Martin Marietta Materials Inc (MLM) 2005 Q1 法說會逐字稿

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

Thanks for joining us this afternoon. I have with me Janice Henry, Chief Financial Officer and Anne Lloyd, Controller, Chief Accounting Officer.

We had an excellent first quarter with earning of $0.15 per diluted share versus a loss of $0.14 per share in the prior year period. Revenue from continuing operations was $340 million, up 14%, from prior year, while earnings from operations of $18.9 million compared very favorably to $4.3 million recorded in the prior year period. In addition to good operating cost performance SG&A as a percentage of sales fell from 10.6% in the prior year period to 9.4%. During the quarter we repurchased 740,000 shares of our common stock for $41 million. We also increased capital spending by $17 million on what we believe are an array of high return planned expansion and efficiency improvement projects.

In Aggregates revenue of $310 million was up 14%, while earnings from operations of $16.5 million increased sharply from $3.2 million in the prior year period. Shipments volume at Heritage plants increased 7% with the southwest showing the highest rate of increase at 16%. Average selling price increased 5.6%. Unit production cost at the plant level decreased slightly in spite of cost pressure from diesel fuel, parts and supplies and wages and benefits.

Magnesia Specialties business got off to a strong start with revenue of $30 million up 19% from the prior year period while earnings from operations of $4.9 million increased 62%. Demand was high in both the lime and magnesia chemicals businesses. We have filed for permits on the addition of a new lime kiln in at our Woodville, Ohio facility, and are currently evaluating the comics and return potential on what would be a new investment of about $35 million. This would add about 275,000 tons of annual capacity to our existing 750,000 ton capacity. Currently both our customer sales and our manufacture of magnesia chemical products are constrained by shortage of lime.

In Composites we are seeing an accelerated level of trials and interest in military, rail, transportation and general industrial applications of our products. The objective is to build backlog and begin ramping production in the second half of 2005.

Based on our current assessment of our business we continue to have a positive outlook for 2005. In Aggregates we expect volume to be up 2.5 to 4.5%, while pricing is expected to increase by 3.5 to 4.5%. In our Magnesia Specialties business we now expect earnings of 19 to $22 million, with a loss of 6 to $8 million in our Structural Composites business. For the year we expect earnings per diluted share to fall in a range of $2.90 to $3.25, with our second quarter ranging from $0.95 to $1.10. At this time I would be pleased to take any questions that you may have.

Thank you. [Operator Instructions] We will go first to Arnold Ursaner with CJS Securities. Please go ahead.

Steven, good afternoon. One of the things I notice in your press release is you've slightly raised band on both volume and price for Aggregates. Can you give us a little better handle on what it is you are seeing that's encouraging you?

On the volume side we continue to see some positive ramp up in commercial construction. It does appear that home building is going to be solid somewhere around the levels of prior year, perhaps down just slightly, but that looks very good. Primarily it's commercial construction that's a little bit better than we anticipated. On the pricing side we've gotten off to a good start with pricing. We implemented our increases earlier than we typically do, which gave us a very positive result in the first quarter. We think that the environment will allow for some mid year increases selectively. So we think there's some upside potential versus where we started.

And the other change very noticeable is the size of the loss, or amount of the loss in Composites has increased. Can you expand on that a little bit?

Yes, just simply a matter of feeling like it's probably going to be a little lighter in the second half as opposed to early in the second half when we begin to pick up some volume and ramp up and that's really based on initiatives in two areas where we have some potential substantial contract value, and that's in the military sector and it's also in the rail sector. So it's timing of people that we are working with.

Okay. Thank you.

Sure.

[Operator Instructions] We will go next to Jack Kelly with Goldman Sachs.

Good afternoon, Steve.

Hey Jack.

A couple of questions. Maybe just starting with other operating income for Aggregates and then other nonoperating income. And then maybe tying into that this nonstrategic divestiture that you talked about. I assume the other operating income number was just a land sale, that was in -- you reported that in Aggregates, the 1.9 versus 600,000 a year ago?

Hang on a second.

You have other operating income expense net, and then Aggregates was 1.9 versus 600,000.

Other operating income, Jack, is made up of a couple of things. Really the tick on that other operating income is some subleasing that we are doing that has increased income in 2005. Those subleases were entered into at the end of last year so we saw the full benefit in the first quarter of 2005. In addition to that we had some adjustments related to some retirement obligations and the benefit of those adjustments came in through that line. So that's primarily -- those are the two major drivers on the Delta and other operating income.

Okay.

And other, let's see.

Other nonoperating income was 2.3 versus 400,000.

