Martin Marietta Materials Inc (MLM) 2004 Q1 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 remarks and introductions, I'd like to turn the call over to the President and Chief Executive Officer, Mr. Stephen Zelnak, please go ahead, sir.

Thanks for joining us today. I have Janice Henry, our Chief Financial Officer, Anne Lloyd , our Chief Accounting Officer and Roselyn Bar, our General Council.

First quarter showed significant improvement from the prior year. Our first quarter loss of 14 cents per diluted share compared favorably with the 29 cents per diluted share in the prior year, before an accounting change, which increased the prior year loss to 43 cents per diluted share.

Net sales increased 12% to $308 million with strong performance from both our aggregates and specialty products segments. Aggregate shipments at Heritage locations were up 10% based on better weather and an improving economy. Aggregate's pricing increased 2.6%. Shipments were particularly strong in the Carolinas, Virginia, Indiana, southwest Ohio, south Georgia, Florida, Iowa, and south Texas.

We continued our trend of margin improvement with a 240 basis point increase in gross margin in our aggregate's product line at Heritage locations. Our road paving business was negative for the quarter. We have a dispute with a state DOT for charges on a remaining large construction project. We took what we believe is a conservative view of the disputed charges, which reduced earnings 3 cents per diluted share for the quarter. Upon completion of this project, we will have exited our road paving business in Louisiana.

In our specialty products segment, our magnesia specialties business got off to an excellent start. Revenue was up 26% to $25 million. Operating earnings were $3.2 million as compared to a small loss in the prior year. Our lime business is strong. The pricing up 10% for the quarter.

Our sale of byproduct brine to Dow chemical was a positive contributor, as was increased magnesic chemicals volume for water treatment and pulp and paper applications. We expect this business to remain strong for the year.

In our composites business, we continued to bring on line our new factory at Sparta, North Carolina.

In April, we reached a milestone with the completion of acceptance testing on our first flat panel machine. This innovative technology is used to produce lightweight flat panel products for applications ranging from truck-trailer floors and walls to mud mats and portable runways.

We have underway or committed a significant number of customer trials, as well as quoting an increasing number of opportunities for our products.

We're pleased with SG&A expense, which was 10.2% of net sales for the quarter versus 11.3% in the prior year. Our management restructuring and our aggregates business, along with reduced pension costs were positives.

Based on current information, we believe the outlook for both our aggregates and magnesia specialties business is somewhat more positive than our earlier view. In aggregates we expect volume to increase 2.5% to 4% with pricing up 2% to 3%.

We expect our earnings for the year to fall between $2.37 and $2.62 per diluted share.

For the second quarter we expect earnings can be to be in a range of 85 cents to 97 cents per diluted share. 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 would like to ask a question, please do so by pressing the star key followed by digit one on your touchtone telephone. If you are joining us today using the speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order you signal us and take as many questions as time permits. Once again, please press star one if you do have a question. Our first question comes from Jack Kelly at Goldman Sachs.

Afternoon, Steve.

Hey, Jack.

Just a couple of things. Maybe doesn't sound like it showed up in the quarter, but diesel costs given what's been happening to oil. Can you give us a sense of what the average diesel price was for you in the first quarter, compared with a year ago, what drag, if any, and how you see the rest of the year. Secondly in the past you've had at times I think the magnesia specialty business kind of under strategic review and then opted not to do anything with it, except hold onto it. You know, given that things seem to be turning pretty sharply, just kind of wondering what your kind of current view of that subsidiary. Finally, if you can give us a little bit on the aggregate side, a little bit more of a breakdown geographically on how things went.

Okay. Starting with diesel costs, actually in the first quarter, Jack, diesel cost was down a little bit, roughly a million dollars, a little over a million dollars of positive benefit compared to last year. Average diesel price for us was about $1.03 a gallon. However, last year in April diesel began to drop and this year in April diesel was rising.

So as we go into the second quarter, I think we'll clearly see a contrast with that. So that's where we are right now.

