete regularly in this product period going forward.

We view this as a significant business opportunity for our structural composites business. Also, we're seeing increasing interest in our composite bridge deck products both in the U.S. and worldwide.

We continue testing on the United States version of composite trailer, our specialty all-composite truck trailer, which is currently on the road in Europe. The testing has gone well. We currently expect to introduce our first line of specialty truck trailers in the first half of 2003. These units will be imported from Belgium.

We are finalizing an assembly location contract in North Carolina and expect to be assembling specialty truck trailers in the U.S. in 2004. We expect our structural composites business to be a meaningful component of our company in 2004 and beyond.

The outlook for the remainder of 2002 remains soft with no expected improvement in industry demand. This weakness coupled with the adverse weather conditions experienced in the fourth quarter to date will effect sales and operating efficiencies.

While we currently expect net earnings for 2002 to range from $2 to $2.15 per share, continued industry weakness and adverse weather will likely result in earnings at the lower end of this range.

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

Thank you.

Today's Q&A session will be conducted electronically.

If you do wish to ask a question, please press the star key followed by the digit 1 on your touch-tone phone. Once again, that's star 1 on your touch-tone phone to signal for a question.

If you're using a speaker phone today, please pick up the handset while posing your question and be sure your mute function is turned off to allow your signal to reach our equipment.

We will pause for a moment to assemble our roster.

Our first question today comes from Armando Lopez with Morgan Stanley Dean Witter.

Yeah, hi, good afternoon.

Hi.

Just a couple of quick questions one it seems like you guys continue to get pricing despite the weak environment. When -- when does that -- I mean how sustainable is that if demand remains weak. I mean do you eventually expect pricing may moderate here some?

Well, actually pricing is already moderated, Armando, if you go back over the last five years, coming into this year, we had averaged about 4%.

Right.

So you're looking at last year being down around 2.5, you're looking at this year, year to date, being right around 2. So, it's already come down.

It's a split market, I say that from the standpoint of the customer base. The ready mix business is in dire straits based very poor demand out of commercial construction.

It is extremely difficult to get price increase in the ready mix side of the business and, in fact, more apt to see some price decrease.

However, in the asphalt side of the business, based on the pressure related to, you know, even what is a little bit less robust highway program than we expected, there still is some supply pressure there related to asphalt-size stone and the price increases in that area have been much better. So that's what's carrying it. You have one side that's extremely soft and the other side is stronger.

Okay, so like going into the fourth quarter, would you expect like to continue to see like a similar trend that we saw in the third quarter?

I would.

Okay.

And in terms of like the highway, it seems like highway demand has softened up more than people would have expected a few months ago. Are these projects -- are they just being delayed or are people starting to take projects off the table? Could you just provide a little more color on that?

It's -- it's a variety of those kinds of things. You can go to Virginia as an extreme where they literally stopped construction projects in progress and shut down jobs because of cash flow problems. That -- that is one extreme.

In some cases, you have states proceeding along at what I call a normal clip. The more likely scenario, what is taking place in most of the states that we do business in; that they're looking at the fact that their revenues have slowed down, they're in deficit, so, in virtually every case, they have taken advantage of the federal matching money and they're using state funds to do that.

Uh-huh.

But they're slowing down and in some cases, you know, deferring for substantial periods of time the 100% paid state maintenance. You know, that the state has to do itself on secondary roads and other state roads.

Right.

So, they're shifting money toward the federal side and with that, they seem to be operating at a somewhat slower pace as far as the build-out of those projects. However, I will tell you, that is part state, part contractor because some of that relates to contractors' backlogs which are not as robust as they were a year ago.

Uh-huh.

And a lot of these jobs have long time frames on them, so, the contractors are trying to make sure that they've got adequate work to keep their people employed so they're not pushing in most cases.

Okay.

So, it's all of that together.

Okay.

That causes deferral. And deferral is the correct word, I think. You know, the funds on the federal side are out there. The states will ultimately match in almost every case.

