Martin Marietta Materials Inc (MLM) 2003 Q4 法說會逐字稿

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

Thank you. Appreciate you joining us today. We have with us: Janice Henry, our Chief Financial Officer; Ann Lloyd, Chief Accounting Officer; and Roselyn Bar, our General Counsel.

We were very pleased with our fourth quarter results in both our Aggregates and Magnesia Specialties businesses. Earnings per diluted share of 60 cents was 83% higher than the prior year's 33 cents. Revenues for the quarter was up 11% to $378 million, while earnings from operations increased 73% to $52 million. Aggregates shipments were very strong in the southeast and mid-Atlantic areas, some 20% above the prior year period. This was a reflection of much improved weather conditions and what appears to be a modest improvement in underlying construction demand.

Unit production cost declined 6% in our Heritage Aggregates product line, resulting in a 660 basis point improvement in operating margin. Production and shipments were in balance for the first time since second quarter, 2002. Our recent capital investments in process improvements produced excellent results.

For the year, aggregates net sales were up over 4% to $1,141,000,000. Earnings from operations increased to a similar amount to $185 million. Magnesia Specialties net sales for the quarter were up 23% to 22 million, based on strong line shipments to the steel industry, increased demand for water treatment products, and increasing sales of the new product line for the pulp and paper industry. Earnings from operations of $3 million compared very favorably to the prior year earnings of $300,000. For the year, sales increased 16% to $86 million, and earnings from operations increased 34% to $5.5 million.

We had an outstanding cash flow for the quarter and for the year. Operating cash flow of $106 million was up $35 million, or 48% for the quarter. For the year, operating cash flow of $277 million was up 36%. During the year we paid off our remaining $30 million in short-term debt, contributed $21 million into our pension plan, increased dividends 20% on an annualized basis, and repurchased $13 million of our common stock. Subsequent to year end, we put an additional $32 million into our pension plan and continue to repurchase our shares. At year end 2003 we had a cash balance of $125 million versus $14 million at the end of 2002. Our balance sheet at year end was the strongest since we became a public company in 1994.

In 2004, we expect to see improved performance from both our Aggregates and Magnesia Specialties businesses. We also expect to see a ramp-up in our new structural composites business as we move through the year. Composites is expected to incur start-up losses in the first half of the year based on limited sales. As sales begin to increase, we would expect to see the business become profitable in the second half of the year. With total company, based on our current assumptions, related to demand growth and improved operating efficiency, we expect earnings per diluted share to be in a range of $2.30 to $2.60 for 2004.

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

Thank you. The question-and-answer session will be conducted electronically. If you need to ask a question on today's conference, star 1 on your touch-tone telephone. If your phone is equipped with a mute function, please make sure that the mute function is turned off to allow the signal to reach our equipment. Once again, star 1 to ask a question. We'll go first to Jack Kelly with Goldman Sachs. Please go ahead.

Good afternoon, Steve.

Hey, Jack.

Couple of things. In terms of the composite business, you indicated break even for the year with losing money first half, kind of making money in the second. If you do reach a break-even what would be the run rate in margins in the fourth quarter as we kind of looked into '05? In other words, what kind of margin level would you have to get into the fourth quarter to break even for the year? Secondly, on pensions, could you just give us what the expense number might be in '04 -- pension expense, and if any more cash is going to be put in there? I know you're probably not required to, but if you're thinking about it. Third, just if you could comment on the Bahamas facility, you know, where in general terms profitability is and what needs to happen there to get it higher?

Okay. Let's start with composites. What I would tell you in composites in the latter part of the year, that we would need to get to double-digit margins to be at the break-even area, so that's certainly the target. It's really going to be dependent upon development of sales, Jack. We've got a lot of conversations ongoing now with companies whose names you would recognize if I were at liberty to talk about it. Just depends upon how quickly we get some of these opportunities put together and again to turn the product out the door in sales mode. So that's the key to it. Pension expense in cash. I'll ask Janice to comment on.

