Martin Marietta Materials Inc (MLM) 2004 Q3 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 opening remarks and introductions, I would 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 an excellent third quarter with gross profit, operating earnings, net income, and diluted earnings per share all at record levels. For the quarter, our operating margin increased 160 basis points. This was accomplished in spite of the negative impact of 4 hurricanes and extremely high diesel fuel cost. For the quarter net sales of $449 million were up slightly from the prior-year period, while after-tax earnings of $54 million increased 19 percent. We had a lower tax rate for the quarter, which was positively impacted by the change in estimated 2003 tax expense upon filing the 2003 tax return, and an evaluation of deferred taxes. For the year-to-date through September, net sales of $1,169,000,000 increased about 4.5 percent, while net earnings of $92 million were up 43 percent.

Third-quarter aggregates shipments from heritage operations were down 2.4 percent, while pricing increased 3.1 percent. Shipments and production in the Southeast and Gulf Coast states were significantly impacted by the hurricanes and the accompanying heavy rainfall. Our most impacted facility was in the Bahamas where we took direct hits from 2 storms. Our plant withstood category 4 winds with some moderate damage to our buildings. Electric power to the facility was down for 5 weeks, so we were unable to produce while incurring major cleanup cost. At this time, we are back in a more normal production mode.

Energy cost increases were significant during the quarter with diesel fuel prices per gallon increasing over 50 percent. The total negative impact of energy cost for the quarter was about 8 cents per diluted share.

During the quarter, we sold a small non-strategic quarry in Washington State. Also today we completed the sale of 3 asphalt plants in the Houston area to a local contractor and asphalt producer. These plants comprise about 70 percent of our asphalt business in Houston. This move is expected to strengthen and expand our aggregate supply position in the Houston area, and will enable us to redeploy some investment into expanding our leading aggregate supply position in Houston. While the sale was essentially breakeven on an after-tax basis, we expect this move to have positive impact on our margins and return on capital employed in the future.

Our Magnesia Specialties business had another outstanding quarter with operating earnings of $5.4 million versus $500,000 in the prior-year period. Net sales of $27 million increased 23 percent. Both our lime business and our magnesia chemicals business performed well. Currently, we are reviewing the possibility of a major expansion of our lime business to meet increased demand from commercial customers and from our growing magnesia chemicals business.

Our Structural Composites business operated at a loss, as much of our effort was concentrated on producing products for trial and evaluation by a variety of high-potential customers. Customer interest remains high with negotiations underway with interested potential customers for rail, transportation, flat-panel products and military applications. We hope to conclude some of these negotiations in the fourth quarter.

Our cash generation continues to be excellent. We finished the third quarter with a cash balance of $135 million versus $64 million in the prior-year period. Year-to-date we have invested $51 million in our pension plan. We purchased $30 million of our stock, including over $5 million in the third quarter, and increased the dividend 11 percent. We expect continued strong cash generation and are focused on how to use it to the best advantage of our shareholders.

We remain cautiously optimistic for the remainder of the year. We expect recovery from the hurricane disruptions in our aggregates business, along with improvement in rail and water transport availability. We also expect continued positive results from our Magnesia Specialties unit.

Given the positive outlook for both businesses, we expect full-year 2004 earnings to fall in a range of $2.42 to $2.62 per share versus $2.05 per share for 2003. At this time, I would be pleased to take any questions you may have.

(OPERATOR INSTRUCTIONS) Arnold Ursaner, CJS Securities.

Good afternoon. A quick question to ask you. Given some of the transportation issues that we have had in the past in Texas, what steps if any did you take in the current quarter to perhaps move some product from the Midwest or other heritage operations to places like Texas?

Well, we took advantage of our waterborne transportation network to in fact move some material in by barge down the Ohio and Mississippi River. We were successful in doing that in a way that was economic and met the needs of some of the customers there. The major transporter of aggregate into that market is the UP Railroad, and UP is improving its velocity, putting more cars back into service for aggregate hauling. So we are seeing some positive steps there, but we are augmenting by water until such time as the railroads get it fully back on track.