Right. Uh-huh. Okay. Thank you.

Sure.

We will take our next question from Arnold Ersner with CJS Securities.

This is John Riley for Arnie Ersner. First, can you give us a volume and pricing trends by region?

I will give you volume trends.

Sure.

Mideast for us, which is Virginia, Maryland, West Virginia, the volume was up about 13%. But that's really skewed to the upside by a new location that we opened up in West Virginia. In North Carolina, volume was down 3%. This is for the quarter.

Right.

In the southeast, which is South Carolina, Georgia, Alabama, Mississippi, Florida, volume was down 5%. In the southwest, which is Texas, Oklahoma, volume was up 1% but I need to split that for you because it's a dichotomy and San Antonio, Houston and south Texas, volume was very strong. In North Texas, Dallas Fort Worth it was extremely weak. In mid-America, which is Indiana, Ohio, Northern Kentucky, down 2%. The midwest, which is Iowa and the rest of the farm belt, down 3%. And our central division, which is the Waterborne plus Arkansas, up 4%. And that adds up to a negative 1% for our Heritage locations.

Okay. Looks like your CAP-X year to date is a little more than $100 million. Can you tell us what to expect in Q4 and 2003?

For Q4 -- I will give it to you for the year. We expect to wind up the year at between $135, $140 million of CAP-X.

Right.

And our depreciation just as a comparison will be in the range of about $140 million. With respect to 2003, capital expenditures will be in a similar range.

Okay, so you're not going to cut CAP-X?

We're probably going to take it down slightly, but, you know, no major cuts. We've got a lot of very good high return internal productivity improvement projects that we want to move along on.

Okay. And last question, what are you hearing from your sources on the state of the reauthorization bill in Washington?

I wish I could find someone who truly knew! [ Laughter ] It's about as confusing as I've ever seen it.

You know, we are operating right now under continuing resolutions since October 1. It will likely be March/April before there is a true number set.

You know, the feedback we're getting is that if -- if the economic woes continue there is going to be more interest in a higher number with respect to generating jobs in the economy. So, if we have a weak economy, which it certainly appears that way in the fourth quarter and in the first quarter, then that would tend to make you believe that they will come back at the higher end of the range as opposed to -- you're at 27-7 on the administration side right now. $27.7 billion.

Right.

Senate Appropriations Committee at $31.8 billion, which is last year's number. So, a weak economy would lead you more to the $31.8. The fixed problem we've got is the states don't know right now. And if -- if the number worked to be lower, they're really not in a position to do anything but work with the low-end numbers until they know.

All right. Okay. Thank you very much.

Sure.

Steven Ken with Salomon Smith Barney.

Hi, it is Jed Baron for Steve Ken.

I wanted to drill down a little bit on your fourth quarter guidance.

First of all, on -- on the volume side, looking at your Heritage volumes in the fourth quarter, I know you're up against somewhat of a difficult comparison and given the weather conditions that you referenced that you've seen in October so far, what do you think the chances are that we might be talking about, you know, a mid- to high single digit decline in Heritage volumes in 4Q.

I would be surprised if we had a high single digit decline. The real issue is October.

Okay.

And I think you've heard that from other producers.

October is normally the driest month of the year and normally the highest shipping month. It has 23 shipping days typically. And the fact is that October has been incredibly wet.

We haven't gotten out from under it yet and the key to the fourth quarter will be whether or not we actually get some drying out and some decent weather to work in November. You know, even with the less than robust economy, contractors do have work to do and if they can get an opening to do it before the year-end in November, you know, the possibility of getting some better numbers. But, you know, we -- we advise you that October weather conditions are just horrendous, so, November will be the key.

Okay. And last thing: In terms of the tax rate, what might be a fair estimate here in the fourth quarter? I think you said in your press release you were thinking of averaging 35 for the year? Is that correct?