Pension expense -- we would expect to see about $14 million of expense in 2004, and we would not expect to make any further contributions -- cash contributions in '04.

We've done our job on the cash side into the pension plan, Jack. One of our objectives, obviously, is to make that sure we meet our obligations to our employees. We feel like we have done that very well, and we were in a position to go ahead and take care of it, and we did. With respect to the Bahamas, Bahamas operated at a loss in the first quarter, and the last three-quarters we operated profitably. As we go into '04, the expectation is we're going to see a ramp-up in both volume and earnings in the Bahamas. With respect to volume in the Bahamas, we were a little over four million tons in '03. The expectation is that we're going to be five million tons or probably better in '04. And with that comes cost reduction as we've improved our process there, and we think some pricing opportunities also. So we're pretty optimistic about that for '04.

Janice, could -- the pension expense number for '03 versus the 14 million for '04?

16 million in '03, 15 million in '04.

16 in '03?

15 in '04.

15 in '04. Okay, thank you.

Contribution, Jack, you know, gives us the opportunity to control pension expense for '04. Go ahead.

And we'll go next to [Joe Baumnagel] with CJS Securities. Please go ahead.

Hello there. It looks like your inventories are down sharply year-over-year. What were the targeted inventory reduction levels, and how much additional improvement to margin do you think that can have?

We set out to reduce our inventory levels by something in excess of 10%. We were successful in doing that, and we think we did it in the right way at plants where we had the opportunity to do it. It clearly hurts you. Sixty to 70% of your cost is fixed in the short term. So you can take the inventory reduction level, and you can play with it that way, and it's going to give you a number which will approximate what does it to your earnings. Expectation in '04 is that we're going to operate in a more balanced mode. However, I will tell you that we continue to be focused on working capital reduction, both receivables and inventory to a smaller degree, but certainly very strong focus on receivables. So the expectation is that with a ramp-up in sales, we're certainly going to see working capital reduced as a percentage of sales, and the target is to reduce it in absolute dollars.

And just an additional question. Could you talk a little bit about the road paving business that you've sold?

Yeah. We had -- we've actually got three elements of road paving, one located in the Shreveport, Louisiana area, one located in the Texarkana area, and another located in Hot Springs. The element that was sold was the one located in Shreveport, which is an asphalt and construction paving business. That business was not profitable. We sold that with a small loss on sale. That was concluded in the month of November. And at this point we retain the other two businesses.

Okay. Thank you.

We'll go next to [Nashu Sued] with Smith Barney.

Good afternoon.

Hi.

First question is on the aggregate side of the business. Now, you cited a 6% decline in cost per ton in the fourth quarter coming from volume increases and from efficiency gain. On a rough order of magnitude, how much of that decline was from volume and how much was it from efficiency gains?

If I were smart enough to tell you that I probably wouldn't be here talking to you today. I would be doing something else for a living, telling people those kinds of things. That's very difficult to discern, and I'm not trying to be facetious about the answer. You can't really break them apart. I would tell you that the volume component of it probably weighs a little more heavily than the efficiency side, but not much in my judgment, and it's purely judgment.

Okay. Now, you've made significant efficiency gains over the past couple of years, so what about just a rough sense of how much cost you've taken out of the Aggregates business over the past couple of years, three years, through initiatives?

The reality is that with the weather conditions that we have had, the low volumes, you know, it's been screened, and we really haven't had it until the last two quarters. In the Aggregate products last quarter we had a margin increase that was in excess of 100 basis points, this time 660, both of them driven with improved cost. So I don't think we've seen -- what I would suggest to you is that you need to be looking forward in terms of where we're going to go with the efficiency improvements, because we're just beginning to get the real yield out of the investments that we've made over the last three years, and until we get some clear running weather for a sustained period of time, we're not going to be able to show you those numbers, you know, with regularity.

