Martin Marietta Materials Inc (MLM) 2003 Q1 法說會逐字稿

Stephen Zelnak, Jr.: Thank you for joining us today. I have with me today Janice Henry with me today, our Chief Financial Officer, and Lloyd our Chief Accounting Officer Rosen Bar General Counsel.

The first quarter was severely impacted by weather conditions that ranged from poor to a dismal in most of our operating areas. Particularly during February, we experienced precipitation events and extreme cold that limited shipments and sharply curtailed production. I'll provide some profit impact numbers for some areas in product lines later in the call, you should have a clear idea of what we have encountered. During the quarter, net sales decreased 2% to $283 million from the prior year period, while the loss from operations was $10.6 million versus the prior year of $5 million. Interest expense decreased 9% or $1 million from the prior year quarter, based on debt reduction and lower rates on variable debt.

Loss for the quarter was 29 cents per diluted share versus 22 cents in the prior year period. The first quarter of 2003 earnings are prior to the cumulative effect of the adoption of statement of financial accounting standards, number 143, accounting for asset retirement obligations. During the quarter, the corporation recorded a charge of 14 cents per diluted share in adopting the new standard. In our opinion fas 143 does not provide worthwhile information for either investors or the company. Historically we have accounted for reclamation expense on an as incurred basis.

Our closer cost are historically insignificant. Predicting shutdown costs is extremely speculative, given the long life of quarries and the alternate uses of quarry property, including development, parklands and water reservoirs. The new standard increases accounting complexity and makes results less reflective of the true business. The Q1 2002 earnings restated to reflect the adoption of fas 142. Net sales for the aggregate division were $263 million for the quarter, a 3% decreation from the prior year period. The loss from operations was $10.4 million for the quarter, compared to $6.4 million in the prior year. The aggregates product line showed an increase of gross profit of $2.8 million or 16% versus the prior year quarter with the margin percentage increasing 110 basis points. This positive performance was the result of pricing, product improvements, acquisition to divestiture activity and favorable development of health cost, overcoming low volume, poor operating conditions and high energy cost. The asphalt product line, which is located in our southwest division, experienced a 20% decline in value, tied to weather and a gross profit decrease of almost $3.5 million, primarily due to the low volume and high energy cost. Ready-mix concrete volume and profits were down slightly, while construction operations experienced a loss that was over $1 million higher than the prior year. Again due to poor weather conditions.

On a geographic basis, the southwest was most severely impacted with gross profit nearly $6.3 million below the prior year. The previously-mentioned asphalt and construction laydown businesses accounted for over 80% of the reduction. Aggregate shipments in the southwest were down 13%, while production was down 18%. A very good cost control cushioned the impact in the aggregates product line. On the positive side, shipments from our water transport locations increased 11%, coupled with a significant improvement of over $2 1/2 million in gross profit. We continue to have a positive view of shipments and earnings growth from these locations. During the quarter we saw some positive events with respect to transportation funding.

The state of Ohio passed a 6 cent-per-gallon increase in the gas tax to be phased in over three years. And coupled with an increase with registration and license fee, the changes are expected to generate $4.7 billion in new money for transportation. The governor of North Carolina has proposed $700 million of new funding for transportation to be used over the next two years. The measure is aimed at road improvements and job creation. It would be funded from existing bonding authority. The state's largest business group is supporting the bill, and it is at this time receiving a favorable reception in the legislature. U.S. Congress has come forward with a non-binding budget resolution which could provide about $230 million in highway funding, which is about 30% more money than t 21. It appears that the administration and republican house leaders are becoming more receptive to a larger program, based on highway needs and the desire to create jobs. This is encouraging, given their position at the end of last year. Our specialty sales were up 6% due to strong demand.

However, weak sales in the magnesia chemicals area, coupled with very high natural gas prices used in the production of these products caused an overall loss of $200,000 on the quarter, versus an operating profit of $1.4 million in the prior year period. On April 1st our previously-announced agreement with Dow Chemical at they're Lovington, Michigan plant went into effect. We began selling our waste from our Michigan plant to Dow under a long-term contract. This will be a positive for future earnings. Also, since Dow is exiting the magnesium hydroxide flurry business, we may pick up new business in this product line, used for water treatment. With natural gas prices coming back to more normal level, we expect improvements in this business, going forward. During the quarter we made significant progress with our plan entering into the constructional composites business.

