Martin Marietta Materials Inc (MLM) 2004 Q4 法說會逐字稿

Welcome to this Martin Marietta Materials Incorporated 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 fourth quarter with record earnings of $37 million or 77 cents per diluted share, versus 60 cents in the prior-year period. Net sales of $391 million increased 3 percent, while net earnings was up 26 percent. Other operating income increased 40 -- $4.7 million over the prior year due to the sale of asphalt plants in the Houston area. However, on an after-tax basis the increase in earnings versus the prior-year period was only about a penny per diluted share.

For the year we had record sales of $1,551,000,000, up 5 percent from prior year, while record net income of $129 million was up 29 percent. EBITDA of $364 million increased 12 percent and was also at a record level.

Cash provided by operating activities was $267 million inclusive of a $51 million voluntary contribution to the Corporation's pension plan. During the year we increased capital spending by $42 million, repurchased 1.5 million shares of our common stock for $75 million, increased our dividend by 11 percent, and ended the quarter with 162 million in cash, up $37 million from prior year.

In our heritage aggregates business in the fourth quarter we had a strong pricing with an increase of 5.8 percent. Volume was down about 1 percent due primarily to poor weather in the Southeast and Southwest in November. Earnings from operations of $68 million was up 24 percent from the prior-year period.

For the year aggregates revenue increased 4 percent to $1,441,000,000, while earnings from operations increased 13 percent to $220 million. Our focus on cost and efficiency improvement had a very positive impact on our results. For the year heritage aggregates volume increased 1 percent while pricing was up 3.2 percent.

During the quarter we completed to transactions of note. In Houston we sold 3 of our 5 asphalt plants to a large privately owned contractor. In January we leased the remaining 2 plants to the same company, which completes our exit from the asphalt business in Houston. We are redeployed some of the proceeds to grow our aggregates position by opening new rail distribution yards and by enlarging unloading facilities at existing yards. We expect these moves will expand our aggregates position in the greater Houston area.

Also we completed a joint venture agreement with Hunt Midwest industries, covering Kansas City and surrounding areas. The new company includes all of the quarry assets of the 2 companies in the relevant area and has annual production of about 7.5 million tons. The joint venture is operated by Martin Marietta as the managing partner and is the leading aggregates producer in the area.

Our Magnesia Specialties unit finished strong. Revenue for the quarter was up 20 percent, while earnings from operations increased 25 percent to $4 million. For the year revenue was up 23 percent, with excellent sales of both lime and our magnesia chemicals products. The record earnings from operations of $17.1 million was more than triple the prior year. Strong volume, good pricing, and very good cost performance all played a role in the outstanding results.

The only area where we did not meet our objectives was in our new Structural Composites business. We experienced both production and sales delays as we started to ramp up this business, which resulted in limited sales as we carried the cost of our new factory and increased staffing.

During the fourth quarter and early in 2005 we put in place a number of agreements that we expect will lead to revenue generation in 2005. We signed a product development agreement with a major company related to recreational vehicles; an exclusive agreement with the Greenbrier Companies related to the use of our products and technology in insulated rail cars; and an agreement to build trailer bodies for a paper shredding company. In addition we signed our first agreement with a distributor for our flat-panel products.

For 2005 we currently have a positive outlook. Based on current forecast of indications of business activity we expect aggregate shipments to increase 2 percent to 4 percent, with aggregates pricing up 3 percent to 4 percent. We also expect to show continuing margin improvement. We expect another strong year in Magnesia Specialties with pretax earnings in the range of 18 to $20 million, based on profitable growth in both our lime and magnesia chemicals businesses. In Structural Composites our objective is to cut our 2004 startup loss in half, while creating a backlog of business that will lead to profitability in 2006.

Under this scenario we expect 2005 net earnings to range from $2.85 a share to $3.20 per diluted share. For the first quarter we expect earnings to range from a loss of 10 cents per diluted share to earnings of a nickel per diluted share. At this time I'd be pleased to answer any questions that you may have.

(OPERATOR INSTRUCTIONS) Jack Kelly at Goldman Sachs.

A couple questions, just on the magnesia and the structural. I might have missed this, but did magnesia -- did you say it made 17.1 in '04?

That is correct.

So 18 to 24 for this year. I would have thought, given the way that business, the way it picked up momentum or had that momentum in '04, that we would have seen more this year. Can you give us some sense of what's happening in pricing? Is something happening in terms of raw materials? It just sounds like there should be more leverage there.

Secondly, on structural cutting the loss in half, can you give us what they did lose in '04?

Let's take the magnesia business. We did triple the profit in magnesia from 2003, so we are starting at a pretty high level. It's one of those years where most everything went very well.

The real push in 2005 is the energy costs and the uncertainty about that. We're a big natural gas consumer in that business; we're also a big coal and petco (ph) consumer. So if energy prices were to flatten out, drop back a little bit, that would certainly be a positive for that business.