Other nonoperating income we saw a benefit related to interest income. We had some notes receivable that we picked up interest on, also our cash balance was higher than in the last year. We have a investment in a nonconsolidated subsidiary that we have about 40% ownership in and they have a very, very profitable, very strong first quarter. And actually the minority interest elimination runs through that other nonoperating income, and it was favorable in the first quarter of this year and that was a result of some timing differences where the UP takes their maintenance product there, the timing of that was different this year than it was last year.

There was also a comment made that the results benefited from the divestiture of a nonstrategic -- nonstrategic asset. I don't know if that was captured in these nonoperating income numbers. Maybe you could tell us what that was?

That's below the line. It's in the gain and loss on discontinued.

On discontinued?

Yes.

That's our Construction Asphalt business that we've been exiting.

Okay. Steve, just on the Structural Composite business, the earlier question in terms of the size of the loss, what do we need to hit in terms of -- well maybe you could give us what the revenues were in the first quarter, and what kind of revenue, annualized revenue number do we need to hit in the second half to come into the 6 to $8 million loss number? I know when you first got into this, I'm probably a little foggy, in December I thought a $50 million annual revenue number was kind of the break even level, but that was based on certain kinds of products and maybe thing have changed but if you could give us what that number is in your mind as we look out to maybe '06?

I think the break even number on an annual basis, Jack, is in the 25 to $30 million range.

Okay.

As opposed to $50 million.

Okay.

The things that we are working on are more substantial than that but they have to happen. And we've been a bit frustrated by the timing of introducing some of the products we have into the marketplace. Revenues at this point are diminimus. We don't have -- we had the Bridge Deck business which was where we started and what has happened with a lack of a federal highway bill is that the Bridge Deck business has pulled back. Because of the newness of that type of product much of that was done with the Federal innovative research monies. So the expectation is that when we get a highway bill, assuming we do, that that will gear back up as well as the other initiatives we are working on. And the two big ones I mentioned are military products, which we have been in test with certain products related to military transportation in both Iraq and in the southeast. And those tests have gone well to this point. We've qualified for a portable run way, taxi way competition with replacement of aluminum products which are out there and we've technically qualified for that. So we have got an array of military things. And then we've got -- we announced that we have an agreement with Gunderson, which is part of the Greenbriar interest, with respect to insulated rail cars. And at this point it appears that that's developing positively, but we are just going to have to wait and see what the timing is. But back half of the year, to answer your question, we would need to be somewhere in the $15 million, 12.5, $15 million range in terms of revenue.

Run rate?

Yes -- well, yeah, in the last two quarters actual.

Actual.

Actual. Run rate in the 25 to $30 million range.

On the military what has to happen there? Is it a matter of, they are going to award a contract or do you have to go through some further qualification, what are kind of the metrics you guys have to meet to get the contract?

We are not dealing with military directly. We are dealing with a military vendor whose name I can't disclose to you. It is a matter of contractual obligation. It's been a very significant amount of work that's gone on with respect to the vendor and the military as well as us and the vendor and the military. So we are actually well along with that in terms of product testing all of which has gone very well. It's back to what you can offer which is lightweight, corrosion resistance. And those are properties that the military seems to be very much interested in. In some cases it appears more so than the commercial market right now.

On the price increase for Aggregates for the year, the range you came out with was lower than what you did in the first quarter. Is that just because you are trying to be a little conservative or was the first quarter kind of a mix issue that might not be duplicated for the full year?

It's tough to read the first quarter because we implemented price increases earlier than we typically do. Normally our price increases are going into effect, the bulk of them, around 1 April when the season opens up. In this case we put in increases early and the majority of the increases were in effect January, 1 with very limited carry over, very limited protection out there for major customers. So I think we got very nice benefit out of that, clearly at 5.6% we did. Yes, I don't know that that run rate is going to continue for the full year. Although I will tell you , as I just mentioned, that there is an opportunity to implement some mid year middle of year increases in selective markets. So I would tend to say that we are on the high side of that range right now. And we will evaluate it again after the second quarter. And if it looks appropriate we would adjust it then.

Finally diesel costs, can you give us any metrics either on a per ton basis or per gallon basis what you paid in the first quarter versus a year ago?

Diesel cost in the first quarter average was about $1.51. That's versus $1.03 prior year.

Okay good. Thank you.

And I will elaborate a little further on that. We are pretty proud of what we did on the cost -- production cost line because we had to eat that as well as wage and benefits cost increases and significant increases in supply parts. And we still came in with a lower unit production cost to the clients than we had in the prior year.

Thanks.

Sure.

[Caller Instructions] Take our next question from Trip Rogers with Carlson Capital. Please go ahead.

Hi, good afternoon.

Hey Trip.

Steve can you talk about the trade-off you are seeing now between acquisitions and buying back your stock, with these lows?