With mag specialties, you're correct we have looked at that business, we did sell the refractories component. Our view for quite a long time has been if we could take this business and re-position it so that our factory production facility at Manistee, Michigan, which previously produced predominately refractories, we converted them into a mag chemical plant, we would have a much better profitability strain. Likewise, we felt like the lime business was good business anyway. What's happened is that with the steel business perking up and being as good as it is, dolomitic lime, which we're the largest producer in the country, is in short supply. We are essentially sold out.

We would expect to have a record production year there, barring breakdowns at the plant. And with that we had an opportunity to improve pricing, which I cited in my earlier comments. We just think that business is going to be strong certainly this year, probably going forward for a while.

Mag Chem part of it, with the agreement we made with Dow chemical, whereby we supply them with byproduct brine. We take out the magnesium chloride portion of that, their interest is in the calcium chloride. We ship them that brine. We are selling that to them via a 27-mile pipeline that was put into service the fourth quarter of last year. That is a good deal for both companies. The benefits, we certainly are beginning to notice.

On top of that, we've got a couple of new products in the mag chem area that are going well, vapor area, then our water treatment products line, which has picked up markedly. So we're reasonably positive about that business right now. We've gotten the investment base down to an equity level of about $20 million, so it does not take much to make very positive returns on that equity in that business. We have no plans to do anything other than run it and run it well.

And I would publicly compliment our management of that business because they have hung tough and done quite a good job.

With respect to aggregates I'll give you some further breakdowns on volume.

In our Mid East division, which stretches from North Carolina up through Virginia, Maryland, West Virginia on out to Ohio and Indiana, volume was up about 16% as I had cited earlier, Carolina volume was good.

Volume was particularly strong in Indiana and Ohio, better weather and also we improved demand there. Virginia was surprisingly strong. Something that we did not expect. The southeast division, which covers the rest of the southeast down through Florida, all the way out to Louisiana, volume level there was up about 12%.

Very strong in the coastal markets, Florida, south Georgia continued to be outstanding. Very little pause there.

Southwest was really a mixture. Volume was essentially flat out there. We had very good volume in the south Texas area, what you'd call the NAFTA quarter. But we were impacted pretty severely by weather in San Antonio and Houston. We had good volume in northern Texas. But the weather impact in San Antonio and Houston reduced those below the levels of last year.

In our Northwest division, which is the farm belt and the quarries we have that range out to the West Coast, Iowa was particularly strong and the overall volume increase for that division was 12%.

Thanks for that rundown.

Sure.

Our next question comes from Arnold Ursaner at CJS securities.

Good afternoon, everyone. This is actually Joe Geomichael in place of Arnie.

Okay. Hey, Joe.

Just two quick questions for you. In the past quarter you bought a little over 500,000 shares back. What remains on the authorization for the share buyback?

We've got about 5.2. In total we've taken down a little over 800,000 shares in fourth quarter of last year, first quarter of this year against an authorization of 6 million.

Got it. Thank you. And also just on the composites, obviously you're starting to take the indications, and you're saying revenues for '04 can be anywhere from 15 to 30. Do you have any sort of idea what your revenue run rate can be by the end of Q4?

I really don't want to speculate on that yet. We're still in the early stages. I will tell you that it's been interesting to watch it unfold. We're still, as I say, in the early stages.

But what has happened with the opening of the factory, we're beginning to manufacture products now. And we're getting a steady stream of visitors to Sparta.

Interestingly enough, we're getting major companies that are calling us who are wishing to come and visit the factory to see what it is that we have, because it is -- it's intriguing technology. And we'll see where we can take it from there.

I'm sorry, I think you've mentioned it before, but what's the revenue levels you guys require for break even in composites?

It's going to depend upon what product line. There is a wide divergence in terms of the profitability in individual product lines. But if we get in the $20 million-$25 million range annualized, we ought to be in the break even range. So it's not going to take very much.

We do not have heavy fixed investment in this business. If you recall, that was one of the key things, key attributes of this business that we started out with as an objective. And one of the reasons why we think it's attractive.

Got it. Thank you very much.

Sure.

Our next question from Nishi Sued from Smith Barney.

Good afternoon. My first question is on commercial construction. I just want to understand your thinking better here.