We think the volume levels are going to be good. We're essentially sold out at our lime plant, Jack. We' got good price increases in '04, we think we will do that again in '05. The question is how much offset we get the energy? We've got a little bit of incremental capacity coming on about midyear. Our shipments in lime were at a record level this year, a little over 730,000 tons.

On an annualized basis we're going on about 25,000 tons of new capacity; but that won't come on till midyear or a little later, sometime in the third quarter. So there's not a whole lot to play with there. We can't do much else on the volume level.

But why couldn't you, if you're sold out, at least on lime, and even if the energy prices don't go the way you think, you can't go to the marketplace and recoup a good portion of that?

In this case we're quoting annual requirements, in some cases multiyear contracts. So, we have gone to the marketplace with some pretty hefty increases. We do understand pricing and the opportunity to do that. The concern is really the energy cost side of it, which keeps us from being more aggressive.

On the magnesia chemicals side that is a more competitive marketplace than lime. What we're trying to do there is build up our volume levels a bit more to get back to something close to full utilization of that facility.

When we sold the refractories business back in 2001, we took that facility from close to full utilization down to about 50 percent. With our deal with Dow last year we brought it back up into more like the 80 percent or so range. Hopefully we will be able to ease it up a bit more. So there are some upsides.

In the structural business we lost a little over $10 million last year, certainly well beyond any expectations we had when we entered the year. Quite frankly we thought we had some business locked down that was going to get started; and it turned out that it didn't get started. It got pushed out and deferred.

We also had issues with a couple of our products. We want to be very careful about what we put out there, because we want to make sure it's before we start putting volumes of products out there. So we have been cautious.

The objective this year is to pull that down. We've got a full factory complement; we're staffed, ready to go; we have brought in some additional staff into the corporate side of it in our composites business. So we are kind of sitting on ready. A lot of product testing, also I mentioned a variety of agreements. I did not mention everything that's going on. We have other initiatives, some of which may play out in 2005.

Just on pricing now with regard to aggregates, 5.8 percent in the fourth quarter, 3 to 4 percent this year. What happened in the fourth quarter? Was it a bit of a mix issue?

Secondly with regard to the 3 or 4 this year, is that pretty much already in the cards in terms of price increases you have already put through, Steve, for the spring kind of selling season? Or do we need to get another price increase June and July to kind of make 3 to 4 percent happen this year?

With respect to Q4, mix was part of that. It was not just a product mix, but was also a geographic mix. We had some heavy business levels in places that have higher prices; and that was a positive in terms of the average selling price increase. The other part of that was we had a great cost quarter in the fourth quarter, which we had in the third quarter. In fact we had a great year cost-wise when you look at our unit production cost in aggregates, period.

In Q4, just to mention the energy cost pressures which I think are worth noting, we had about 7 cents a share negative impact. If you calculate the numbers it was over $5 million of additional energy cost. Diesel was up to $1.55 a gallon versus 92 cents in the prior year. We offset all of that. So we felt very good about what we were doing.

As far as the 3 to 4 percent in 2005, based on what we put in place we think we are in the 3 to 4 percent range. We went out and got some midyear price increases in 2004. We think there is some limited opportunity for that in '05, but not as much as we had in '04, just based on certain markets where there was an opportunity to get a little better pricing on a by-size (ph) basis. So the 3 to 4 is pretty well baked in right now we think.

Good. Thanks.

(OPERATOR INSTRUCTIONS) Arnie Ursaner at CJS Securities.

The question I have is on your sale of land. You had an $8.7 million income item and yet it was only 1 cent per share after-tax. Can either you or Janice walk us through the math of the difference between the two?

I will elaborate. First of all if you look at the difference, it's under the other operating income category. The bulk of that relates to the sale of our asphalt plants in Houston. If you look at the difference between other operating income -- which we have every quarter, I mean that is just something that is part of this business -- there was a difference of about $4.7 million in Q4 this year as compared to Q4 last year.

And it's very simple as to what happens there. You had a book gain of $4.7 million difference. If you take the transaction in Houston, what you have in terms of tangible assets is one grouping of assets that are part of the book value, and then on top of that you have another set of an asset class which is goodwill. In fact the goodwill is the majority of the book value of the Houston asphalt plants.

When you get to calculating taxes on that, the tax man does not allow you to deduct that goodwill. So you start with a very low tax basis, which is the tangible assets. Once you run the tax numbers on that, you have washed out after-tax all but a little over a penny of that gain. So the $4.7 million after you tax effect it added a little over a penny to our results. (multiple speakers)

So saying that another -- saying that the other way, how much did that increase your tax liability?

Our tax rate for the quarter was over 38 percent.

Right. That was the tax rate. How much did this increase the liability? The actual (multiple speakers)?