I guess the other broad question I have is the decline in volume in the quarter, I'm assuming that is almost entirely due to weather. Would it be fair to say there are other markets where you didn't have weather issues? Could you comment more on volume trends where you don't have weather issues?

Well, volume trends were quite slipped (ph), depending upon what the location was. We estimate that probably somewhere between 1 million and 3/4, 2 million tons, lost because of the hurricanes and all the torrential downpour that came with it. If you take our Southeast division which covers South Carolina, Georgia, Florida, Coastal Alabama, Mississippi, that division was down 8 percent on volume. It was the one that truly got hammered. I mentioned the Bahamas earlier. We lost probably a half a million tons of shipments out of the Bahamas. In addition to that, we couldn't run the plant for 5 weeks, and beyond the 5-week period we had partial running conditions. So we took a very substantial hit there with the 2 storms. We had just gotten back up online from the first one when the second one hit.

So those were significant dislocations in terms of shipments and also in terms of extra cost. We had to sit there and absorb all the fixed cost, the cleanup costs. We tried to keep our employees gainfully employed because I can tell you they were devastated and truly impactful on the Grand Bahama Island. So -8 percent in the Southeast. In the Mideast division with most of this being in Carolina, we were down a little over 3 percent. And in contrast if you go out to the Southwest, volume was up about 2 percent, and in the Northwest which covers the Midwest area, we were up about 4 percent. So the expectation without that was that the volume trends would have continued on at the level they were moving at, which is somewhere between positive 2 and positive 4 percent, if you look back on preceding quarters.

I'll hop back in queue. Thank you.

Stephen Kim, Smith Barney.

Can you hear me okay?

Yes.

While you are on the issue of the Bahamas, I was wondering have you tried to bring that down to an EPS impact this quarter?

Yes, I can give you an estimate. In the Bahamas by itself, it probably cost us 4 cents a share.

Okay. The second question I had related to the sale of the asphalt operations. Did you give a dollar value of that on an annual basis, the production?

I did not, but I will tell you that it comprises about -- what we sold comprises about 70 percent of our asphalt volume in the Houston market. The play there is that we see an opportunity to invest some additional capital in our distribution network. We also see an opportunity to partner with what will now be a major customer who we were not doing a lot of business with. That customer will be the largest provider of asphalt mix in the Houston market. So we are going to take some capital off the table there with the disinvestment in the asphalt plants. We will put a relatively small portion of it back into improve and enlarge the distribution facilities, and we think that is going to be a profitable move for us to make.

It makes sense. Is this something that you think might be something that would be replicated in other markets as well, or was this really a unique situation that you had in Houston?

Well, we don't have a lot of asphalt anyway. We had previously sold our position in the Shreveport area. We continue to operate in Texarkana and Hot Springs, Arkansas. We will have a couple of plants in Houston and then a small plant in Missouri. So this makes it a minor business for us with the sale of these operations.

I guess where I was going in terms of the dollar value of the sale is I was trying to figure out what sort of a boost to the margin overall you might expect. Is that a number that you feel comfortable giving us?

Not yet. We will talk to you at the end of the year and give you some idea of what we think margins are going to look like, but clearly consistent with what we've told you before which is our focus -- the way we're running our business is designed to improve our margins and put them back up to something more akin to normal historical levels for us.

If I can just ask one last question here; the composites business, the magnesia business, you have interesting trends in both. You have magnesia obviously running at a level of profitability that I don't think you have ever seen out of that business. But it seems to be short-changed a little bit here by what is going on in composites. I guess my question is in the composites business, do you feel that we might be reaching somewhat of a decisive moment? Is there a point at which you are going to cease making additional incremental capital investments into that business unless you see a clear road to profitability in that business by a certain time, or are we still too early to draw those kinds of ultimatums?

Well, that is a fair question. The expectation -- what we have done this year is that we have ramped up at a faster pace in terms of investment in the plant, hiring and training of people than we had originally anticipated. With that, we did it because we saw business coming that we were not prepared to handle if it came, based on the size of the opportunities that we're looking at. The expectation is that we are going to bring that business flow through the system, and that in fact we are going to ramp up the revenue and with that the contribution to profit consistent with what we've put in there physically. We are not going to sit here and continue to lose money in composites for some lengthy period of time.

