Martin Marietta Materials Inc (MLM) 2004 Q2 法說會逐字稿

Good day and welcome to this Martin Marietta Materials Incorporated conference call. Today's call is being recorded. At this time for openings 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 with me Janice Henry, our Chief Financial Officer and Anne Lloyd, our Chief Accounting Officer. We had a very good second quarter despite some major challenges with transportation shortages, cement shortages, and a significant negative weather impact in the Southwest. For the quarter net sales of $415 million were up 4% from the prior year period, while after-tax earnings from continuing operations increased 14%. For the first half net sales were up 7% to $722 million while after-tax earnings from continuing operations increased 46%.

Second quarter aggregate shipments from heritage operations increased 2% while pricing was up 1.7%. We had very strong shipments in the Carolinas and Georgia, which overcame very weak performance in our Southwest Division, which covers Texas, Arkansas, Oklahoma, and Louisiana. Major transportation shortages on the Union Pacific Railroad reduced shipments significantly into Houston and South Texas. The combination of railroad issues and record or near record rain in major market areas caused profitability to decline 46% below the prior year in the Southwest. Our other 3 major aggregates profit centers performed extremely well in spite of transportation shortages and cement shortages in the Southeast which reduced shipments by an estimated 1.1 million tons for the second quarter.

The gross margin at these units was up 170 basis points from the prior year. Our offshore quarries and our Mid-Atlantic region showed significant profit improvement compared to prior year. Our magnesia specialties business which is reported in our specialty products segment had another excellent quarter with net sales up 24% to $27 million. Lime sales to the steel industry continued strong with our plant currently in a sold out position. Magnesia chemical sales also continued to show double digit increases.

Operating earnings for the quarter were $4.7 million versus $2 million in the prior year. For the first half, magnesia specialties net sales were up 25% to $52 million, while earnings from operations was $7.7 million versus $1.8 million in the prior year. Based on current trends we expect continuing strong results for magnesia specialties in the second half. Our structural composites business operated at a loss as we continue to build up our manufacturing capabilities.

We had extensive trials underway with a variety of product applications and are beginning to quote some significant opportunities in rail, truck, infrastructure, and military applications. The business metrics for 2004 will be very dependent on the timing of orders in the third quarter and early fourth quarter. Our cash generation continues to be very strong. We finished the second quarter with a cash balance of $86 million versus $17 million in the prior year. This is after investing $32 million in our pension plan and spending $25 million on repurchase of our stock in the first quarter. Our focus on receivables produced very positive results.

A 5 day reduction in days sales outstanding resulted in $37 million less in cash requirements to fund accounts receivables. We expect continued strong cash generation and are focused on how to use it in the best interest of our shareholders. The outlook for our aggregates business is cautiously optimistic for the remainder of the year. We expect transportation movements to improve on both the Union Pacific and CSX railways in the second half. We will have in service 2 dedicated deepwater ships for coastal movements beginning in mid-August. We're in the process of increasing capacity 50% at our Nova Scotia operation from the current 3.2 million tons to 4.8 million tons annually.

We expect demand for material from this quarry and our Bahamas quarry to continue to be very strong. We currently expect aggregate's volume to be up 2.5% to 4% for the year with pricing up 2% to 3%. Given the positive outlook for our aggregates and magnesia specialties businesses we expect earnings for 2004 to fall in a range of $2.37 a share to $2.62 a share versus $2.05 per share in 2003. At this time I would be pleased to take any questions.

Thank you Mr. Zelnak. Today's question-and-answer session will be conducted electronically. If you would like to ask a question you may do so by pressing the star key followed by the digit 1 on your touch-tone telephone. If you are using a speakerphone we ask that you please make sure your speaker turned off to allow your signal to reach our equipment. Once again that is star 1 for questions. We'll pause just a moment to assemble our roster. We'll take our first question from Arnold Ursaner, CJS Securities.

Good afternoon. Can you hear me okay?

Sure can, Arnie.