It was over $4 million. You can subtract out and get to a little over a penny.

Got it. Another mechanical question if I can. In looking at trying to go from your earnings from operations to your EBITDA, I have got the 68 3; I add in the 33 million; that gets me to 101 3; and I'm trying to reconcile how I get to the 104 6 that you show.

(indiscernible) earnings before interest income taxes. The EBITDA number, Arnie, is not based on just continuing. It's all earnings. It's both the continuing operations and the discontinued operations.

You have to plug all of it in. I mean it's all cash flow during the quarter, even though the reporting these days is done based on continuing operations. So that's the plug element. Discontinued.

I missed a part of your call. Did you give or have you discussed your CapEx plans for '05?

We have not. The capital expenditure plan for '05 is about $195 million; that compares to about $162 million for '04.

Included in that, do you have plans for either an additional magnesia facility, or are you building in or including a facility for composites?

No. We've got normal CapEx for magnesia; very little CapEx for Structural Composites. The big part of the increase there is that we've got about a half-dozen major plant projects that we either have underway or are starting in the first quarter.

We have one very large project; in fact it will be the second largest that we've done next to the Bahamas. That is our Three Rivers, Kentucky, quarry near Paducah, Kentucky, that is primarily a barge shipping quarry. We're going to spend about $45 million; roughly half of that in '05 and half of it in '06. We are going to build a facility that will produce in excess of 8 million tons a year, very economically and have the capability of pushing it up in the 10 to 12 range if we need it.

Thank you, I will get back in queue.

Leo Larkin at Standard & Poor's.

Could you give us DD&A for '05?

For planning purposes, Leo, I'd probably take the 133 million that we had for DD&A this year and add about $5 million onto that for next year. I think I would be a good starting point for your plan.

The other thing I'm wondering about, the contribution to the pension plan. Where does that appear in the cash flow statement?

It would be on the cash flow statement in other assets and liabilities net, which is just above the line that says net cash provided by operating activities.

Finally, just one last thing. Interest expense for this coming -- for this year?

I would assume for planning purposes again about a flat interest expense for next year. As you know we have paid off all of the debt that we are able to pay off. So the interest expense should be relatively flat.

Thank you.

(OPERATOR INSTRUCTIONS) Todd Vencil at BB&T Capital Markets.

With regard to the discontinued operations, can you tell me what is in there? Is that, I'm sure, probably the asphalt plants; but what else is going on in there?

We've had some operations that we have disposed of that fall into that category. A couple small quarries; we've had small ready-made concrete plant; another asphalt plant in Oklahoma. The bulk of discontinued is not the Houston asphalt plants this time around; that will fall in later. It's just the miscellaneous group of quarries and asphalt ready-mix operations.

Thanks. Can you give us some color, Steve, on various geographic markets and the different segments of construction? Just whatever you see that's different or changing or notable? Is any place getting stronger in a particular area or weaker?

What I would say is that the Southeast in general has strengthened; and the Southeastern markets, at least in our areas, we view as very positive. They gained momentum last year as we went the second half of the year, pretty strong; and we expect continued growth in the Southeast in '05.

The Southwestern markets, the Southwest was weather impacted in '04, as it has been for the last couple of years. That supposedly arid climate in Texas, that is a misnomer, at least for the last 4 years. It's been in the flood zone, it's been a rain forest in some cases.

As you look at '05 and you look at the underlying demand, we think that in the Southwest that there is a very good opportunity for some significant growth out there, based on the levels that we have been at, which we think have been below the norm for what the economy could support. Plus some very good highway projects. San Antonio is going to be particularly strong because of the Toyota project there. And there is some very good highway work in Dallas-Fort Worth. The Houston market overall looks pretty solid to us.

If you go out to the farm belt, Midwestern states, nothing very exciting going on there. Pretty much same as it has been. Solid, but we don't see any real volume growth there. And I would make a similar comment with respect to Indiana, Ohio. We think those markets are going to be pretty flat. Nothing that says to us that there's going to be any quick upswing there. That is a quick summary.

Thanks for that. What is driving the growth in the Southeast at this point?

Res continues to be strong, but nonresidential is coming back; and highway work in much of the Southeast has been quite good. So you've got all 3 of the major areas that are positive. I don't know that I'd say that res will continue to grow; in fact I think it will taper a little bit, but it is at very high levels already.

So, with non-res has actually exceeded our expectations. More commercial building than we would have expected in '04 in the Southeast. The highway programs have been a bit stronger than we would have expected. With that frankly we've, based on our positioning with the long haul distribution system, we've picked up some market share, market penetration.

Okay. And finally, with regard to I guess the President's comments about the highway programs going forward, it seems like he has kind of come up to the House level in terms of his proposal now. I guess the House and Senate are formulating their own plans to reintroduce. What are you hearing or expecting about what the Congress is likely to do there?