We think the business has a lot of merit and we think we have excellent potential in it. It is up to us to execute, and if we get to a point where we feel we are not executing vis-a-vis the potentials, then we would re-evaluate. But we are pretty excited about that business and the opportunities that are there for us. The testing and evaluation by customers has taken longer than we would have expected. The properties of the material are unusual, and I guess because we've worked with them for a long time, our comfort level is pretty high. It has taken customers longer to get accustomed to it.

Would it be fair, Steve, to say that if you still hadn't had follow-through on the order front by let's say first quarter of next year, that that would suggest that there was something else, some problem that hadn't been part of the discussion so far that sort of came in? Do you feel that they should be, by all reasonable measures, done with that testing by the first quarter of next year?

First quarter is probably a little bit premature, but I would certainly say to you and we will elaborate more when we get to the end of the year, that the expectation is we are going to see an order flow that is truly discernible and one that indicates that your order opportunities are ramping in the year 2005, to your expectation that that is there. If it were not there, then it begs a different question.

Thanks very much.

Thomas Russo, Gardner Russo.

Steve, on the 2 nonconstruction businesses, the composite which you were just talking about, do you have a measure of what has been invested in that business, both plant and equipment and also income statement investments or losses to date?

We do, and what I would tell you is it non-material. That was the way we went at this. Part of the rationale for working a new business, which new businesses are always risky, is that we wanted to keep investment levels pretty minimal. We did not want to get involved in something that was going to require a lot of capital outlay, and we have been successful in doing that.

The second one, the specialty chemicals, clearly the steel industry recovery seems to be behind your remarkable turnaround.

Well, that is part of it. The fact of the matter is that both businesses are going very, very well. Part of what has happened in the lime business is that you have had a positive steel environment, but in addition to that you've had some capacity come out for various reasons. There were a couple of plants that were shut down; one because of lack of permitting, one shut down because of lawsuit and neighbor issues. There were some others that were deemed just not to be fit to run with all of the requirements that it was going to -- all of the upgrades it was going to take to get them up to environmental requirements. There may be some additional capacity coming out there, so we are looking at it as a significant opportunity. We would not make the investment unless we are very comfortable that it is sustained opportunity rather than meeting peak load type opportunity.

What sort of magnitude is that investment?

Investment in a new lime plant would be somewhere in the $25 million range, plus or minus 3 (ph).

Are there other competitors still able to meet this enhanced demand, or are you now amongst the remaining?

Well, there is no capacity available. We are basically sold out. We are going to do an incremental improvement in the short-term that would add a small amount of capacity.

Do you have any concerns over the consolidation of the industry and what it might mean to their ability to pressure you on terms, now that there is one steel company left standing in the entire world, it seems?

Not really. There is a shortage of lime supply, dolomitic lime. We think that is likely to continue for some sustained period. The cost of lime in the steel manufacturing process is less than 1 percent of the total cost. They have got to have the lime, and what is working on the other side is that you have got a number of plants that are going to require very large-scale investment to meet new environmental requirements. So we are not convinced at this point that there is going to be an abundance of supply.

You are up to grade for environmental reasons?

Yes, we are in very good shape.

On the construction aggregates, one question. You have talked in the past about your ability to seamlessly deliver sourced stone across your transportation net (ph) with water, rail, truck. Any evidence of how that flexibility has started to yield you any improved margins yet?

Based on pricing we are getting in certain locations that are remotely served, the answer to that is clearly yes. The ability to have some flexibility which I described with Texas, which has been -- Houston is a shortage market right now. And the fact that we can bring in barge material to South Texas, free up some material to go to Houston, is a real positive. So the flexibility has come into play. Aggregate prices in Houston have gone up sharply akin to what has happened to Florida prices in the last couple of years, and we just see markets that have more and more difficulty filling the demand, and we see ourselves in a position to fill much of that demand. So we feel like the investment we made is a very productive investment, and yes, we are seeing some nice price increases which means increased margin.

Thank you.

Jack Kelly, Goldman Sachs.

Just a follow-up on the composite questions. In the past I think you have indicated, Steve, that when you get to a 20 to $25 million revenue level, that that might indicate a breakeven for that business. Is that still kind of a fair barometer of breakeven, and is that something on an annualized basis we could maybe expect in the second half of '05?