Hi Steve how are you? A little shocked at the 46% decline in the Southwest. Could you expand a little bit more on volume issues, weather issues, and the transportation and how much of that might be recoverable if weather actually cooperated a little bit in Q3?

Well, the starting point was that shipments were down about 7.5% for the aggregates business and on the asphalt side down about 19%. So we got hit very hard. We've gone through the analysis to try to determine how much of that was related to the weather factor and how much was related to transportation which was Union Pacific shortages. Our analysis would indicate a little more than half relates to transportation. And the remainder of it was very very severe weather from Houston all the way up to Dallas Fort Worth. So 7.5% volume decline on aggregates and 19 on asphalt.

Could you expand a little bit more on what steps they're taking to resolve these transportation issues?

What they're trying to do is, what they have done to date is actually pull some power and cars out of the system. They've been jammed up, unable to move traffic, they've been trying to systematically work their way from the West back toward Texas. Our understand is the movements in the West have improved. There is slight improvement in Texas at this point. And basically what they're trying to do is get the velocity of the trains up. We have met with Union Pacific, we've had considerable conversation with them. We are working together to try to do some things that would increase the turnaround. I made - - in earlier comments I made the comment that we expected the transportation issue to improve in the second half. Based on what we're told by both the UP and CSX we do expect to see that. But we think probably it's going to be end of the year, maybe even the end of the first quarter before they truly get back to their normal performance ratios.

In your guidance what sort of decline do you have in shipments from that region for balance of the year?

We actually think the balance of the year we're going to be in reasonable shape, Arnie. Again it will perk up - - pick up out there. So, we're not looking - - we did not have a particularly good shipments half out there the last half of last year so we're not looking for further decline.

I'll jump back in queue and come back later. Thank you.

Okay.

We'll go next to Jack Kelly with Goldman Sachs.

Good afternoon, Steve. Just 1 question on the balance - - excuse me, income statement and then maybe jump into operations. Looking on page 6 of the press release, other income for the aggregates group looks like we swung from, you know, a modest expense last year to a $3.2 million income item. So roughly a $4 million swing in operating income. Was that a land sale a gain on a land sale or just, you know, it's a fairly big number in relation to the overall gain for the group?

Just normal PP&E is the majority of it, Jack. We had 1 item in there we talked about at the end of the first quarter, and that was a dispute item on a road job in Louisiana. We were able to resolve part of that dispute. So therefore, we picked up some income on that. However, embedded in the other side of the equation on the operating side were some negatives. So if you take that particular job and net out between the 2 it was very slightly positive, couple hundred thousand dollars. So it was not a big factor overall.

Okay. But the 3.2 million income item was largely due to kind of recouping, I don't know if recouping is the right word, - - you recouped it in the June quarter?

No, a portion of that, and actually a modest portion of. The rest of it is PP&E sales, just bigger than they were in the prior year. Just the way it hit.

Okay. And getting back to the Southeast, excuse me, the Southwest, if we were to kind of exclude that decline from the equation, so you had mentioned the other divisions were strong. In rough terms what would have aggregates' operating income done if you just kind of put aside the Southwest if we throw everything else together?

I think if I give you that information, Jack, I'm probably giving away a little bit more than I want in terms of people back calculating, being able to break the divisions out. We indicated that we had a very significant gross margin decline. You could put your own overhead figures with that and figure out what that might do. We've given you information in the past that relates to, you know, relative sales of the various areas. So I'll leave that to the analyst community, but it was very significant. And when you lump that in with the 1.1 million tons of missed shipments in the Southeast, even though we did very, very well in the Southeast, we had the opportunity for significantly more upside in the Southeast. Because those would have been some very high incremental margin shipments.

Okay and then just kind of one last question on the Southwest then. If we look at 7.5% in aggregates and 19% in asphalt, should the decremental margins have been that bad? In other words, if you were looking at that a couple month ago and knew it was going to happen, I guess you would taken some steps you prevent, you couldn't but, I guess my point is it seems like the earnings is a lot more significant than the top line hit was. But I don't know the relative profitability of all these businesses but it just looks like it's a big hit. Vis-a-vis the top line.