I think the key really is what Bush is likely to do. Now he's come out now with a program that matches up to the number that was floated at the end of last term, which was the 284 guaranteed spend, 299 authorizations. Our view is that he really doesn't want to spend his political capital finding fighting over this one. He's got a much larger agenda. I suspect that his leadership has told him that he really ought not get into this fight.

So my guess is that what happens from here is the Senate would like to get the number up. There is some number at which Bush would veto. I don't know that; we certainly don't know what that number is. My guess is that it's pretty close to the 284 guaranteed spend. So there may be a little bit of negotiating wiggle room, but I don't think it's a lot.

I am pretty optimistic that they're going to go ahead and move with it and get it done at the levels that are at or better than what was in the President's budget.

Thanks very much.

There are no further questions in the queue at this time, but I would like to give you one last chance. (OPERATOR INSTRUCTIONS) Leo Larkin at Standard & Poor's.

Just one last thing, the tax rate for '05.

Leo, again, for planning purposes a 31 percent tax rate is a good number to use for next year. That of course would not include any discrete items which may occur next year; and it is also pending a complete analysis of the American Jobs Creation Act and the impact on the Corporation.

Thank you.

Jeff Smith (ph) at Sanford Bernstein.

I wonder if you could give us a little bit more color on the pricing increases in the quarter. It was quite a bit more than you had expected in the prior guidance. Could you help us understand a little bit more about how much was due to the mix of the products versus the geography and where (indiscernible) geography, where that might have been coming from?

It's more related to geographic mix than it is to product mix. The reality of the aggregates business is that there is a pretty wide range of pricing based on where you're selling product. For us in the fourth quarter, we had disproportionate volume in places where the prices are on the higher end. I mean, the spreads can be pretty significant. So that was the driver.

Second question is can you tell us a little bit about the railcar availability? I know that was a problem the past couple quarters; and what that's looking like last quarter and on a go-forward basis?

It continues to be an issue. 2 of the railroads that we do business with are struggling, the Union Pacific and CSX, with car availability as well as just ability to move freight. You have read about those issues so I am not going to go through them.

What we have tried to do with the system we built is to create options. In some cases that option can be a waterborne option, in other cases it can be another railroad. What we're trying to do is make sure that we are availing ourselves of all the available options.

We have in fact, based on the railroads' inability to handle the growth in our business, and the growth in demand in customer areas that we think is going to be there for the foreseeable future, we've gone to some significant expense to ramp up in the Bahamas. We've recently completed a project to ramp up in Nova Scotia, adding about 50 percent capacity there.

With that we have also contracted for more long-term shipping. Producing it is only part of the equation; you have to be able to deliver it. In addition to rail cars being short in '04, there was a shortage of deepwater shipping capacity.

So we have been working all fronts. I think we are going to be in much better shape in '05. certainly on the waterborne side of it. We are seeing improvement from both UP and CSX; but it's gradual and quite frankly it is slower than we and our customers would like to see. So the constraint is much less on production capacity and much more on transportation capacity right now.

Great, thank you.

Todd Vencil at BB&T Capital Markets.

Steve, I just wanted to follow up on that. Can you talk about what you're seeing with regard to deepwater shipping capacity currently, as opposed to the tight conditions last year?

I can talk to you about what we're doing. We have the ability to ramp Bahamas up roughly 1.5 million tons beyond what we did last year. We actually had a lighter year in '04 than we had planned because of the two hurricanes that hit us back-to-back and shut down shipping for over a month.

We had had a target last year of 5 million tons out of the Bahamas; we were under 4.5. We've got the ability to do 6 million tons out of there without pushing it too hard.

So the key there is having the shipping capacity available. We brought on a new dedicated ship third quarter of last year. We think we are going to be in pretty good shape there. In fact we've gotten off to a good start already in the Bahamas as far as shipping.

Nova Scotia, we have ramped the capacity up there from about 3.2 million tons to 4.8. We have some staggered shipping commitments, meaning that we are bringing on shipping commitments throughout the year that will increase our capability to deliver that capacity. So, you know we have ramped up our capacity pretty sharply. At Nova Scotia we've got the ability to just keep taking it up, because we've got reserves that are basically uncountable, well over 1 billion tons, on the order of maybe 2 billion or more. I kind of quit counting after a billion tons.

Thanks a lot.

Mr. Zelnak, there are no further questions. I will turn the conference back over to you.

Okay. We appreciate you joining us. We closed out the second half of the year very strongly. We were quite pleased with third-quarter and fourth-quarter results. Had a record year. Certainly the expectation based on what we have told you is that we are going to have a very good year in '05; and we look forward to talking to you at the end of the first quarter. Thanks.

That does conclude today's conference. Again, thank you for your participation.