Jed, the tax rate that we're estimating for the year is the tax rate that's used year to date in the third quarter, it is 35%. That's our estimate for the year, also.

Okay. Okay. Great. Thanks very much.

Sure.

Once again, as a reminder to our audience, if you do wish to ask a question, please press the star key followed by the digit 1 on your touch-tone phone at this time. We will go next to David Weaver with Legg Mason.

Good afternoon.

Hi, Dave.

On the North Carolina market, at the beginning of the year that was one of the few markets that looked like it was going to be very healthy on the public side and you cited that as one that's getting a sharp decline. Is it more on the commercial side, are you also seeing the public spending soften up quite a bit in North Carolina?

Actually, the public side is quite good.

I had mentioned earlier in the year that North Carolina had appropriated some additional monies for resurfacing and that money has come out, jobs being done and in some cases it's put a lot of pressure on us for asphalt sizes.

The issue in North Carolina is commercial construction, which has been a very, very robust market in the last five or six years and I'll just give you a couple of data points here in Raleigh-Durham, you know, that research triangle has been exceptional. If you go back two years ago and look at office construction statistics and you look at what's under construction to date, it is a 77% decline. If you take distribution warehouses, two years ago there was roughly 675,000 square feet under construction. Today, that number is 0.

So, that gives you some idea of what's going on commercially. That's where the issue is. Home going has been pretty good, as it has in most places, based on low interest rates. Even though North Carolina has run, you know, had financial difficulties in balancing its budget, the highway program has been a good one. It continues to be.

Okay. On Texas, is there -- to what extent are you able to discern between what's been a reaction to the weather versus actually slowing demand?

It's difficult to do. I -- I think it actually masked it, the weather masked it in the second quarter when Dallas/Ft. Worth got hit pretty hard weather wise then, too.

I think our view and most people's view was that, you know, it was more weather than demand, certainly in the third quarter it was both, clearly demand has dropped pretty sharply up there. And that, again, is driven by commercial.

You know, you're back to the composition of the economy and Dallas/Ft. Worth, like a Raleigh-Durham has a very high technology component and we know the state of finance of those kinds of people.

Okay. And one last thing, could you -- could you note any areas of strength that you're seeing in the country?

It's -- it's pretty easy to sort out and get to the areas of strength because they are few.

You know, Florida market, which we are not a large participant in, but an increasing participant, continues to be overall pretty strong. You know, it's more residential-driven. And, you know, very positive there.

South Georgia continues to be a very strong market for us, it's an area of strength in road construction and it is an area where we have a very strong market position from Augusta, Macon, toward Columbus, all the way down to the Florida border. Savannah is very strong. Those are the areas where we're seeing significant strength. San Antonio and Houston are pretty good. And south Texas is pretty good. Beyond that, you know, weakness.

Okay. Thank you very much.

Sure.

Operator: We'll go now to Mark Alta with CS First Boston.

Hi, thank you. Where do you hope to get that leverage down and over what time frame?

Debt leverage for us, you know, down about 35% is a very, very comfortable number and I think with the course that we're on right now, you know, we've got an opportunity to push down toward that, maybe get to it by the end of 2003.

But that's a net debt leverage number that you're using, right?

Yes.

Okay. Thank you.

We will take a follow-up from Armando Lopez with Morgan Stanley.

Hi, just another quick question. With respect to the -- the guidance that you provided for the full year, like the -- the low end of the range, the $2. Does that assume further -- like what type of additional deterioration does that assume in the markets? Or does that assume things kind of level off in like November and December?

The assumption is that October is what it is, which is pretty raunchy.

Uh-huh.

That November is a normal November, which means you get about 2 to 3 weeks of decent operating weather and along about Thanksgiving week you're beginning to shut down, things are coming down seasonally.

Typical December and late onto that is the fact that, you know, the economy is weak, you know, we think that's going to continue. You know, I don't think it's going to fall off of a cliff --

Right.