The trade-off is very simply with respect to acquisitions, we don't see much out there. So what little we do see seem to be priced rather robustly as we would view it. We don't see returns that are very attractive to us. In terms of buying back our stock we have an internal forecast. We base our interest in buying back stock on that internal forecast. So you can conclude given that we were a buyer in the first quarter that we like the stock price. And if there's some more that wants to come at us with that number we would be happy to take it.

Excellent. Thanks a lot.

[Operator Instructions] We'll go next to Jack Kasprzak with BB&T Capital Markets.

Hi. This is actually Paul Betts for Jack Kasprzak. Looking at SG&A for the quarter we see it was flat on absolute terms and down as a percentage of sales. Do you see that continuing for the rest of 2005?

I think we are going to have a good year with respect to SG&A. I certainly believe given the revenue metrics that we've laid out that the percentage is going to go down. Whether or not we will in fact be able to have just diminimus increases in dollars is problematic. I kind of doubt that. But what we are getting the impact of is significant restructuring we did which took overhead cost out of our business. We went from 7 units to 4 units in the Aggregates business and that has been a real positive for us. It's flowing through. We -- that's real. But will it be as good as it was comparatively in the first quarter? I wouldn't bet a paycheck on that although I think it is going to be good for the year.

Thank you very much.

Ladies and gentlemen, at this time we have one question remaining in the queue. However we would like to give everybody one final opportunity to signal. [Caller Instructions] We'll take our next question, Arnold Ursaner with CJS Securities. Please go ahead.

Could you give us, Janice, a tax rate guidance for the year?

The basic tax rate that we booked in the first quarter, which was before the adjustment, is about a 30.3%. As you know when we do a base tax rate that is our forecast for that base for the full year, the 30.3% is the number right now, Arnie.

Regarding capital expenditures, I know you've obviously been demonstrating your success with the programs you've put in place. Can you give us your best view right now of CapEx for this year and whether some projects from '06 may shift into this year?

I'm not going to give you a number right now, Arnie. We will give you some more insight into that in the second quarter but what I will tell you is that we are very much focused on looking at projects that have relatively quick returns, i.e. projects that can benefit the Company in late 2005 on through 2006. And we've been spending time within our organization racking up an array of such projects. And right now we are busy evaluating them. My expectation is that we are probably going to have some increase in capital spend. What I would also tell you, though, is that in terms of cash available that I don't think that's going to cause any alteration in our view of cash available as we budgeted. Because we are doing much better on working capital side. If in fact you look at our receivables and inventories compared to prior year first quarter with the 14% increase in revenue we are $7 million down or a couple percentage points positive on working capital. So I think we are doing a very good job of that, plus we are likely to have some asset sales that will put some cash into the hopper that were not planned earlier. So I think cash wise we are on the same trim line but we will take some of the additional cash that we are generating which goes with improved profitability and less outflow into working capital and we are going to put that to work in terms of plant projects that will improve cost and generate more profit.

Could you expand a little bit on Florida? You obviously are gaining some share of the market in the state. One of your key competitors recently reported volumes down pretty sharply. Are you gaining share in Florida and can you give us maybe a sense of tonnage that you have in Florida at the moment?

First of all we are a minor player in Florida. We are not anywhere close to the major players there. But what we have been able to do is to bring considerable supply of granite or hard rock which is not found in Florida into that marketplace. We've done that for about 17, 18 years now on the rail side of the equation and then we began to introduce it in a major way with Nova Scotian granite by water after we bought that operation in 1995. There continues to be a very strong demand for that granite product. That is something that the Florida producers do not have available to them. So that's where a significant piece of our ramp up comes from. And also with respect to Bahamas material and the concrete stone that we can produce there, we certainly have readily available market in Florida but with all the coastal markets we serve out of the Bahamas we basically can sell every pound we can make. We have a good scenario with our offshore and Florida is a part of that but it's not all of it.

Can you freshen up the current production levels in both the Bahamas and Nova Scotia and I know you've had incremental capital expenditures in both, when the increment will kick in?

In the Bahamas last year we were on a course to produce there about 5 million tons and we had those two significant hurricanes that shut us down for five weeks or so. And actually caused a lag on production as we did electrical repairs for most of the rest of the year. We came in closer to 4.5 than we did to 5. Expectation this year is we are going to be closer to 5.5. So we are looking for a very good year out of the Bahamas. In Nova Scotia we had capacity of about 3.2 million tons and we were basically at capacity. We've increased capacity up there to something that's on the order of about 4.8 million tons and the key there is shipping. We've been negotiating on additional shipping, but that shipping will not impact us greatly until the latter part of '05 and into '06, so we will just steadily ramp there depending upon the incremental availability of shipping until we bring on the dedicated shipping. So that's going to progress up from here on out and in 2006 we should be able to ship full capacity and I would think that we are going to be pushing capacity there. We think the market is very good for the Nova Scotian granite.