We're well along in our Sparta, North Carolina plant to prepare it for manufacturing and assembly operations beginning in the fourth quarter of this year. We plan to produce composite sandwich, flat panel products, and all composite and specialty truck trailer, at this location initially. In March we introduced our composites life floor trailer at a truck show in Kentucky. This trailer takes over 4,000 pounds of weight out, as compared to aluminum trailer, with steel chassis. We received a very positive reception to the product and plan to display the trailer at two additional truck shows over the next 90 days before beginning our sales effort. We're also seeing considerable interest in our flat-panel products from a variety of potential customers. Based on the early level of interest, we are currently assessing the need for increased capacity following our opening of the facility in the fourth quarter.

At this time, I'd be leased to take any questions that you may have.

Thank you, sir.

Today's question-and-answer session will be conducted electronically. If you are usage speakerphone, please are sure your mute function is turned off. Once again for question, please press star 1 at this time. We'll take a question from Jack Kelly of Goldman Sachs.

Could you characterize a little bit the quarter with regard to Eric Gibbs. We heard this morning that March was very strong, you know, maybe just give a sense how that, you know, I mean, we know February is bad. Do we see a good bounce-back in March. Do you sense that's going to continue, at least in the early part of this quarter?

Secondly, you had mentioned medical was a favorable variance versus the budget expectations. Could you elaborate on that? Thirdly, if energy prices stay where they are, what's the energy impact on the chemical group for the year?

Stephen Zelnak, Jr.:

Okay. With respect to, you know, trying to give you any type of forecast of Q2 volume, I'm just not going to go there. What I will tell you with respect to 1st quarter is that, you know, January was about as expected, actually a little bit better, from my planning standpoint. February probably was the worst month I've ever seen in the 29 years I've been in the business. We probably could have shut down, locked up and gone home for the month and been about as well off. I mean, it was truly a dismal month. March, things did snap back. Weather improved in March, and it wasn't what I'd call an open March, but we did have two and a half weeks or so far pretty good weather-.

The nice thing was that when the weather cleared up, and we had some sunny dry days, the shipments picked up pretty markedly. We've said and I'll reiterate that in conversations with our major customer, they indicate they have very strong backlog, particularly the asphalt guys, and they're under time constraints with respect to doing the work because they have been deferred in some cases six months. So we expect to see, given weather conditions being cooperative, we expect to see a pretty busy remainder of the year on the asphalt side. On the concrete side, not quite the same surge, but certainly the commentary we picked up from major customers indicates that they're seeing more opportunity than they have seen any time in the last six to nine month. So I think it's a little more encouraging than we were 90 days ago. Okay.

You know, with respect to the medical, I think what I would want to do is tell you some of the things that we've done to manage medical costs over time and change our plans, which clearly be being affected. We have significantly increased co-pays and the objective there is to get our people to be a consumer of healthcare, particularly with respect to prescription drugs and particularly with respect to use of the emergency room. So we have changed the co-pays, escalated those fairly sharply, and you know, I think that's a really positive move. I don't know what the others are doing, but it's certainly a move that's working for us. So I think it just comes back to trying to manage the environment we're in, which obviously is an environment with escalating health costs. You know, we're going to continue to modify co-pays. We are going to offer good benefits to our people, as we always have, but we're going to manage the process.

With respect to energy costs in magnesia, the magnesia business actually should have a pretty good year. The business, we think we'll have a very good year. Demand is high; pricing is good, and we're very positive about that. The real key will be in the magnesia chemical side, which is the plant out of Michigan, thats the one where natural gas is a big factor.

With gas price coming back down, we certainly expect that turn, you know, positive with the Dow agreement, we're going to pick up additional income on the sale of waste, and we actually had two product lines in that area that, you know, we think we're going to see improve prove the levels of demand. One is the water treatment that I mentioned. The other is what we call cell guard, which is a product we've developed for the pulp and paper industry. We're getting a lot of trials on that product. It looks like an interesting opportunity for us. So yeah, I'm reasonably positive about that business for the remainder of the year. We spiked over gas prices up to ten bucks at the peak during the quarter. And we're back down to roughly half that right now, and we'll see what the trending is.

Hopefully that's helpful.

Okay, Thanks.

Stephen Zelnak, Jr.: Sure.

Our next question comes from Armando Lopez of Morgan Stanley.

First, you mentioned the backlogs. I was just wondering, could you just comment a little bit, provide a little more color in terms of what states, maybe this backlog work is located in?

Stephen Zelnak, Jr.: Okay.

Why don't I take it via some public information? I think that's an easy way to get at it.

I think as you know, our largest customer, and I believe [inaudible] customer is the Apac in the city of Ashland. They announced earnings and made some commentary earlier, like last week. They indicated at the time the amount of backlog was about $1.8 million. I believe that's a record backlog for them.

