Martin Marietta Materials Inc (MLM) 2005 Q2 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 the Anne Lloyd, our CFO; and Janice Henry, Senior Vice President and Treasurer.

We had an outstanding second quarter with earnings of $1.30 per diluted share, up 41% from $0.92 in the prior-year period. Net sales from continuing operations of $479 million was up 18%, while net earnings of $62 million increased 38%. Strong volume, positive pricing, and good cost control in our Aggregates business along with continued good results in our Magnesia Specialties unit were the key elements leading to record earnings for any quarter.

SG&A cost was also a positive as it dropped $1 million or 3% in the quarter compared to prior year. As a percent of sales, SG&A was 6.7% compared to 8% in the prior year. Quarterly results benefited by $1.2 million from changes in a tax law in Ohio which was more than offset by a $1.4 million write-down associated with the closure of an Aggregates plant, and a $2 million charge related to the write-down of certain composites inventory.

Year-to-date sales from continuing operations of $819 million was up 16% while net earnings of $68.5 million was up 80% over prior year. In Aggregates, revenue of $448 million was up 18% while earnings from operations of $96 million increased 34%. Total Aggregates shipment volume decreased 9.2% for the quarter as compared to the prior-year period, while pricing increased 8.2%. Volume and pricing were particularly strong in the Southeast and Southwest.

Year-to-date, Aggregates revenue of $758 million was up 17%, while earnings from operations of $113 million was up 51%. Our operating margin for the quarter was up 250 basis points as compared to the prior year.

As noted earlier, we took a charge of $1.4 million for the shutdown of an Aggregates plant in Ohio. This location is being replaced by a new location, which is well located in proximity to market growth and which is expected to have a much lower operating cost.

In our Structural Composites business we made the decision to defer further activity in the waste trailer area. We are focusing our resources on flat-panel products, rail products, and select trailer products where we believe the opportunity is greater in the short intermediate term. In concert with this decision, we wrote down $2 million in inventory value associated with manufactured waste trailers. Our activity level in composite products is very high particularly with military applications. We're awaiting a number of decisions regarding down selects and purchases.

During the quarter we decided to increase our capital spending by $32 million as compared to the original plan of $195 million. $6 million would be used for the purchase of some key mineral reserve properties while the remaining $26 million will be employed in a significant number of small- and medium-sized capacity expansion and efficiency improvement projects. These projects have the combined expected internal rate of return of over 30%. We expect a significant majority of these products to be in place by April 1, 2006, the startup during the beginning of the 2006 spring construction season.

We continue to be committed to using our strong positive cash flow in a disciplined manner to the benefit of our shareholders. The high return projects just noted are one example of deploying cash to create higher value. During the quarter we repurchased 599,000 shares of our common stock at $37 million. Year-to-date we have repurchased 1,339,000 (ph) shares or $78 million. We also plan to review our dividend this year.

Based on current assessments of our business, we continue to have a positive outlook for 2005. In Aggregates, we expect volume growth of 4 to 6% for a year, while pricing is expected to be up 5.5 to 7%.

In our Magnesia Specialties business we continue to expect pretax earnings of 19 to $22 million, with a pretax loss of 10 to $12 million in our Structural Composites business inclusive of the $2 million inventory write-down. For the year we expect earnings per diluted share to fall in the range of $3.35 to $3.55 with the third quarter ranging from $1.20 to $1.35.

At this time I would be pleased to take any questions that you may have.

(OPERATOR INSTRUCTIONS) Jack Kelly, Goldman Sachs.

On the composite side, you entered that business in a pretty conservative fashion in terms of the plant, etc. The losses are kind of getting up there. You pulled back a bit on the trailer side. Can you give us looking out over the next 12 months, what has to happen to get that to breakeven? And then maybe secondly, of the 10 to $12 million loss that you have talked about for this year, we know $2 million odd is for the inventory write-up. How much would you associate with the trailer activity or can't you do that?

In other words, what is the run rate loss on everything but the trailers and how quickly can that get to breakeven?

Fair question. Breakeven as we have indicated before we need 25 to $30 million of revenue in that business to break it even, we think. It depends upon particular products that go out the gate. We have indicated that the expectation is that by the time we get to the end of the year, we need to have some backlog building for this business. We need to have some real business float. If we don't see that, then obviously we're going to have to look at it in a different way.