Well, you've got a couple of factors here. 1. you pick up 2 profits on the aggregates because most of that is going into Houston, South Texas, all of it, via rail. So you've got profit at the quarry and then you've got a profit margin at the distribution point. So you've got significant more profitability relative to - - it's 2 transactions as opposed to 1 transaction. So that's the starting point. The second part of is it that with respect to being able to operate with the type of conditions that we had from Houston to Dallas we simply were not able to operate effectively. Is it just strictly volume driven? No. We got pounded. We got pounded in April and we got pounded in June with respect to the weather factor.

Okay and then just last point, you mentioned the cement shortage caused some slippage in stone shipments. Were you referring to - - that that stone couldn't be used for ready mix? Or were you saying there wasn't enough cement and that was stopping projects that you were feeding stone into, in another way?

Slowing down shipment demand, Jack. You've got many of our ready mix customers in the Southeast are on allocation. And based on the opportunity that they have, normally this time of year they would be running pretty much flat out, 5.5, 6 day schedules, running long hours, basically dawn to dusk, sometimes later. With the allocation of cement they're just simply not able to run those hours. Therefore, some diminished demand for aggregate, but that was not the major factor. The major negative for us was, in fact, the transportation shortages, Southwest and Southeast. We had the opportunity, based on demand structure, you know, to do significantly better if we could have moved it.

Okay. So this is not - - this is related to Houston or it's just in other areas?

No, the cement shortages really relate to the Southeast as opposed to Texas. Not that there aren't some there, but we don't view that as a big enough factor to even cite.

So in the Southeast you also had transportation difficulty aside from the Southwest which was kind of the Houston deal?

That's correct. We lost 1.1 million tons of shipments on the CSX Railroad because they couldn't furnish cars and move trains.

Okay. And that stone was all in the Southeast?

Yes.

Okay. Thanks.

We'll take our next question from Jack Kasprzak, BB&T.

Thanks. Good afternoon Steve.

Hey, Jack.

My first question is the tax rate in the quarter. I think it was effectively 29.5% of close to 36% of the first quarter. I just curious what was going on there and what you thought the tax rate might be for the balance of the year.

Jack, the tax rate, if you include discontinued operations and just look at it from a corporate perspective, it was 29.7% in the first quarter in total and 29.7% in the second quarter in total. I think that what you're seeing is really just the difference between what is included in continuing operations and what's included in discontinued ops. But overall the number has been 29.7% through the first 6 months of the year. And that is our estimate for the full year 2004 also.

Okay. Great. That's very helpful. And my second question is, on the end markets, specifically the highway market, and what you guys are seeing there I think it's been a strange year for highway construction because it's been fairly strong through the first half of the year by most reports, anyway, up high single digits in terms of spending. And yet we still have this issue of not having a Federal Highway Bill. I was just wondering if you could talk about maybe what you're seeing right now in highway construction in your markets? I mean is it still fairly strong, are backlogs still fairly high, or is the lack of a Federal Highway Bill finally starting to wear on some of the states?

I can't see where the lack of A\a Federal 6 year bill is really having an impact. Despite the fact that Congress has not dealt with that, they - - you know, they're dealing with the annual program. And in fact, you've got a annual 2005 expenditure that is been offered up that's $1 billion more than the current. So I think - - you know, there's no halting of the program. By and large what we're seeing is robust highway demand in our key states. Southeast highway demand is strong. The only place that I would note as being very weak is Mississippi where we're relatively small presence. And Mississippi has basically discontinued the lettings for the remainder of the year and transferred highway money to the General Fund to cover shortfalls in their State Budget. Our big states, North Carolina, Texas, Georgia, Georgia with respect to the southern part, which is where we have our major presence, South Carolina, are all going very strong.