You're seeing signs in your operations that commercial construction spending is beginning to recover in some areas, but you're sticking to your expectation that it might not recover, perhaps not even until the beginning of 2005. Can you give us just some greater detail on how you're reconciling those two?

Yeah, I think what we're really talking about is shades of movement here. You know, we are seeing the beginnings of some improvement for the first time in a couple of years in commercial construction. You know, statistically barely just beginning to show.

But one of the things that we're looking at is ground cleared, people ready to construct, because that's a precursor for the placement of stone, concrete and crushed stone, and asphalt parking lots in many cases that go with that. So we're a little more encouraged than we have been. But the comment was meant to say that we don't see any boom taking place in commercial construction.

We do see commercial coming out of the trough. I would expect that fourth quarter was probably the trough -- last half of last year was the trough. And we're seeing some small signs of recovery.

And I would expect that as we get into the second half of this year, we'll see a little bit more discernible recovery. But difficult to believe that anything exciting is going to happen there, until '05. So hopefully that elaborates a little better on the comment.

That's great. Second question is on acquisitions. Now, you deployed or distributed significant cash to the share re-purchases in the quarter. And, you know, the contribution to the pension plan. Looking ahead in terms of acquisitions and in terms of the valuations you're seeing out there, now that times have improved in the aggregates business, are you seeing more attractive opportunities out there in terms of acquisitions that might consume some more cash in the future?

Interestingly, no. I would have expected that we would begin to see some more opportunities that we might like at this point. But the acquisition flow that we're looking at, is probably at as low a level as we've had since we've been a public company.

Very few opportunities, the ones that we're looking at not very excited about pricing that the owners want. I still think there's an adjustment that has to be made by some of these small owners. Many of these people are people who had the opportunity to sellout in the back half of the '90s.

And there were some pretty nice valuations paid then, because the business was growing, the opportunity looked better. If you come forward to today, the growth rate doesn't look like it's going to be as robust, therefore the valuations when you run your models are going to be lower. I think that's just difficult to accept for some of these people who, quite frankly, missed their opportunity for a while.

So we're going to maintain the discipline, we'll buy when we think it's attractive and adds value. But if it doesn't, we're going to deploy the cash in ways we think are constructive. We're going to pay our debt down, we paid down all of our short-term debt. We'll review dividend, again, which we have said, bought back some shares.

We will make capital investments where we think those are attractive and can add value. However, at this point I don't see capital investment exceeding depreciation. So that's the scenario for us. We expect to see a lot of positive cash flow.

And we expect to deploy that in the best interest of the people who have invested in our company.

Okay, great. I'm sorry, just one final question here on pricing. You saw a good improvement in your aggregates pricing in the first quarter. I was wondering if you could help me to understand how pricing is affected by shifts in your kind of end user demand. So over the last couple of quarters, residential has been very strong, while let's say highway and commercial have been weaker. What kind of impact will it have on pricing as commercial, for example, begins to improve or if we see a stronger growth in highway spending?

Well, it's a good question. Commercial I think is really key.

Because if you look back over the last couple of years, the ready mix concrete segment of our aggregates market has been relatively weak, even though residential has been good. A big chunk of opportunity lost when commercial goes down for the concrete people. And because of that, there have been more than a few price wars in the concrete industry, margins have been relatively low, in some cases nonexistent.

Therefore, tremendous resistance to price increases on materials. What we are seeing is that for the first time in most markets in three years, that there is some optimism on the part of the concrete people. And after three years of not being willing to accept price increases, us not being able to get them, we're seeing some ability to get small price increases there.

As commercial expands, I would expect, then, that the demand for concrete stone improves. And with that, you've got an opportunity to get some better pricing for that segment of our business.

The pricing in the asphalt side is already reasonably good. You know, it's been maintained. And certainly with a new highway bill at some point, that ought to push up the demand, particularly for asphalt stone, which in some markets is already in short supply. I think the pricing scenario there will continue to be positive.

The other segment of our business, which goes with commercial, and some with highway, is base stone. With the commercial having gone down, base stone tends to be in a surplus in most markets. So as commercial goes up, that will be in better balance and more opportunity to get some pricing there. So commercial is really the key in my view.

Okay. Great. Thanks.

Sure.

And this question is from Trip Rodgers at UBS.