If we do get good weather conditions, then you're going to see it quarter by quarter. So I think it's premature to try to answer that question. It's been masked by weather largely.

On the Composites business, you're speaking of 15 to $30 million in sales for the coming year. How much does that -- how much does that represent in terms of trailer units, and what are you kind of targeting over the next several years to reach in terms of units or market share?

You know, I'm not going to try to break it out for you in terms of trailers, sales to railroads, flat panel products. It is a mix of all. And we have a number of different markets, and it will be a function of which areas we wind up taking orders in first. What I would like to see is that we're going to be pushed on capacity as we get to the back of '04, and we will be spending our time ramping up capacity further. We said publicly awhile back that the objective in this business was to build a 300, $500 million business over a five to seven-year period that had 15% margins. That is the target.

And the other objective is to maintain a very low investment base in this business, which we indicated is the structure, that's the business model, and we don't see anything that says that that's not readily achievable. We don't see any need for significant investment. So we've got longer range target. How fast it ramps up, we're just going to have to wait and see, but if we get the kind of momentum in the back half of '04 that we would like to see, then as we get to '05 discussion it's going to be a very interesting one.

Okay. Just a final question. Share repurchases that you initiated in the fourth quarter. Was that just a result of a cash buildup from working capital efficiencies from rebounding volumes, and is that something that we could expect to continue to see in the coming quarters of the coming year?

Well, clearly, we have cash available, and in the past, you know, our firepower has gone towards acquisitions. We don't see a lot out there that's particularly attractive to us with respect to the acquisition market right now. We continue to look, and if we see something, when we see something that would add value to the business that way, then we will deploy the cash in that manner. If that's not there, then I'm not excited about just sitting on large hoards of cash, particularly with the kind of interest rates that you're going to earn on it today. We've got an excellent balance sheet. We're in a position where we can deploy that cash in a way that's most beneficial to the shareholder. So you should expect that we're going to assess it, we're going to look at the share price in terms of where we think our company is going, and if that looks like an appropriate opportunity, then we'll take down some more shares.

Okay. Great. Thanks.

Sure.

We'll go next to Jack Kasprzak with BB&T Capital Markets.

Thanks. Good afternoon, Steve.

Hi, Jack.

My first question is related to the series of divestitures and asset sales that you guys have undertaken over the past couple of years -- talked about it. Are you pretty well through that program, and are you, I guess, well positioned in terms of -- if you are through it, in terms of your margins that you thought you might be?

Yes, we had a number of things that were on our list as potential divestitures as we came back and looked at what had been acquired during the period where we were extremely active. As we acquired, we picked up some things that had overlapse, where it made sense to shut down some locations, which we did. We also picked up some things that really weren't attractive to us, and we had the opportunity then to divest of those, and again, I would repeat, we've done the majority of that.

With respect to capturing margin improvement from that, the answer is, no, you haven't seen the capture yet. As we get into 2004, and even into '05, you'll continue to see positive things that come by taking some things out that were low performers. And, in addition, what we've done is we put a very significant amount of money into capital investment, ramp up of facilities that we think are very exciting opportunities. That's where the growth is going to come from, and those are high efficiency operations. So as we add volume in those places where we have invested significant capital, the incremental margins there are very attractive, and that's going to give us improvement. We're quite positive about that.

On the subject of capital expenditures, can you update us on your 2004 cap ex plan and what might be in [inaudible] '04 as well?

Yeah -- '04 we're looking at a capital expenditure is consistent with DD&A, roughly $140 million, in that range, plus or minus 5.

Okay.

We don't see anything that is compelling that would cause to us invest more capital. We have a similar target this year. We actually came in about 120 million.

Right. Okay. Thanks a lot, Steve.

Sure.

We'll go next to Bob Bridges with Sterling Capital Management. Please go ahead.

Good afternoon.

Hi.

Can you refresh us if you've disclosed how much the road paving operations in Aggregate have contributed to sales and EBIT? Is that something you've broken out in the past?