How about on the commercial side, Steve? Of course, that's been the weakest area. Have you seen any noticeable pickup there?

We have seen pickup. And I'd say the pickup is a little better than the statistics might indicate, at least from a stone consumption standpoint. And I think that relates to the fact that there are a lot of what I would call small and mid-size projects that people have commenced. And those projects, on average, when you start looking at the total dollar expenditure will have a higher ratio of aggregate consumption per total dollar spent than some of the very large projects will. So that's plus for us.

Okay. Great. Thanks.

Sure.

We'll take our next question from Ann [Goodison] with Mutual.

Hi Steve. I wondered if you could be more precise on what you call the best use of free cash flow for your shareholders?

Well, I think you know what the options are. As we look at cash we've indicated that we're already in a very good position. We think we're going to have a very good second half in terms of free cash flow. So you just come back to the basics. Are there investments that we can make that would be positive with respect to shareholder value? That could be in the form of an acquisition, it could be in the form of an internal capital investment. As we've indicated before, the aggregates acquisition market as we view it is rather thin right now. That's not to say we don't have some things that we're looking at or under discussion. Just not the volume that we've seen in the past. Actually we have seen a better opportunity to invest capital internally, to expand market positions and to take out costs. And, in fact, the second quarter I went back to our Board and asked for some additional capital for just that purpose. So we're deploying some modest capital with regard to that. We have the ability to review the dividend, which is something that we do periodically. We've been in the share buyback market. We did that fourth quarter of last year and first quarter of this year. We have the opportunity to look at debt paydown although we've paid down our debt down to the long term number at this point. So those are be the options that are on the table and basically we're just looking at that array. And we'll try to use those funds in the way that does what we believe is the best job for our shareholders.

Ms. Goodasin, anything else for you?

No, that's fine. Thank you very much.

Once again ladies and gentlemen that is star 1 for questions. We'll take a follow-up question from Arnold Ursaner, CJS Securities.

HI a couple of followups if I can. On your composites business what sort of backlog number would you need to build a second facility and what sort of revenue number would you need reach break-even?

The break-even number, Arnie, is probably somewhere in the 20s with respect to revenue, $20 to $25 million would relate to the product mix. That would be a factor in it. And in terms of moving into another facility, that's going to be dependent upon the types of orders that we get. As I mentioned, we do have a lot of quotations out. We have some interesting things that we're working on. The materials that we are creating, what we manufacture, are very different than what people are accustomed to. And I'll just give you an example. When you can take a composite panel that's got a urethane core and you can put 15,000 pounds of point pressure on it which the scientist at NC State have done, deflect it 9 inches and it comes back and squares up, that's a different material. Because this is very very strong and it also has unusual elasticity characteristics. So it's taken awhile for people to get accustomed to exactly what these materials can do. And we'll just wait and see what the order flow is. But I can tell we are extremely active. And we have already begun to look at additional facilities opportunities.

2 more questions.

Need to fill up the first of the [Torche] facility, you know, before we actually make the move.

When you gave your range of guidance you mentioned that you have down the sale of underperforming assets are - - could affect the range. In the guidance you've given, have you built in any sales of underperforming assets into the guidance?

Nothing out of the ordinary no,.

Okay. Final question from me. Your inventories jumped about 15 million. And I'm assuming most of that was unplanned jump related to some of the weather and transportation issues. Can you give us a feel for what you --?

Actually, the best way to compare inventories is to go back to the prior year period as opposed to the end of the year.

Arnie, I think the increase in our inventories was in the first quarter as opposed to the second quarter. We increased inventory about $17 million through the first 6 months of the year. A portion of that is actually related to our composites business as we begin the start up process there.

Okay.

Bottom line is there's nothing out of the ordinary with respect to the inventories we're carrying. We have taken inventories down pretty sharply last year. We're just trying to make sure we're balanced out and the reality is that in some of our key locations we'd like to have some more.