Good afternoon. Let's talk about have you seen any impact as far as the delays in the highway bill, as far as the state delaying any projects and also maybe possibly what you're seeing is for the state budgets and any kind of recovery there and reflected in better spending.

As far as the impact with the ongoing debate at the federal level, we don't see any impact at this point. Basically what we've got is a continuation. What was a pretty good number before, remember that the number had been kicked up to $32 billion. The one-year authorization was almost $34 billion. So, you know, it's not like we're operating at levels which take us back. In fact, they had taken us forward.

We're continuing at really a record level. With respect to the states, you know, we are beginning to see some improvement in state budgets, which is certainly a positive. Difficult to know what the states are going to do with respect to highways. I can tell you that the need is there.

Also I can tell you that in my view, that states have been kind of holding their breath hoping they were going to get some disproportionately mammoth federal program. That wasn't going to happen, in my view, a year ago, certainly not going to happen now. The $375 billion number that was floated in the house transportation committee really was a nonstarter politically. But there were people out there who believed that that was going to get done. I think that's pretty well dead.

So what we're at now is a point of realism for the states. They understand they are going to see increased monies, but not quite certain what.

But whatever happens, they are going to have to raise revenue at the state level and take more responsibility. One of the problems in the last six-year bill is that many states shifted revenue out of their state funds for federal match. And that was a wise thing to do. They weren't going to let the federal monies get away. As you look at where they are today, they are going to have to come up with more money to meet the match on a bigger bill and keep their state programs going.

So I would expect over the next couple of years, we're going to see some additional revenue generation out of states and also municipalities. What's happening in many metro areas is they are looking at the states, and the states aren't giving them the help they need. They are saying we're going to have to get it done ourselves.

So combination of additional bonding, and I guess what politicians call revenue enhancement. We'll call it user fees. Whatever you want to call it. I think that's where the activity is going to be.

That helps. Specifically for North Carolina, you were talking about a year ago we were having some environmental issues there and that seemed to be cleared up in the second half of last year. Can you talk about where that stands as far as spending?

North Carolina is in good shape. The first half of last year, North Carolina's highway lettings, the flow can take place over two or three years but the lettings were almost nonexistent. It was held up by environmental issues. In the second half of the year mammoth lettings. The pipeline is loaded in North Carolina. Plus the governor has put forth a resurfacing program and we're in the third year of that. That's about $150 million of extra money.

Plus. he came forward with a transfer of trust fund monies that were originally primarily aimed at loop highways around the major metros. There have been delays on those projects. He's freed up that money, $630 million minimum up to a max of $700 million over a two-year period. So I think you're going to see strong activity in North Carolina from a road standpoint.

The other positive for North Carolina, and really the core southeastern states we operate in, North Carolina and South Carolina, southern Virginia on down through south Georgia are manufacturing areas.

And clearly the manufacturing component of this recession has hit those areas extremely hard. For the first time since it hit, you know, we're beginning to see it come out of the trough in those areas. So I'm somewhat encouraged by what we're seeing there. It's certainly much better than what we saw in the last three years.

Good. Thanks. Nice quarter.

Thank you.

Our next question is from David Weaver with Legg Mason.

Good afternoon.

Hi, David.

Can you give us an update on the Bahamas? I think last quarter, if I recall, it was about break even. Give us an idea where that sits today?

I will give you an update on total offshore. What I will tell you, is there are a couple of things going on. We indicated Bahamas was probably going to ship at a 5 million ton level. We think we're going to ship at a 5 million ton level.

The offshore operations had kind of a rough first quarter, particularly in Nova Scotia, we got started very late. So we did not get the contribution out of offshore that we expected. Bahamas was a little lighter than we expected.

So even with the improvements we made, there was opportunity for more and better with the offshore. The expectation is that the next three quarters with the offshore are going to be very good. Bahamas is, you know, going great guns. Nova Scotia has opened up. Our problem in Nova Scotia in particular is shipping. We have demand, which, in fact, has caused us to allocate approximately $4 million of additional capital up there to increase asphalt stone capacity, which we hope to have in place early in the third quarter.