Apac operates in the southeastern states, and on out to the southwest, you know, all the way out to Texas and Kansas, in areas where we're active. So you can sort of take the southern tier, come across the southeastern states and take it out to the southwest, and you know, Apac is something of a proxy for that. So I will give you that as public information that you can think about.

Okay.

Stephen Zelnak, Jr.: You know, other areas of the country where we have seen some work opportunity that is better than we originally expected, I would say specifically Indiana and Ohio, where we have picked up some jobs that, frankly, we didn't expect to get. So I'm a little more positive about those areas with respect to road construction.

Okay. And then, you also mentioned in terms of the new structural products business, evaluating whether you need to increase capacity. Do you have preliminary orders for products that are being produced already?

Stephen Zelnak, Jr.: We do not. We're not taking orders at this point. And I say that, we have done some quoting, but it's really preliminary type of quoting. We get the factory geared up, you know, what's driving us in the assessment of capacity already is that the response to the products that we've put out there, the products, sample products, has been very, very good. And frankly, it's beyond our expectations at this point.

So given what we had expected, we are going back already and assessing whether or not we're going to need to follow on with the initial opening of the plant with additional capacity. You know, if we do, that's great. What I will caution you is that we haven't taken orders yet. This is a new business. It's based on some new technology. We'll be opening a new manufacturing plant complete with all the bugs that go with that.

The expectation is that we'll actually begin to get some machinery and equipment operating in the Q3 and go through debugging, likewise, debugging through the Q4 and hopefully be able to hit ground, running in early 2004. If we can do in volume turn out the kinds of products that we have out there, I think there's going to be considerable demand. We're just trying to keep you abreast of what we're doing.

Right, okay. One last quick questions, could you just kind of give us what maybe the average diesel cost was during the quarter, as well as the natural gas cost?

Stephen Zelnak, Jr.: Why don't I give you diesel? Because natural gas really isn't that relevant for us. Diesel, we averaged right around a buck five for the quarter, and last year we were around 63 cents. So that gives you the comparison.

Do you have what it was in Q2 of last year?

Stephen Zelnak, Jr.: Yes. It averaged about 73 cents.

And what are you guys expecting in the guidance that you provided, what were you, what are you expecting for diesel?

Stephen Zelnak, Jr.: Well, I'll tell you where we are right now, and it is continuing to trend down. You know, we'll have to see how far it comes. We're in the mid 80s. We're back down to the mid 80s from a peak of a little over $1.15. It ranged between $1.15 and $1.20 at the high point in the first quarter.

So it came down pretty markedly and it continues to come down. You know, I don't know whether we will average in the mid 70's like we did last year, but clearly we're on a much better trend line.

Okay, all right, thank you.

Stephen Zelnak, Jr.: Sure.

And once again, that is star 1 for questions. We'll go next to Bob Bridges of Sterling Capital Management.

Good Afternoon, in looking through your 10k, you have a great discussion in the back about reaching years of building out your remote distribution strategy. If I do my math right, it looks like you disclose in 2002 about 12% to 13% of your volume shipped came through the remote plants that have the higher embedded freight costs. What do you invision over say the next three to five years that growing asset base for you is going to be able to generate in terms of the total shipments?

Stephen Zelnak, Jr.: We've commented publicly. If you take our water borne and rail shipment, which is all of it combined, whether it goes through a distribution yard or the direct customer, the last couple of years it's been running about 23%. We've indicated that over the next five years we expect that's going to ramp up in the 25% to 30% range. And there are a couple of reasons for it.

One is that there is a dimunition of reserve, in the markets that we serve, you know, southeast, coastal market, gulf coastal markets, and the reserve base is not going to be there and material is going to have to come from other places, which really is the underlying component to our long-term strategy. So we think we're going to pick up some market share, based on growth in those market, which are above-average growth markets, and lesser resource to supply, so that will take us up, we think, in that 25% to 30% range. How it breaks out with distribution yards versus director shipments, you know, remains to be seen. I don't think the split will be a whole lot different than they are now.

So the split, you said the total for both direct and for remote yards was 23% last year?

Stephen Zelnak, Jr.: That's correct.

So it's roughly maybe 60/40, yards to directorship right now?

Stephen Zelnak, Jr.: Yeah, 50-50 to 60-40 is probably the range.

Okay.

On the directorship then, how does that, is the gross margin impact comparable? Because I think that it said that there's with about a 400 basis point gross margin impact on the remote yard. How does the math work on the directorship?