In the southwest, your 16% improvement, how much of that was weather related, meaning last year wasn't it pretty wet or is this just better expansion into new markets like San Antonio.

Weather played a factor there. Last year Texas was very wet the first quarter. So you've got a weather component, but you also have a very nice lip. You mentioned San Antonio. And the San Antonio market is going extremely well. Toyota has really energized that market with their plant construction project and there is a lot of ancillary construction going on with other people moving in. Home building construction has moved up. And also because of the development needs for infrastructure the state of Texas is putting a lot of road money into that area. So we are seeing a very positive ramp up in Aggregates. Our Asphalt Business where we have a supplier of asphalt but not a contractor there, that's going well. Those two categories in particular. The other weather related comment I would give you which we didn't spend a lot of time -- we didn't spend any time talking about in our release, is that in parts of the southeast in the Mid Atlantic area in the month of March we were pretty heavily impacted. And in fact March in what we call our Middle East division which is North Carolina, up through Virginia, Maryland, all the way out to Ohio and Indiana, we had a significant diminishment of profit and lower volume there. But we were able to recoup that and do much better than prior year based on what we did in other areas and particularly what we did with respect to, again, what I think was a very good job on the cost side.

Final question if I could on your Composite business, Steve. Could you give us or investors a sense of what you think the right bench marks we ought to be focused on over the next few months?

Well, over the next few months it's a matter of reeling in that which we've got out there that we've been working on very hard. The key is by the ends of the year we need some real backlog that indicates that the marketplace is willing to pay for the products that we have. We know we have good products. But we've got to create the backlog that takes our plant forward. And we are concentrating on the two big areas that I talked about. We are also producing a lot of our flat panel product that is going out into an increasing number of trials. And that product is used as temporary roadways, mud mats can go into thing like cooling towers. There are a host of applications where corrosion resistance and high strength is something that's desired. So as we go forward and we talk about where we are as we get toward the end of this year the expectation is, and what investors ought to be looking for is, we've accumulated a backlog that takes us forward into 2006 at a level that would indicate that we are going to be profitable. And you are seeing an array of different products not just total concentration on one product line. Because I think that's important. Those are the objectives and that's what you ought to hold us to.

Very good. Thank you.

We'll go next to Leo Larkin with Standard & Poor's.

Good afternoon. Could you give us DD&A for '05?

Yeah. We are looking at something in the neighborhood of probably 138 million, Leo.

I'm sorry, did you give a number for CapEx in '05?

In '05 as we currently stands the number is about 195 million. But, again, you should have an expectation that that number is going to go up, but also we have some offsetting items which will cover the cash flow.

Thank you.

We will go next to Jeff Smith with Sanford Bernstein. Please go ahead.

Hi. You spoke a little bit about the pickup in commercial construction. I was wondering if you could give us some indication about maybe how broad-based that is and if there is any way to give us some year on year growth in the volume you are seeing there?

I'm not going to offer up year on year growth. What I will tell you anecdotally is that the pickup is concentrated in our areas in the southeast and the southwest because of the pace of the economy in those two areas. You can take certain states where we have a heavy presence, if you take the Carolinas, Georgia, Florida, obviously, continues to well in that regard. Those areas are doing quite well with the pickup in commercial construction. If you move out to Texas we are seeing a ramp up, I mentioned San Antonio, clearly the strongest market out there. But also some increase in ramp up in other areas of Texas. Those would be the highlight states.

Great. And second question is can you talk a little bit about the situation with the rail availability?

Rail availability continues to be an issue. We have -- in the southwest we operate on UP and Burlington Northern. UP is the one that's had the major problems. What we are seeing on UP is some gradual restoration of service. They are beginning to put more cars into our aggregate pool. That's a positive. So we are encouraged although we are still not anywhere near moving the kind of volumes that we like to mauve. To supplement that what we are doing is we are bringing in some material into Houston by barge all the way out of Paducah, Kentucky area. We are able to supplement the market that way. With respect to the southeast primary carrier for us is CSX., some Norfolk Southern. Norfolk Southern has kept up reasonably well. CSX has been under severe pressure with respect to demands outpacing their ability to deliver service. What I would tell you there is would have seen some improvement. Certainly we see a commitment to improvement. So we are reasonably encouraged there. In fact just in the last couple of months we have seen some tangible evidence of improvement. So all in all they are still short but they are doing better.

Thank you.

At this time we have no further questions in the queue. I would like to turn the conference back to Mr. Zelnak for any additional or closing remarks.

Thanks for joining us. We certainly were pleased with our start. Again, we look forward to a very good year. We are going to stick to our game plan that we've laid out for you. And we look forward to talking to you at the end of the second quarter. Thanks a lot.

Ladies and gentlemen, this does conclude today's teleconference. We appreciate your participation in today's discussion and have a great day.