We're trying to round up additional shipping, which has been tight, and trying to make sure that we maximize the turns on the ships that we are using. We think that the rest of the year that offshore is going to make a very positive contribution, both Bahamas and Nova Scotia. That's where we are right now.

Okay. Could you give us a little more insight on the road paving operation, maybe an idea of what the issue is there. Can you give us an idea what the size of that business is?

The size of that business is one project.

Okay.

At this point. What we did last year, if you recall, in the fourth quarter is we divested Shreveport asphalt and construction paving operations. And as part of that, we sold the business and we also wound up with an agreement that enhances our ability to sell stone in Louisiana and north Texas.

However, we kept one project to finish, which was an interstate project. With respect to that project, we have a disagreement and dispute with the state, related to charges that, you know, we view as charges that we're entitled to. The state has a different opinion. During the quarter, what we did is we took what we think is a worst case scenario and we went ahead and conservatively booked it that way. And that reduced our EPS for the quarter about 3 cents a share.

You know, I would tell you where we're probably headed is to litigation. We have a very strong view that we're entitled to certain revenues which are pretty significant. And at this time, at this point, the state has been unwilling to recognize that. So we will probably litigate that one, we will finish up that particular job. We will no longer be involved in road paving in that area, however, we will have an enhanced aggregates business with a company that bought that operation. Pretty significant increase in our aggregates business.

Okay. One last question. On mag spec, looks like margins are almost 13% there. Is that a sustainable rate for that part of the business?

We think we're going to have a very good year there. I would say, yeah, we likely should be in that range. The margins in the lime business are going to be very attractive. You know, I mentioned significant price increase there. We're going to run at capacity.

And the capacity utilization at our Manistee facility has ramped up sharply with more magnesia chemicals volume. We're getting a much better margin structure there, plus our ability to sell the calcium chloride brine to Dow is a real plus. It's improved our operating effectiveness. I think we'll have a good run there.

Could you give a Cap Ex update for the year? Cap Ex should be in the vicinity of depreciation, which is around $140 million. Great. Thank you very much.

Sure.

And the next question is from Jack Kasprzak of BB&T.

Good afternoon. Hi, Steve. One of my questions was just asked and answered. Also the $32 million pension contribution you made. Is that reflected on the cash flow statement for the quarter in the other assets and liabilities line, is that why that's negative?

Yes.

Okay.

We did make that investment in the first quarter and that reduced cash. That was a deployment of our cash.

Okay, great. Back to the subject of highway construction, I guess following on Trip's question. T21 was a big increase in funding when it was passed. Seemed like, in retrospect, we can tell a lot of the money was spent on, say, larger, longer life projects, a lot of bridge projects or maybe a little more aggregates intensive. Do you think there's a possibility that with a more modest increase in spending, the states would be more likely to take on, you know, smaller scope, shorter life projects that might entail a little more paving work, that might be more aggregates intensive? Could that be a silver lining in this current highway program?

Jack, I think they are going to have to. If you go back to the last bill, go back to T21 when it kicked in. The states, if you look at the aging of the interstate system in particular, the interstate system was overcapacitied. Or undercapacitied rather, overused.

In order to get the capacity up, there was a lot of work that needed to be done to rip out old bridges, raise the height on bridges, to widen bridges, put in three and four lanes to make those bridges four and five lanes over the top, to handle traffic flow onto the interstates. Much -- there was considerable amount of the T21 money that went toward those kinds of projects. Not that there is still a need, but in the interim, what we've had is -- a disproportionate amount of that kind of construction relative to resurfacings and widenings.

If you look at condition of just the roadway now, I think you're going to have to go back to the basics of paving a roadway before the roadway disintegrates.

My expectation is we're going to see more consumption of aggregate highway money in the next bill. If you go back and track the numbers in the last bill, and the federal highway administration publishes this kind of data, you can see the consumption of aggregate going down during the life of that bill. I think you're right on target.

Okay. Great. Thank you very much.

And as a reminder, if you would like to ask a question, please press star one. You have a question from Bob Bridges at Sterling Capital Management.

Good afternoon.

Hi.