Stephen Zelnak, Jr.: It depends on whether or not we're paying for the freight or the committee is paying for the freight. If it's a directorship, the freight is embedded. If it's a directorship where the customer is paying the freight, then we are quoting FOB to the yard, then all we would have in revenue is the fob.

What kind of impact or gross margin dilution are you using for your strategic plan, going out? Maybe if you just look at it on a consolidated basis through both modes? Is 400 a good number to use, kind of looking forward?

Stephen Zelnak, Jr.: Yeah, I think it's probably going to average less, wherever we are on the non-long-haul compelling business. I think you are probably going to average, you know, 400 or so basis points less than the truck or directorship, without freight embedded component of the business.

The real question is, where do the margins go in the upcycle? We've indicated that particularly with all the efficiency improvements that we've made at key plants, you know, high-volume plants where we think we have a lot of growth opportunity, you know, as volume expands and we go back up the cycle, the incremental ought to be awfully attractive. So we expect the whole margin curve to move. What is also going to happen, we think, is that as material becomes shorter in some of these long-haul markets, the pricing opportunity there is going to become more attractive than perhaps in some other areas. So we think in that five-year period we'll probably see some pricing opportunity above what we may see in some of the other markets.

And kind of speaking to that, we've talked a little bit last call last quarter about maybe the hot springs at the Jones, Arkansas plant and some of the other plants that have had the recent productivity enhancement projects go on.

Can you maybe quantify for us a sense of the magnitude of what the profitability looks like in some of those plants in a before-improvement and after-improvement basis?

Stephen Zelnak, Jr.: I'm not going to try to, you know, dissect them because they're in various stages. But I will tell you that in the analysis that we did on these various plants where we put productivity improvement money, it's not unusual to be looking at 50 cents to $1 reductions in the cost structure. And that's big money in the aggregates business. So we're not talking about low-impact projects. If you look at these on a rate of return and average them up, then you're looking at projects that are going to average over 30% internal rate of return as we would pro forma them and view their performance. So these are very important to us, going forward.

And one last question. What were the dso's at the end of the quarter, and what is the quality of your receivable work look like? It looks like the receivables have picked up as a percentage of sales?

Stephen Zelnak, Jr.: Receivables did pick up a little bit. The major reason for that was that we got a slug of sales at the end of March. So you have to think about when people were paying. The quarter was pretty dismal. It was a winter quarter and a horrible February, early March, and then we got a very nice slug of sales at the end of March. That's what boosted receivables number.

Dso information is not something that we give out. The primary reason for that is because everybody has a different formula for dso. And I don't want to get into the comparables when you're not dealing with same formulas.

Great, Okay, thanks a lot.

Stephen Zelnak, Jr.: Sure.

We'll now go to Trip Rogers of UBS Warburg.

I'm trying to reconcile the guidance for the second quarter vis-a-vis the year. It seemed like, I'm looking at 70 cents to 80 cent, it's still quite a depressed level of earnings. Is there anything, when you look at the backlogs at Apac and others, that that won't come through in the second quarter that's more back-end load at the year?

Stephen Zelnak, Jr.: Yeah, I'd love to see it come through in the second quarter. But given our recent experience, I'm not going to bet on it. We're going to watch it develop.

I think that certainly, given normal weather patterns which we didn't have last year in the Q4 and late in the Q3, that the contractors ought to be very, very business with respect to road work in the second half of the year. Our forecast really does count on that. You know, there is a small expectation, and I stress small, that there is a little bit of glimmer of some increased activity out there. Our customers are giving us a fair amount of feedback that they're quoting more work and picking up more small job, kinds of things that are, you know, off the screen that have to accumulate. So that's encouraging.

So we're looking at it, you know, last year was a very tough second half, particularly the Q4, and we're just looking at it in terms of being very busy in the second half of the year. We're very hopeful that we get an opportunity to do our business from a weather perspective.

It seems like that second half, the business in the second half will be driven again by the backlogs. You're not assuming any kind of rebound in commercial or road and interstate funding, are you?

Stephen Zelnak, Jr.: Actually, I think we'll get a little bit more activity on the road side of the equation in the second half, based on the late release of funds for this fiscal year. You know, if you think about the fact that, you know, it was March before you determined a budget and the states for holding back, you know, it's likely that we will see some uptick of activity in late Q3 and that should carry on into Q4. And actually should give '04 a little boost.

Yeah. Thanks a lot.

Stephen Zelnak, Jr.: Sure.