I have referenced the military side of the equation, which is in fact the most interesting part of it right now, although we have got some good commercial applications that are interesting (ph) too. A bit frustrating to us right now because we really thought that we would have some fairly significant orders on the books and moving forward at this point we continue to be delayed by additional rounds of testing where people will in some cases just don't believe what they are seeing with the product, which is very positive. They just want to make sure that it is going to continue to perform.

With respect to the trailer component, we're talking about -- we have put a lot of activity toward waste trailer side. We took that on -- it is the toughest application that we could dream up or find. And we took it on with the expectation that we're going to be able to do something with it pretty early. What we have found is that even though the finite element analysis is very positive, when we get the products out there, we have people who find ways of doing some kind of damage. And we may be an iteration or two away from having a product that is fully effective, but we have just decided there is too much opportunity in the other things that we're doing to continue to put resources into waste trailers right now.

We're not going to increase the total resources that we're putting in. We're reallocating them and I think that is important for you to know. I can't really break out that piece of it because the processes are so integrated it's very difficult to do. So I think the best way to look at it is it's a reallocation of resources. We're going to put them on the things where we think we have got opportunity to move it forward. And if we don't see something that is positive in that regard, we will reassess this business at the end of the year.

And then just secondly, in terms of your expectations for down volume in the second half, is that solely because of strong comparisons to last year, Steve? I am saying you had mentioned four to six unit volume growth for the year and for the first six months you were up -- where are we -- heritage was up 7.6.

Not down volume -- a lesser rate of growth. You had me confused there for a moment. If you look at the comparison to the second half, Jack, they are tougher, particularly the fourth quarter compare. Let me tell you how we have come at approaching the range forecast and you and others can draw your conclusions as to how you want to look at it. There clearly are two strong positives going into the back half of the year. Demand is strong. There is no question about that. And certainly the passage of the highway bill is going to give that a little bit more positive momentum as we get toward the end of the year but particularly as we go into next year. Pricing is very positive.

We had just gone through the largest round of midyear price increases that we have ever done. That will set the stage more for '06 than it does in terms of its impact on '05. And the reason for that is it gives us an opportunity to bid project work at the new prices and that project work won't come in until late in the year, but most of it will be next year, based on normal lead times. We will be able to flush out some of the protection that we have from individual customers and get that covered this year. So it really sets the stage for '06 more so than adds a lot to 2005. But clearly it is a positive move.

The downside of the equation, certainly we are seeing more cost pressure. We have done awfully good job of managing our costs over the last four quarters. We will continue to do that well I think relative to everybody else out there. I expect good performance, but we are seeing a lot more increases in terms of parts and supplies, consumables that we'd use in our business. And obviously you know about diesel fuel.

The wild card here that we have tried to build into our forecasts to what we think is a reasonable agree is really the weather factor. The predictions are for a very robust hurricane season. We saw that get cranked off to the middle of June. We have seen activity in early July. And the expectation in our forecast is we're going to have some heavy activity in that regard. If in fact the weather does not play out that way, that would be a positive. And I would tell you the overall forecast I think there's more upside opportunity than downside risk. So you can take it from there.

Okay, thanks.

Jack Kasprzak, BB&T Capital Markets.

Can you quantify the impact of energy in the quarter? I guess just particularly diesel year-over-year change?

Hold on just a second. We will give that to you. Roughly in our Aggregates business, roughly $7 million. Big number, almost -- not quite double the impact of the first quarter but the numbers certainly grew.

And the issue in the press release that you mentioned, the $6 million investment for key mineral reserves properties, I was just wondering if you could give us a little more color on what that is? Are those greenfield properties or expansions of existing contiguous quarries?

About half of it is going to a new location, which we will have up and running early next year and the other half of it goes toward expansion of reserves at existing locations. So key pieces of property that we have been interested in taking down for awhile and you never know when property owners are going to be ready.

Okay, and the tax rate for the second half of the year, do we still think a normal tax rate is around 31%? Is that still a good number?

Yes. It could be more like 30 for the balance of the year excluding any discrete events.

30. Okay, great. Thanks.

(OPERATOR INSTRUCTIONS) David McGregor, Longbow Research.

A couple questions. First of all on the cost side, you may have addressed this. I got on the call a little bit late. I'm sorry. But I heard you talk about 7 million in incremental diesel expense. And I guess the question was just if you could break out cost inflation versus the other costs associated with the volume increase?