The 20 to 25 number, I think, is a good number. Again, I am going to wait to comment on '05 until we get to the end of the year.

Okay. With regard to the possible expansion of the lime business and $25 million, in the past you have thought about maybe divesting that business. You know, times are pretty good; it's hard to probably imagine things could be better. Does that change your view? I mean, at some point you were thinking about selling it, pulled it off the market maybe because prices weren't good, etc. Can you just give us a sense of what your view of this business is longer-term?

There is another piece of it, Jack, and that is the magnesia chemicals piece. The fact is we are constrained on supply with magnesia chemical production right now, because we don't have enough dolomitic lime. So the dolomitic lime issue is one not only for commercial customers, but it constrains some of the good growth opportunities we have in magnesia chemicals. The combined businesses are going very well. When you look at worldwide in the chemicals case supply/demand, you look at some of the products that we have newly developed which are proprietary; some of the opportunities we have, I think it is just a significant change over where we were with that business even 3 years ago.

So I look at it today and although it is a relatively small business for us, a little north of $100 million this year, we think it is going to be a very profitable business, one that has excellent return on capital employed, and we see very good growth, very good organic growth in that business for the next 5 years or so. So there is no interest on our part in selling the business, either component of it. The expectation is we are going to run it, and where it is productive to invest in it, we are going to invest.

Just two housekeeping items. You had mentioned the sale of the quarry. Does that -- I assume there was a gain. Does that show up in other income or was that in the segment component of earnings? Then maybe, Janice, if you could just give us a view of the tax rate for the fourth quarter and maybe as you look into '05?

Jack, your question with respect to the sale of the facility that Steve mentioned, the sale that was done in the third quarter is included in discontinued operations. Both the operating income from that operation over the past 9 months, plus the gain on the sale is included down in that line.

Okay.

As far as the tax rate is concerned, where we are right now, we believe that the tax rate in the fourth quarter will be about 31 to 32 percent. As we get into next year, I'd for planning purposes assume about a 32 percent for 2005.

Thank you.

Bob Bridges (ph), Sterling Capital Management.

Could you repeat what you said the impact in the Southeast was from the hurricanes and the rain on what the shipments -- how they got impaired during the quarter?

Roughly 1 3/4 million tons to 2 million tons.

And approximate EPS impact, of what that would be? Do you have a range?

Yes, I indicated that Bahamas was about 4 cents. If you were to run out the volumes at some kind of reasonable incrementals, you can get to 10 cents pretty quickly all up, both Bahamas and the remainder of the shortfall.

On diesel, what was the average price you paid in the quarter and what was it running at the end of the quarter?

We were at about $1.34 for the quarter, and I think we were around 87 cents preceding third quarter.

Refresh my memory; do you do any hedging on your diesel fuel?

We do not, but what I will tell you is that based on the conservation measures and the method of purchasing, that the impact on us from a cost per ton is a significantly lower percentage. We feel like we're managing that pretty well, in terms of translating it into aggregate production. But nonetheless, it is a big number.

And then on the Union Pacific and the rail congestion in your Southwest territories, do you have any sense as to how long and how many quarters that might take to get back to normal?

The railroad has indicated that it probably will be into next year. I think they have an expectation of perhaps the end of the first quarter next year to being back on normal schedule. We are seeing actually at this point a little more improvement than we would have expected. They are reallocating cars to us as opposed to taking them away, which they were doing at one point. So that is encouraging.

Then I think you had said earlier in the year that you were doing an expansion at your Nova Scotia facility. Has that come online yet, or where are we in that project?

That project is just about complete; a major portion of it is complete. It will be complete in the fourth quarter, and that will take us from about 3.2 million tons capacity to about 4.8. We believe it will have the shipping -- shipping has been an issue. We believe we will have the shipping lined up that will enable us to move to market that which the market will take.

On the year what has been your utilization that has been (indiscernible) above that plant, and also maybe the Bahamas facility maybe before the hurricanes hit?

Well, Bahamas was running flat out, and Nova Scotia other than the fact that we had winter weather that impacted us, it was running flat out. So per your Nova Scotia project, it was producing pretty much all it could.