We have not. It's a relatively minor part of our business in terms of revenue. It's less than 3% of the total revenue stream of the company. It has been an operation that has not been profitable. The objective for us in entering portions of that road paving business was to improve our long-term Aggregates position. And what we have done there is that we were able to capture the position, and as we have divested, we have captured long-term Aggregate sales in a way that we think's going to be very attractive to us and in a way that we think is actually going to grow our Aggregates business. So we're pretty positive about that.

Okay. And that makes sense. And then maybe if you could walk through the demand and public works funding picture right now in some of your key states and key metro areas as it's shaping up for this part of the year.

Okay. Well, we are obviously being held hostage on the federal side right now. Very difficult to tell, and that has a bearing on what the states will do. It looks like, pretty clearly, we'll get a $2 billion increase at the federal level that will be doled out to the states, goes from 31.6 to 33.6. The real question is, What are we going to get beyond that? And the Senate is in the midst of that right now trying to make a determination of where they're going to be. They will do that first. If they can arrive at that determination, then the House will get into the fray.

As you look at our key states, North Carolina has a pretty good program going in public works. The governor had some excess monies that had built up over time in a trust fund that was isolated. It was dedicated specifically for loop highways around the big cities. Then it had some other elements that went to smaller jobs in local areas, like most places, environmental hold-ups on major construction, so that money has been sitting there. The North Carolina Legislature came forth and took $700 million of that money last year and said, "We're going to use it. We're going to put people back to work." And of that 630 at a minimum is dedicated to roads over a two-year period. Those jobs have already been -- they've already started the letting process for that work, and that's rolling along pretty smoothly. There have been a couple of good size lettings in the last four months, so we're reasonably positive about highway infrastructure in North Carolina. We think it's going to be positive for us. We also are seeing -- there was bond program passed a couple of years ago that was over $3 billion for educational buildings in North Carolina, dedicated toward college campuses, and we're seeing a lot of that money begin to roll out with construction on campuses. So we think that's going to be another real positive at a higher level in '04.

If you go to Texas, which is our next state of major interest, looks like the highway program in our areas is going to be positive, be up in '04. So we feel good about that. Some rapid transit work coming in the Dallas-Fort Worth area which should be a plus in addition to the highway work. If you go to Georgia, Georgia's in limbo right now. We have a very good backlog in south Georgia. We think the year will be good. The question is, what does the state and the governor do beyond that, and particularly how they're going to deal with Atlanta in the longer term, because Atlanta has been in hold-up status -- lots of conflict there with respect to environmental constituency, planning and transit. So it's hard to read where that's going to go. We have very little business in Atlanta. The majority of our business in our strong positions are from the middle part of the state down, and that's where the road work is the strongest. So those would give you three very large states, give you flavor.

And do you have the breakout for 2003 as the percentage of your Aggregates volume that were shipped by water and rail, and how that compares to 2002?

We have not done that yet. It's not going to be greatly different than it was last year, which was 23%.

And building on that working capital question that commented a few minutes ago, do you have any specific goals as to how much you can work down DSOs in the coming year?

We do have some goals. What we would like to do is to -- we took about $25 million out of receivables in the fourth quarter. We'd like to take a comparable amount out during the year '04. That may be aggressive, but that's an objective that we're going to set out after.

Great. Thanks a lot.

Sure.

At this time, we have one question remaining in the queue. I'd like to give the audience an opportunity to signal. Star 1 for questions. We'll go next to [Dennis Schnall, Rubicon Capital]. Please go ahead.

Yep. Good afternoon. Just a couple of quick things, Steve. On the Composite business, you give kind of a broad range of revenues. Would you be breakeven for the year at 15 million of revenues, or is it more kind of at the midpoint of that 15 to 30 million range?

It depends upon which products sell first, because certain product areas we're working in have higher margins than other products. On the lower end, if we were to sell products with the highest margins that we have envisioned, then we can potentially break even on the lower end. I think more realistically you're looking at something in the middle.