I would really prefer not to do that. It is not a piece of information that we normally furnish. But what I would say to you is that obviously we managed our costs well, well below the rate price increase which we expected to do. I will also tell you that we were able in the fourth quarter and the first quarter to actually hold production costs level in what was a very tough environment with respect to cost increases on the things we consume.

We did have some cost increase in the second quarter and we are beginning to see more impact from that and I think that will carry through into the back half. The rate of price increase obviously will continue to go forward too.

You had mentioned that the real benefit from the midyear price increases would be in 2006 as opposed to the second half of '05. What percentage of your second half '05 business will you get a price increase on?

I think it will be a modest percentage. It might be somewhere in the neighborhood of 20% or so; 20 to 25. But the real impact will come in '06 from this midyear ramp.

Regarding the composites business -- and you may have addressed this in your prepared remarks which I missed, I apologize -- was there anything in the highway bill that would support your composites business and if so, how quickly would that come on?

There is in fact opportunity that comes out of the highway bill. We had a number of bridge products that were funded around the transportation at the last time around and in fact part of the drought on revenue in composites right now is because we have not had a bill. There is money in there for innovative transportation. There is innovative transportation funding and that is utilized for things like composite bridge decks. So we would expect to see coming fairly quickly composite bridge deck activity that has just been in a lull, basically deferred and that will be a plus for us.

Would that be a factor in the second half or should we be thinking more about 2006 for that?

2006 is when I think we will see it back on strength.

Okay. In your press release you mentioned that you had been active in share repurchase activity during the quarter. Can you say whether you were a buyer right through the end of the quarter or how linear was that activity?

I think the question you are asking is are we a buyer at the kind of prices that we have seen in the last month or today. And the answer to that is based on looking at alternative uses of funds, looking at what we think we're going to do, the answer is yes, we find it attractive. If we did not, I would tell you that.

Okay, and final question is you were just talking about being cautious with respect to third quarter expectations and the weather and the fact that it is typically a hurricane season for you. I am just looking back on your third quarter last year and you had a lot of hurricane activity and there were a number of disruptions. I think your Bahamas operation went five weeks without electricity and there were just a number of different disruptions.

I guess the point I'm making here is that it ought to be a relatively easy come on that dimension. Am I missing something?

You are missing where the hurricanes hit. That really makes a big difference. Bahamas was the place where we really got pounded and actually we had very little impact in other parts of our system. The question is with the predictive extent of activity, do we get hit hard throughout the coastal Southeast, other parts of the Southeast? It is no surprise that we have very good profit structure in the Southeast and our profit structure in the Southwest was improved markedly. So it will be a question of the extent of hurricane activity and where it hits.

Okay, good. Thank you very much.

I will give you one other comparative just to give you an idea of how we have gone at this. If you take our quarter and you take the write-downs we took and you take the positive on the tax, as apposed to $1.30, it would've been $1.33 if you didn't have those things. We've got a range of $1.20 to $1.35 for the third quarter and as I have said, we factored in the forecast that is out there, which is for very robust weather activity. Now let's hope that it doesn't hit. If it doesn't, that could be a plus.

Right, got it. Thanks very much.

(OPERATOR INSTRUCTIONS) Arnold Ursaner, CJS Securities.

A couple of questions going back to your incremental capital expenditures. Can you give us a feel for the potential volume that you think you can add by putting in these properties? And also perhaps something on the cost savings side you might be able to accomplish?

I would rather not give you the cost or the volume side of it. I would just really rather refer you to the 30% plus internal rate of return and I think you can go from the there. This is a cash flow business so it gives you a pretty good idea of the magnitude. And then in terms of how it impacts our business, a lot of difference between where we do these projects, each specific one. But when you sum them up, you looking at plus 30% IRRs and that is a high confidence number because these are not complex projects and they are in places where we know what kind of returns we should get, can get, have gotten the past. We feel pretty good about that.

Perhaps asking the question in a slightly different way, you showed 250 basis points improvement in aggregate operating margin this year. What do you think with these projects you can show next year? What types of improvements might be achievable?

It is too early to say but clearly we expect to continue to improve our margins. We've said that. And I would reiterate that that's a major point of focus for our Company. We are pretty pleased with what we have been able to do in the last eight quarters or so and the expectation is that we're going to continue to get margin improvement and this will add to it. No question.