I also want to build on Trip's question earlier. I'm just curious if thinking about your higher volume guidance for this year, what kind of implicit assumption is built in there on the timing of any federal authorization and the roll through to states. Maybe starting and letting some of their projects get into this year or into next year?

Whatever happens at the federal level with the re-authorization is not going to have any impact this year. Basically what we're working off of is current levels of funding. Projects that have already been let or are likely to be let, given the current level of funding. We're not looking for any increased level of funding. And in fact, given the lead times that would go with that, you're talking about a 2005 event at the earliest.

And then on to fuel. You already commented on directionally what diesel is doing. Can you review for us what the breakdown of your total fuel costs are and how much diesel, say, over the last -- I know diesel has been volatile the last few years, what component of your total fuel cost that comprises?

Total fuel cost or total cost?

Total fuel cost.

The reality of aggregates plants is, in terms of fuels, you're burning diesel, you don't burn much gasoline at all, virtually all diesel that way, then you're using electricity. If you break it out, diesel is a little bit more than the electrical cost to the plant. But I can probably give you, you know, a percentage of total cost that might be more helpful.

Okay.

So if you were to take, you know, the total cost of aggregates production at the plant, and you were to look at the cost per ton related to diesel, you're probably in the 6 to 7% range on an annualized basis. So it's certainly not the driver of your cost, but, you know, it's becoming a more significant factor. If you go back three years ago, we were paying about 35 cents a gallon for diesel. Now we're more than triple that.

Our costs have not gone up at that ratio, because we've replaced inefficient equipment with new equipment that has lower fuel consumption rates.

Also we've done a lot of right sizing where we have taken equipment out and replaced two pieces with one, so we've been able to mitigate some of it, you know, as opposed to a factor of three, we're more like a factor of a little over two in terms of cost per unit on diesel, during that period.

Okay. That's helpful.

Okay.

Also, do you have a split for '03, and maybe a plan for '04 on the percentage of aggregate volume moved by the water and rail network?

In '03, we are about 23%. And in '04, I would think it's going to be very similar. We're going to see I think some significant growth, as I had indicated earlier in our offshore business.

The river component is probably going to be up slightly. The rail component is going to be in between the two. It will be up modestly, probably more in line to where the total business is.

And when you look for, you know, the fact that we've got 75-77% by truck, you know, that component is pretty much going to overwhelm it just in terms of weighted average. So I don't expect to see any significant expansion of the long hall distribution percentage.

Great. Thanks a lot.

Uh-huh.

As a final reminder if you do have a question, please press star one. We'll go back to the line of Arnold Ursaner at CJS Securities.

Steve, this is Arnie Ursaner. A real quick question to ask you. You talked about a major auto facility being built in Texas. Can you update us on that and the impact it my on your business.

The Toyota plant, which is about an $800 million project in San Antonio. They have begun to let work there, in fact we have picked up some work, both stone and asphalt work at that facility. That is just getting under way. And as you know, those are nice facilities in and of themselves.

But the real key is within a 40-50 mile radius, you tend to bring in another 50 or so suppliers. And I would expect that's going to lift the economy of San Antonio for at least five years, maybe five to ten based on what other such facilities have done. As a reminder, we are the largest stone producer in the San Antonio area and we are also the largest provider of asphalt.

Okay. And you may have answered it before, but could you update us on generally where you stand on the Greenfield facilities this year and into next year.

Greenfield facilities, there's really nothing of consequence going on. The biggest thing that we've done in Greenfield in the last couple of years has been the opening of an underground mine in West Virginia, in metropolitan Burning Springs. For those of you that don't know, that's not too far from Parkersberg, which is actually a town. And that facility is now beyond the early opening stage. We have plant construction under way there that will be finished about midyear to upgrade the facility. So we're moving beyond the early Greenfield startup cost. And other than that, we don't have anything that's unusual.

Okay. Thank you.

Sure.

And sir, at this time there are no further questions. I'll turn the call back over to you.

Okay. Thanks for joining us. You know, a little more positive outlook as we look forward for the next nine months. Hopefully that's going to continue beyond. We'll talk to you again at the end of the second quarter. Thank you.

Thank you. And that does conclude today's conference call. Thank you all for your participation. You may now disconnect from the line.