-- compared to where we are, but it's going to continue to exhibit weakness. I think the seasonal patterns are going to be more of a determinant as I indicated. Really November is the key.

Okay. Okay. Thank you.

Sure.

Our next question today will come from Jack Kasparzac with BB&T Capital Markets.

Thanks, hi, Steve.

They've had more trouble with your name, Jack than mine.

10 years of this now! [ Laughter ] You mentioned you got some new customers for the gulf coast area, just wondered if you could give us an update on the Bahamas operation in the third quarter, how did it run versus expectations?

We're running much, much better in the Bahamas. What we're trying to do now is, you know, just kind of fine-tune there.

We're trying to build a customer base, which is what I, you know, commented on and if you recall, we were doing about 2.5 million tons in the Bahamas prior to the measured capital project. And we have capacity to go to 6 to 8 million tons. We could get to 8 with a small additional capital investment.

So, the trick now is to build volume levels and I would have to tell you that we're -- we're quite pleased because, you know, reality is we are in the midst of a difficult economy. But we've been able to add significant new customer base to both the Bahamas and Nova Scotia based on the quality and the delivered costs coming out of those operations. So, I'm quite please we did that.

It is Southeast, it's a number of Florida destinations and gulf coast primarily, a little bit into the Caribbean. And based on the selling effort in the feedback we're getting from other potential customers, you know, we certainly expect that to continue into next year. Even on a tough comp. So, at this point I'm reasonably pleased with it.

Okay. On commercial construction, it's -- it's very weak and getting weaker, I guess through the third -- through the third quarter. Any thoughts on where you think it might bottom out if it -- maybe it's already bottomed out or is there just no visibility on that at this point?

You know, I can put on my economist hat and speculate like all of those folks do, our view is that it's probably unlikely that we're going to get a turn in commercial construction until the second half of 2003 at the earliest. It's not too difficult to make a case that says that it's '04.

You start looking at office construction in particular and, you know, I cited the declines in the Raleigh-Durham area. That's pretty severe.

But you start looking at vacancy rates in a lot of the major markets and then you go off into a side study on how much space is really in the market, based on sublet space added to the formal vacancy rate. It's going to take time to clear that out and get back to market equilibrium. I'm not particularly optimistic about that.

I'm more optimistic about, you know, some freeing up of road money in 2003 and going in to '04, '04 is an election year and I've never known politicians not to cut loose in an election year. Roads are built in all of the congressional districts. And housing continues to hold up, you know, beyond your expectations.

Right.

With the low interest rates.

And the other thing I would say to you is that, you know, we're -- we feel good about the internal efforts that we have under way with respect to productivity improvement. We've made it a lot of progress with a lot of the acquired facilities, you know, I specifically cited Alabama and North Carolina, but there is much more than that. You've got screened and will get screened with low volumes, but as we get volume uptick, you know, I think we're very well positioned.

Great. Thanks a lot, Steve.

Sure.

We will take your final question from Dennis Scinnel with Ruth Ed Capital.

Yes, hi, Steven and Janice, just a couple of quick questions.

Steve, you mentioned I think it was $100 million of asset sales year to date, are you -- are you done kind of calling auto your under performing properties or -- or could there be more looking out over the next few quarters?

We've got a little bit more to do, expectation is that we will complete that and have our system baseline where we want it in 2004. I do not expect to see anything of the magnitude that we've done, you know, as we've repositioned our investment in the past year.

Yep, yep. Gotcha.

And then, how about on the acquisition front, you know, debt has come down a little bit, maybe not at your target level, but obviously you all aren't the only ones feeling the softness in the market. Does that make it more likely that some high quality properties that you might be interested in would be coming to market at reasonable multiples, less likely, kind of any insight over the next 12, 18 months?

Well, I can tell you what we're seeing right now, there are a lot of people out there that still value their properties rather dearly. They're valuing them based what things were three years ago. And those numbers just don't compute for us and probably not for most people based on the low level of acquisitions. We have only a very small number of acquisition prospects that I consider real and possible right now.