On magnesia, you had at least thinking about a new facility or expansion but did not announce anything today. Can you give us a feel for the issues or thought process there?

Yes, we continue to work the permitting and some preliminary engineering on a possible kiln expansion at our Woodville Line facility. We had indicated before that in order for us to proceed on that, we would have to have very, very strong backing contractually from the seal industry and we would have to have a very strong conviction that we were going to have significant expansion in our chemicals business because we can transfer lime to the chemicals business.

Where we are right now is the steel industry has clearly pulled back. It is in a lull which we expect to get to come out of sometime in the third quarter. Even though it is in a lull, we are still doing quite well there. But our view is that we want to make sure that if we're going to put money in that there is very little risk to the investor with respect to that money and frankly I weigh it off against share repurchase. And right now I am not prepared to make that commitment on the kiln. I like the shares better.

Okay, thank you very much.

Mike Betts, JP Morgan.

I had a couple of questions if I could. The first one was just in terms of the price increases, the second round of price increases. You indicated I think that they would benefit 20 to 25% on the operations in the second half but these were not across the whole of the regions. In terms of '06 or in terms of what proportion of the total business was impacted, could you give some indication of that? And also maybe some indication of the magnitude of these price increases? And then I had a second question after that please.

Magnitude, I am not going to talk about it. I will tell you that -- I will give you something an indicator on a sense per ton basis but I'm not going to try to translate that to percentage. Price increases that were put into effect range anywhere from $0.25 a ton to in excess of $1.00 a ton depending upon the market and you can probably intuit that the hotter the market, the greater the demand supply in balance, the higher the rate of increase.

With respect to increases carrying over to '06, it will really greatly depend upon project work bid and the timing of when that project work hits because what it gives us the opportunity to do is to bid project work at higher prices. We don't bid above list prices. There's some companies that will do that. DOTs typically frown on that. Customers typically frown on it. So we want a make sure we get our list prices up to what we think is the highest level that we can legitimately bid at.

So as we go forward and that translates, it is going to impact maybe double that amount of tonnage as opposed to the 20 to 25%. It will be pretty robust.

Okay, thank you for that. My second question was you referred to the Southeast and the Southwest being much stronger markets. Obviously there were very good numbers anyway for volume and pricing. Could I ask sort of how much they were above the average and also on the canvas side, which were the regions that maybe were below the average in the second quarter?

I'll get it to you with respect to the volume. If you take the areas that were the hottest, I mentioned the Southeast. The shipments in the Southeast were up about 8%, certainly very strong. The shipments in the Southwest were incredibly strong, up 21%. The areas that were softer as you might expect out in the Midwest area, that actually was reasonably robust; it was close to 6%. The area that was weaker was in the eastern side of the country that ranged from North Carolina up through Ohio/Indiana with Ohio and Indiana being somewhat soft. And that was on the order of 2%.

Okay, thank you for that much. My final question -- I think you, and correct me if I was wrong, you talked about really looking at the dividend and I suppose maybe my question without pushing you specifically on that is the view at the moment in terms of what you invest the additional leverage in terms of share buybacks, acquisitions, dividends, where does that fit and particularly in terms of what sort of potential there is for acquisitions if any at the moment?

We just don't see much in the acquisition market that is attractive to us. We always have some things we are working on. But we haven't made an acquisition in 2.5 years, after having done over 60, since we became a public company. And the reason for that is very simple. A lot of the things that are attractive to us that fit with our strategy, we have already taken out. We weight off the relative return between investing our capital and beefing up existing operations versus trying to make an acquisition. And pretty clearly the returns on investment in the existing locations is far higher with much less risk.

We're not particularly enamored of the acquisition prices we see. So we will continue to look at it but it is certainly not first priority for us. We've got a lot of good internal opportunities, which is what we're focused on and taking advantage of.

With respect to share buyback and dividend, we actually went out awhile back and talked to our top 15 shareholders and asked them what they wanted to see out of us. And some of them were very strong on share buyback side. Some very strong on the dividend side. Most of them said do both and we like it all. So what we have tried to do is to balance it out in a way that we think is prudent. If you are going to raise dividends clearly you don't want to raise them unless they are sustainable, so we are looking at that. You are looking at the level of payout.

And with respect to share buyback, that is more opportunistic and we will continue to look at it that way. So that is where we are on those.

Thank you very much indeed.

Thomas Russo, Gardner Russo & Gardner.