Okay. Just one more question on the taxes this quarter. Was there any reversal of deferred tax assets realized through the income statement in the quarter? The press release said that there was an evaluation of your deferred taxes, and I was just curious if any of that had flown through the P&L as a reversal.

Yes, it did. The impact of the analysis and the true-up did run through the income statement, and as we reported in the press release if you compare the tax rate from the third quarter of last year to the tax rate that we used for the third quarter of this year, there was about a 6 cent per share increase in our earnings as a result of the reduced tax rate.

Okay, that's all I've got. Thanks a lot for your help.

Stephen Kim.

I just have one quick follow-up. Steve, I had a question related to your long haul operations. Can you give us an idea of what percent of your shipments or aggregates of revenues, whichever you feel more comfortable giving, you would put under the header of generated from long haul operations?

Last year it ran about 23 percent, about 14 percent by water and 9 percent by rail.

Where do you expect that that might be in a couple of years?

Well, I think it's going to move up a little bit. I don't anticipate that it is going to go beyond 30 percent, but certainly I expect it would move up to something closer to 25, somewhere between 25 and 30.

Okay, great. Just help me understand that portion of the business a little bit better. One of the things I have been wondering about is whether or not that business might be inherently more volatile because of the fact that -- and even though you are supplying markets where aggregate reserves are scarce, I would assume that there is going to be some local production there that cannot meet the demand, but that that local production would always be running flat out and, therefore, anything that is brought in from outside the local market would be sort of the stretch (ph) volume, if you will, during times of great need, then you'd actually have a lot of it coming in. But if for some reason, there was a reduction in the overall demand, then that would be, the long haul or anything brought outside the local markets, would be the thing that would be cut first. I assume I'm missing something. I was just wondering if you could sort of help me theoretically work through that business?

Yes, if you will get somebody to pick up for you a geology map of the United States, it will show you that there is very little aggregate resource available in the coastal markets, indigenous resource available from North Carolina to Texas. The only place that has substantial local production is Miami. So if you start coming down the coast and looking at all of those markets, they are import markets either by long haul truck, rail or water, all the way to the Mexican border. So what we are competing against, and I mean there are other people that bring the material in by rail and by water; what we are competing against is other people who are bringing in long haul materials. Our objective has been to build a network that offers more customer flexibility vis-a-vis transportation modes, more customer selection vis-a-vis types of materials, and with that large-scale distribution yards that have very good off-load economics at the distribution point. That is what we spent the last 8 or 9 years focused on. But there is no indigenous aggregate of any quantity other than in Miami.

So when you talk about the growth in the long haul operations as a part of your business, you're not so much talking about going into other geographies where there is some local production and you're just going to cover what they can't cover, but rather you're talking about intensifying your exposure or your ability to service the southern part of the United States below where there are hard rock deposits; that's what you're talking about.

Yes, you have depleting reserves even where some of that market is served long haul. Let's take Miami as an example. Material flows out of Miami today to Central Florida, to Orlando, flows via the FTC Railroad up in Jacksonville. The Miami producers do not have the infinite reserves and they have the local market to worry about. So they have to make a choice between their production that they target toward the local market versus how much they're going to send out of the market vis-a-vis rail.

And as the market grows, which I think you would agree that the Florida market is a growth market, above average, it's going to demand more aggregate therefore it's going to have to come from somewhere and we've sort of named ourselves "somewhere".

Okay, thanks a lot.

Fritz Von Carp, Sage Asset Management.

I apologize if you already answered this, but could you say what the growth in volume was outside of the hurricane affected market -- outside of the Southeast division?

Yes, the other two major divisions that were not hurricane impacted, the Southwest had about 2 percent volume growth and the Northwest, which includes the farm belt, had about 4 percent.

Thank you very much.

Arnold Ursaner, CJS Securities.

A real quick question. What percent of your revenue do you think is housing related at this stage?

It's been running in the high teens. We typically run from 15 to 18 percent, it's been on the upper end of that.