Yep.

And we're just going to be very cautious with that. We are -- we are much more focused on taking our investment capital and putting it into process improvement modernization and capacity expansion of the existing facilities that we've accumulated over the last five and a fraction years, because that's where the power is. And the returns on those projects are incredibly high. You're looking at projects that typically are north of 30%. Sometimes north of 50%, internal rate of return, versus an acquisition that's going to be 15 to 18%, typically.

Yep, yep. Well that sounds pretty attractive.

And along those lines, you know, if -- if we continue to see for, you know, several quarters, you know, some pretty tough comparisons at least on the volume side, you know, I understand that you've got this productivity, you know, program -- productivity enhancement program under way.

Again, if things get really bleak over the next 12 months, are there other actions that you all would take? Are there other big cost chunks that you could take out of the system, again, if things get really bad?

Well, if we were to go to, you know, some type of close to depression scenario, what you will begin to do is you will begin to shut down plants and consolidate production in areas where you have multiple plant locations and, I mean that's something that's very logical to do.

Yep. Yep.

We're in a position to do that if we had to. We have already pulled back operating hours very sharply and at many locations are operating on minimal schedules, which for us is, you know, 40, 45 hours a week with the load-out. We load out more hours typically than we operate.

Yep.

So, we're doing that.

Gotcha.

And then, you know, you mentioned the end markets vis-a-vis, you know, I thought of you guys in terms of public spending versus commercial, versus the small piece that's residential. But how would you estimate your aggregate end market split between asphalt versus ready mix versus other? Is there kind of an easy rule of thumb for us to think of that?

Yeah, I can give you a rough cut. You know, to asphalt plants would typically be somewhere in the 20, 25% range. Ready mix plants, fairly similar. And then the rest of it is going to go into base or projects, it's going to go into septic stone, all kinds of miscellaneous uses.

Gotcha. And okay, not to leave out Janice, what -- could you talk a little bit about the pension fund, kind of what your expectations are for '03 in terms of what we might see coming through on the income statement and whether or not there will be any cash funding requirements?

Well, Dennis, we're really not going to get into a lot of details on '03 until January.

We have said, however, that, you know, given the state of the market and the returns on assets in the market, that we would expect to see an increase in -- in pension expense for next year. We would also expect to see some level of cash funding for next year. None of that -- neither of those will be what I consider to be material at this time, but it will be in the first quarter of next year that we actually detail that for you.

Okay. Okay. So -- so, we wouldn't be able to get that at the fourth quarter probably sometime during the first quarter --

Excuse me, I'm sorry?

We wouldn't be able to get that kind of guidance after you report the fourth quarter?

Yes, yes, when we report the fourth quarter.

Gotcha. Yep.

In January, when we do the call again we will try to give you some specifics.

Yep, great. And one final one, maybe an update on how the ERP system is working and all of that kind of good stuff?

Well, I'll brag a little bit on that one because we've got some people I think have done an incredible job.

We have one of the few ERP projects that's essentially on time, on budget. And it's been managed well, I think, by the folks that have done that.

There's been extensive senior management involvement, there's been extensive involvement at the operating divisions and at this point, we -- we're pretty well along, we will be doing the tail end of the project next year and possibly a little bit into '04, but the bulk of the expenditure has been made in what we're doing right now is making sure we can get report mechanisms that pull out data in all kinds of different ways that help us with management analysis, really makes it a tool -- much more of a tool. We're focused on outputs now.

So, it's up and running now?

Yes.

Oh, yes!

Terrific, that's it! Thanks.

At this time, we have no further questions standing by in our question roster. I'd like to turn the conference back to our speaker for additional or closing comments.

Okay. Thank you for joining us. We will report back to you in January.

Thank you for your participation on today's conference call. You may disconnect at this time.