Great, great numbers. One question on the opposite side of the robust market. Are there any properties that you would consider selling, that may not have scale and make it better (ph). Others who may pay over the returns that you need to justify holding properties?

We at this point -- Tom, we have looked at our entire system that way. I think it is a very good question. And we have reviewed all of our properties in that regard, taken a good, careful look at where we want to be. Do we have individual locations even in places where our markets are pretty robust and where we have a strong position where we might exit in a way that is very attractive? Do we have some marginal operations that would be better off in someone else's hands?

The fact is that we have done most of that over the last two years. We have a few remaining properties that we may consider doing something with that they would not be of great consequence. I am talking about a value that would be less than $50 million, so there's not a lot there. We think what we have is very, very sound and we would expect to build off of it.

Thank you. And then following up on the question earlier about where price is being taken and the most confident fashion and the answer was as much as $1.00 and typically in your hot markets. The Southeast and the Southwest are enormously large markets for you and those also happen at the moment to be your hottest markets. So how do we square the possibility of price increases as large as you indicated fit for the hottest markets with the fact that at the moment some of your hottest markets are also large volume markets?

I didn't catch the last part about volume.

The hottest markets are also some of your largest volume markets. So if you are on the high end of that $0.25 to $1.00 depending on heat of market, it turns out that two of your hottest regions are also large volume regions.

Well, if you take the hottest regions, clearly Florida is very, very strong. You have seen robust price increases by the Florida producers and obviously we have implemented similar strong price increases in Florida. Florida is a growing market for us but it certainly is not anywhere close to our largest market presence. About 5% of our revenue last year came out of Florida.

The other area that has been incredibly strong has been South Texas, Houston area. And that area we are the leading Aggregate provider in the area, but again that is a relatively modest presence when you sum the two up. When I said $0.25 to -- and actually I said more than $1.00 in a few cases, don't derive any weightings out of that. But clearly what we're trying to do, we have had the question as I have been out talking to investors, do you think the price increases are more driven by cost or are they more driven by supply and demand? And certainly there is a cost component that is a driver underlying all of this. But the real key is that there is a lot of supply/demand imbalance in the southern tier markets, Southeast, Southwest. And if you begin to look at long-term Aggregates supply which is really what our strategy is hinged on, we think that that's going to continue. We think that there has probably been a step function change in terms of the underlying value of mineral reserves and those markets. Reserves that have proximity to market. And by proximity, I don't mean mileage. I mean transportation cost proximity.

So our view is that this opportunity is probably going to be there if there is a reasonable level of demand because I think you are going to have difficulty supplying when you start looking at alternative supply. So we view it as a very good situation in Southeast and Southwest.

Thank you.

Jack Kelly, Goldman Sachs.

Just on the share repurchase, just focusing on that, you did 79 million or so in the quarter; you did 81 for the six months so obviously something happened that made you a lot more favorable on that. Was it the price of the stock? Was it the cash availability? And given the answer to that, can you look ahead for six months and maybe give us some sense of what you might do?

It is opportunistic, Jack, in terms of cash availability at this point. Certainly not constrained by share price in our view of that, as I have indicated very forthrightly. We came into the year with considerably more cash than we had anticipated. And when you go back to the end of last year, we would expect to end the year with something on the order of 125 million in cash and we actually ended with 163. So therefore in the first quarter, we were in a position where we had the ability to go out and be very aggressive in terms of share repurchase.

We were pretty aggressive in the second quarter but we wanted to make sure that we managed our cash flow properly and carefully. We knew that we going to consider some additional capital projects and I had mentioned the fact that we are kicking up capital spend at 32 million. So we wanted to make sure that we had room for that.

And the other thing that will impact in the second half is that our profitability has gone up so sharply that we are actually going to be a cash payer of taxes to the U.S. Government and that cash tax bill is going to be significantly greater than anything we have seen in a long time.

So we are just trying to make sure that we manage the cash flow appropriately. And to the extent that the cash is there for share repurchase, it is optionally way up at the top of our list.

Thanks.

There are no further questions. I'll turn the conference back over to you.

We appreciate you tuning in. Obviously we were quite pleased with the results. We feel very good about the continuation of 2005 and as I mentioned on the pricing side, certainly we have got something that bodes well for 2006. We will talk to you more about that when we get to the end of the year.

I look forward to talking to you at the end of third quarter and hope to report more good results. Thanks.

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