Okay.

And upper. Just depends on product mix. It's truly a product mix question.

Gotcha. So there's not much range in margin?

Right.

By product.

Oh, yes, there is wide range in margin.

Couple of quick pictures on the cost set. Obviously, you're getting a lot of productivity on the Aggregate side. How has -- how have natural gas prices affected you on the -- I guess that really just affects the Magnesia business now.

Right. Magnesia last year had additional cost of roughly $2.2 million on natural gas, and we were particularly pleased with our Magnesia business and where we wound up, because we had to eat the natural gas. It was not a market where we could just go out and get price increases to cover immediately. And we came back, and we had a very, very good year in Magnesia, and the expectation is we're going to have a much better year in '04.

That's great. So you're getting those costs back, not through pricing, it's just through your cost management?

No, we're getting them both ways now. We're -- you're going to see pricing improve, we believe. Part of that relates to a change product mix in our Magnesia business. We had a plan that we had several years ago which would take us out of the Refractories business, which we have divested of, and with that we wanted to migrate toward certain types of chemical products that we felt had a real future growth opportunity and some bona fide long-term margins, and refill the plant at [inaudible] with those product. Well, we're well on our way to doing that. So we're quite pleased with that aspect of it. And also our lime operation in Woodville is going very well, and we expect to have high sales volume and improved pricing there this year. That relies on steel mill for its primary demand. And as you know the steel business is very strong right now.

Yeah, absolutely. Good. Just a couple other quick things. Just follow-ups. When you were talking about acquisitions and there not being attractive ones at present, is that more a comment on tuck-in properties that wouldn't -- just aren't being available, or is it a comment on valuation in the market?

It's really both. We continue to look, and I expect most companies out there are doing the same thing. Certainly, we've bumped into some of our competitors looking at some of these. You still have some sellers who have unrealistic expectations. They haven't figured out that the market is going to grow at a lesser rate in most places over the next ten years as it did in the last ten. I think that's reality in many markets.

And also, you know, in terms of looking at things that really have value to us, we have taken down a lot of that in recent years. So if you look at our thrust we've put together over the last six years, a very significant rate of assets, in fact, more than half of our Aggregates business is new over the last six years. With that, we have come back and made major capital investment in what we think are the key locations that really have growth opportunity. So we're going at it a little different way. We've said before, and I'll reiterate it, 70% of our growth in the last five -- actually last six years -- was related to acquisitions. As we go forward over the next five years, I don't expect to see it at that high a percentage. I think we're going to get more organic growth based on the investments already made. The logistic system that we have developed serve southeast and southwest. I think we're going to get some growth out of our Magnesia business at this point, although it's a relatively small one, and we're looking for growth coming out of the Composites business.

Yeah. And just naively, in terms of the structure of the market now on the Aggregate side, are there other, you know, kind of Redland-type properties out there, you know, large holders of aggregate properties that aren't interested in -- or would be willing sellers at the right price, or have the big properties gone to the Martin Mariettas and, you know, [Vulcans], and so on? [inaudible].

Well, there are certainly some out there. I think it becomes a function of pricing. I'm familiar with at least one sizeable one that was put out about a year or so ago. Did not draw the type of interest that the owners thought it ought to draw, and they pulled it back. So it's a matter of finding a buyer who's willing to pay the numbers that the seller wants. My sense is that, certainly, we, as a company, are scrutinizing these very carefully, and based on a lesser number of deals announced, I would expect that other people in the industry are doing the same thing.

Yep, yep. Just a couple other quick things. On the road paving business. I'm not sure I caught all that. You guys have sold Shreveport. The other two, Texarkana and Hot Springs, are they making money, and are they keepers? Or how are you evaluating those?

We would like to reduce our presence in that business. A question of when. A portion of that business we think is certainly a keeper for us. Could be all of it. We'll just have to see how that plays. And the answer to that is that it's a marginal business.