And again, that is star 1 for questions. We'll go next to Fritz Vonkarp of Sage Asset Management.

Good afternoon, gentlemen, and ladies, if there are any there. Last year, remind me, is my impression correct that second half was somewhat softer last year than the first half, overall, aside from the seasonal factors and.

Stephen Zelnak, Jr.: It was, you know, bids really headed down pretty sharply about mid-year, Fritz, and the overlay on top of that was the dismal weather really from about mid-September on.

Was that pattern in the second half, does that apply specifically to the highway and road sector as well as everything else?

Stephen Zelnak, Jr.: The highway and road sector last year was probably more impacted by the weather issue than it was by anything else, just an inability to perform. The only other thing that was out of the ordinary there was the state of Virginia, which shut down some road work. In fact, we had some pretty sizable shipments targeted on specific jobs that were delayed or shut down.

Yeah, that's right, I remember that, because Virginia ran into their budget problems. Now, the reason I ask that, last year the federal budget was also delayed, just as it was this year, not quite as much as it was this year, and yet the second half was weaker than the first half. I almost got the impression that the states, you know, tell me if this makes any sense at all, the States sort of just, you know, at some point decided to come to terms with their fiscal issues. They weren't forced to do it until they got into the second half of the budget.

Could that potential live happen against again this year, that we see the second half weaker because of what is happening in the state budget?

Stephen Zelnak, Jr.: Well, I think you know that many of the states are financially weak. You know, in our thinking, we're trying to factor that in. We were pleased to see some increased road funding like Ohio and certainly what looks like the promise of that in North Carolina. Two things impacted it last year, don't discount the weather factor, cause it really was a killer for work that was our there, and keep in mind that, with that not being done last year, that there is considerable carryover that has to be performed within this calendar year. These jobs all have time frames on them.

One thing that the contractors are telling us -- and I just met with a large group of our biggest customers -- is that they're going to be under considerable pressure because they have a lot of work that has to be done before the snow flies at the end of this year. So my belief is you're not going to see the same pattern. But you know, do States had money to spend? No, not really.

So the carryover, so therefore you think the carryover, the money that got pushed out of last year to this year will be greater than the money being pushed out this year into next year?

Stephen Zelnak, Jr.: That's our view, yes.

Okay, that's helpful, thank you very much.

Stephen Zelnak, Jr.: In a perfect world without the weather impacts last year, you'd probably see just a pretty smooth flow of that. It wouldn't be much different, statistically. But the weather has caused the aberration.

Our next question is a follow-up from Armando Lopez.

Hi, could you talk a little bit about the pricing environment and how much of the price improvement was attributable to mix versus actual increase? And then on the aggregates gross margin, how much of that gross margin improvement is due to price?

Stephen Zelnak, Jr.: Okay.

With respect to pricing, we had indicated that our average sales price at heritage operations was up 3.3%. You know, I can't give you a precise breakout on mix. I can tell you that because of the weather pattern, we sold more clean stone versus base materials in screenings than we typically would at this time of year. We had forecast originally that we would be in the 1 1/2% to 2% rage for pricing for this year. And if you strip mix out, I don't think it was a whole lot different than that, your 2% kind of range, I think, would be a fair number. So we had that, you know, with respect to gross margins on the aggregate business. But repeat that, what are you looking for?

Yeah. You mentioned like margins I think were up 100 or 110 basis points. And I was just trying to get a feel for how much of that improvement is just a function of pricing versus like cost improvements.

Stephen Zelnak, Jr.: Well, obviously pricing, you know, is a major piece. But what you have to put into the equation is what we had to cope with during the quarter, was a 13% decline in production. So we had to carry a very heavy fixed cost, and I don't think you can look at it and just take one element and really understand comprehensively what went on in the quarter. You know, pricing carries today, but on the operations side, the fact that we were able to cope with what we coped with as effectively as we did, in my opinion, was a big plus. Because we absolutely got massacred.

Right, yeah, it's a big drop. Okay, thank you.

Stephen Zelnak, Jr.: Sure.

It appears we have no further quest at this time. I'd like to turn the call back over to you, Mr. Zelnak, for any additional remarks.

Stephen Zelnak, Jr.: Okay, thanks for joining us, certainly a tough quarter and a tough six months. We'll all cross our fingers on the economy side of it. Certainly we're working very hard to run our business as efficiently and effectively as we can. We're look out the window at what was sunshine, and I think that's really the key for the remainder of the year. We'll be back to you in the second quarter and telling what happens then. Thank you for joining us.

Once again, that does conclude today's conference.