Okay. 2 more quick questions, if I can. In looking at your Southeast volume shortfall, if we were to assume a selling price somewhere around $7 a ton is that a reasonable assumption for the revenue hit you took?

Actually, it would be higher than that because quite a bit of that would go into distribution yards and then be distributed at higher numbers, double digit numbers. So again just like the Southwest you're going to have higher number at the terminal point and you're also going to lose profit at the quarry and you're going to lose profit at the distribution yard.

So more in the 8, 9 million range for revenue?

It would be higher. You're talking double digits, 10 plus.

Got it. And final question. You obviously have had the strategy to build out the water borne and rail transportation mix. This year is obviously not normal, if you will. When you look out towards 2005 what sort of margin do you think you can generate in your aggregate business?

We're not going to comment on 2005 at this point. We'll wait until the end of the year. But we have said that we expect to see increasing margins. I don't see anything that would indicate to me that we're not going to be able to get that job done.

Okay. Thank you.

We'll take a question from Dennis [Ganel] Rutabaga Capital.

Hi Steve, Hi Janice. Just real quick, at least for the third quarter guidance are you guys factoring in much disruption from hurricane Alex and has that affected you so far?

That's pretty much a nonevent for us. That hurricane, based on the forecast, would hit in the upper part of North Carolina. That's not an area where we do any significant business. It's dumped some rain to the east of I-95, not anything of great consequence, no.

Great, great. And then just quickly on the composite business, is, you know, the demand picking up in the way that you guys are satisfied with? I guess, you know, you are talking about a pretty broad range of potential revenues for this year. I know there's a fair bit of missionary work in terms of convincing folks of the attractiveness of your offering. Is it proceeding as you had expected or a little slower? In line?

With respect to the interest level I would tell you that the interest level is far higher than anything we would have imagined at this point. Based on the numbers of inquiries, people who want to talk about their interest in handling particular segments of the market for us. The types of companies that we've attracted interest from are people that would you recognize off the Fortune 1, Fortune 250 list, so we're actually a bit surprised by how quickly the interest has spread. In terms of revenue generation, we're probably 3 or 4 months off the mark in terms of where I thought we would be at this point. And that primarily relates to the truck trailer side of the equation where we thought we would be a little further along. And what we're finding is because of the - - again, because of the characteristics of the product, the newness of the technology, people are very interested in the weight reduction and the corrosion resistance. But they want to take it in hand, they want to trial it before they make commitments. So actually much of our buildout for the rest of the year what we're doing is focused on trial trailers for a fairly large number of independent and corporate haulers who want to put 1 or 2 service and see how they feel about it.

Yep. Yep, great. And then one last thing. On magnesia specialties, it's nice to see that generating the kind of profits and certainly offsetting the start-up costs on the structural components,. Are you thinking any differently about this? I mean, a few years ago, I think you guys would have been pretty happy to sell it. Is there a better market now for those assets? Are you content to keep them? What's your current thinking?

Well, we had the opportunity to take a look at that, as you mentioned, as to whether or not we sell this business, and we did, in fact, sell the refractories component of it which was the biggest piece. We thought that there was some significant value in the line business and the magnesia chemicals business. And with the structural changes we've made there, we set this business up really to succeed, and as we look out, in the foreseeable future, we think this is going to be a very very good business for us. We are putting a little bit more capital back into it, and increasing capacity. We've approved a project to increase mag hydroxide capacity, dry mag hydroxide, up at Manistee. And we're looking at the possibility of adding some line capacity. So we'll just to have see whether or not it's attractive enough to us in terms of internal rate of return calculations to put the capital in.

Sounds good. Thanks a lot.

Sure.

Mr. Zelnak we have no further questions standing by at this time. I'd like to turn the conference back over to you for any additional or closing remarks.

Okay. Thanks for joining us. We'll look to getting back with you at the end of the third quarter and bring you up to date on what's going on in our world. Thank you.

That does conclude today's conference call. We thank you for your participation. You may disconnect at this time.