Yeah. Okay. And have you said how much stock you've bought year to date?

We indicated through the end of the year that we have purchased 13 million. We have not discussed anything in '04 other than to say we continue to be in the market. When we get to the end of the first quarter, we would bring you up to date on that.

Fair enough. Thanks.

Okay.

We'll go next to [Jamie Newman] with UBS. Please go ahead.

Yeah, hi. Most of my questions have already been answered, so I'll just ask one quick modeling question. As far as the tax rate is concerned, do you see that staying down close to the 30% level, or trending back up from there?

[Jamie], really if you look at what we've provided in this press release, we've provided you with a range of earnings, and the tax rate is -- I'm going to give you -- will also be a range. At the lower end of that earnings, the tax rate will probably be at 30%. At the higher end of the earnings range, the tax rate will be closer to 32%.

Okay. Great, thank you.

We'll go next to Bob Bridges, Sterling Capital. Please go ahead.

Yeah, on the cap ex comment, you came in I think a little bit lower than what you were saying in January of last year, and it's also a moderate number again this year. Can you remind us about how much of your cap ex budget is for normal maintenance kinds of things, and how much of it is for productivity or other special projects over time?

The reality is that when you're doing maintenance projects, most of them have some aspect that's going to improve productivity, even in the sense of replacing mobile equipment, drills and such. So it's difficult to just break it out, but with the DD&A we have, if you just had to go to a bare bones capital program where you're nothing but replacing equipment that is wearing out, you're probably going to be in the 80 to $90 million range. But even with that, you're going to be enhancing productivity.

I see. And as you think about, kind of, what you just said in '03 and in '04 and cap ex is down noticeably from, kind of, the prior three years, I guess you've really been -- you could deduce that there's no real major productivity enhancement projects that you're funding into '04 comparable to what you're, kind of, doing in '02 and earlier? Would that be fair?

No.

Help us understand that.

Well, actually, you know, at $140 million -- let's take a bare bones of 80ish -- that's another $60 million. In fact, we have some significant productivity improvement, volume expansion projects that are ongoing right now that have already started, got cranked up late last year, got some others kicking off in the first quarter. So you should expect us to continue to invest in those kinds of projects pretty heavily as a percentage of the cap ex we're spending.

We've got a lot of right-sizing on the mobile equipment side to match up carefully with our plants to reduce the number of mobile pieces that we have. Significant amount of automation. Just a lot of improvements. And as we have the opportunity in expanding markets to increase capacity, it really does give you the opportunity to reduce the inputs, particularly the manpower input -- manpower cost per ton of stone, so that's what we're focused on. That's not going away anytime in the near future.

I would imagine that you sense a lot of these things -- pieces of equipment wear out after five to ten year periods of time, that this will be an ongoing thing. It's not like you've only got a three or four year list of projects that you want to put these productivity items through.

Right. And you could take something as simple as a truck replacement -- to give you an example -- you might be running a 35 or 40-ton truck at a particular quarry, and with a relatively minor investment you might have a dump hopper where the truck dumps into the primary crusher that is size-limited. But if you could increase the size of that dump hopper you might be able to go to 50 to 60-ton trucks. And if you're running forty 35s, maybe you knock out a truck and you go to two trucks. Those kinds of projects are the things that we're focused on. You reduce your head count, you reduce your number of pieces of equipment, you improve fuel cost, you reduce maintenance cost, all good things -- very limited capital expenditure.

Super. Okay. Thanks a lot.

Once again, to ask a question, star 1 on your touch-tone telephone, please. And at this time, we have no further questions. I would like to turn the conference back to Mr. Stephen Zelnak for any additional or closing remarks.

We appreciate you joining us. As I said, we're obviously very pleased with the quarter. We look forward to a very positive 2004, and we'll talk to you at the end of the first quarter. Thank you.

Ladies and gentlemen, this does conclude today's discussion. You may disconnect at this time. We thank everybody for your participation.