And again, I know you're sort of reluctant to speak too much more about what you're doing in composites, but to the extent that the economics seem to be going dramatically in your favor with the rapid rise in fuel prices, wouldn't that make your sales that much easier and, if in fact that's the case, what do you attribute the slow take up of orders, if you will?

You're correct with respect to things moving in our direction with lighter weight, fuel economy, price of steel, price of aluminum, so those things are all certainly positive. It just simply comes down to you need new materials. We're using materials here in applications where people have never seen them. We stake this thing out as Structural Composites because there are plenty of composites done out there. If you want to buy a ladder, the rails on that ladder are composite. What's happening to commodity composites is that that is migrating offshore and headed towards China. And we're not interested in anything like that.

So we're much more interested in things that are put into uses that replace steel and aluminum from a standpoint of structural integrity. And the fact that they do it's for engineers to understand those materials and to believe in them is just taking a little more time than we thought. The other side of that is I'll tell you we have some people on the customer end who are very enthusiastic, but we've got to arrive at arrangements that are good for both of us. So a lot of discussion underway and hopefully we'll have more to talk about on the next call.

Do you have a fair amount of product out in test siting or beta at the moment?

We do. And generally that's going well. The place where we've had the most difficulty and had to go back and do the most revamping of design has been in certain models of waste haul trailers. And what I can tell you is a motivated individual with a letter in his hands can break anything. They smash aluminum trailers -- but we've gone back and beefed up some of our composites design in order to make the trailer that much more attractive. And other than that, that's the only thing that I can think of that has been a real issue. People see it and frankly they just don't believe it sometimes, they want to see it again a number of times. So we'll see where it goes.

But you mentioned the other -- the sale of the quarry was not in other income. What was the key item in other income this quarter?

The key item in other income this quarter, if you look at the other operating income line, it really is higher timber and land sales than we had last year.

And our equipment sales have gone very, very well this year with the shortages of equipment out there. We're going to have a very good year on equipment sales.

Do you have any sense of what that number may be for Q4?

No, not really.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Thomas Russo, Gardner Russo.

A follow-up question, Steve, on the construction. On the roadwork side of your business the federal funding remains under temporary extension of budget I gather rather than a permanent budget. So what is the demand for the roadwork that you serve independent of the budgeting process and how much of that demand might be met by mobile crushing units nearby the site of roadwork and possibly threatening your large quarries?

With respect to demand, demand in roads is flat to slightly up in most areas. We're going to have to wait until we get the big bill, the big federal bill before we get some lift off there. Pretty clearly we're going to get a much larger bill, the question is how much larger and I think Congress will certainly be ready to deal with that after the elections.

Okay. What was the cost of the Nova Scotia addition, of capacity?

The Nova Scotia addition capacity cost less than $5 million. It was a very economic addition of capacity.

It sounds like it. And then for the capital structure, what's the appetite for further share repurchase and what are the plans for continued use of incentive stock options for compensation? Where do you stand on the balance between restricted stock, stock options, cash for your incentives and then what are your plans for share repurchase?

Okay. What we've said with respect to share repurchase is that it is something that we're going to consider as we go. We've not indicated any particular level or whether or not we're going to do that. It's just something that we're going look at prudently and will continue to look at. What I have said, and I'll repeat, is we don't plan to just sit here with a lot of cash on the balance sheet.

So we're going to put that cash to work for shareholders in terms of very good investment opportunities that have high RRs that we feel quite confident in being able to perform and deliver on. We've always bumped the dividend up, we have repurchased shares, there may be an acquisition that comes along of interest. We just haven't seen anything lately. So we'll go at it that way and continue to do so.

With respect to stock options, we are in the process of reviewing our program now. We do that regularly every year. I can't tell you what the outcome of that will be. Certainly there appears to be a trend to use fewer options and go to restricted stock where the number of shares vis-a-vis the options would be reduced significantly. And we get to a point where we make some change in the program and we'll talk to you about that if we do.

Thank you.

Mr. Zelnak, there appear to be no further questions at this time.

Okay. We appreciate you joining us. As indicated, we truly had an excellent quarter which we were quite excited about. Hope to close out the year well, look forward to talking to you after the 1st of the year. Thank you.

This does conclude today's conference. Thank you for your participation. You may now disconnect.