Martin Marietta Materials Inc (MLM) 2006 Q1 法說會逐字稿

Good day and welcome to this Martin Marietta Materials Incorporated conference call. Today's call is being recorded. At this time for 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 this afternoon. I have with me Anne Lloyd, our CFO. We had an outstanding first quarter with net sales of $424 million, up 25% over the prior year period. Earnings per diluted share of $0.66 was more than four times the prior year of $0.15 per share. Operating margin increased 630 basis points based on very good performance in Aggregates and Magnesia Specialties and a significant reduction of a loss in our structural composites business. Our Aggregates business benefited from strong demand, good weather, and very positive pricing. Shipment volume was up 8.5% over the prior year period with double-digit increases in North Carolina, Texas, and the Gulf Coast region. Pricing increased 15% with double-digit increases in the high demand Southeast and Southwest areas, which represent 70% of our net sales. And more modest single-digit increases in the Northern tier states. The Aggregates operating margin increased 610 basis points over the prior year period in spite of significant increases in supply and energy costs, as well as a 22% increase in freight for the portion of our business that depends on rail and water transport.

Magnesia Specialties is also at a superb quarter with net sales of $37 million, up 24% in the prior year period. Earnings from operations of $8.2 million increased 63% based on very good volume and pricing in both the dolomitic lime and Magnesia Chemicals businesses. Our Structural Composites business reduced its loss from $2.6 million in the prior year period to $1.3 million based on 4.4 million in revenue, primarily from ballistic panels for the military. The second quarter will be a light revenue quarter with improvement expected in the second half based on current order discussions. Our selling, administrative and general overhead costs improved 90 basis points to 8.5% of net sales. Magnesia Specialties unit was particularly overhead efficient with an SG&A rate below 5%. About two-thirds of the dollar increase in SG&A related to the initial expensing of stock options and increased performance-based incentive compensation.

We anticipate bringing several new plants online, as well as adding additional shipping capacity in the second and third quarters. Our first dedicated ship, the Nova Scotia, for our Nova Scotia quarry should begin service in May with the second currently scheduled for August. This should boost our shipping capacity from Nova Scotia by more than 1 million tons annually. We expect to bring a new 5 million tons per year plant online in Southern Oklahoma late in the second quarter, primarily to serve Dallas by rail, but with about a million tons targeted for Houston. We also expect to be fully operational with a new sand and gravel plant in Des Moines that will add 500 to 600,000 tons of annual sales in an area that is short of sand supply. Early in the third quarter, we expect to begin operation of our new 8 plus million ton annual capacity plant at our existing Three Rivers location near Paducah, Kentucky. We expect to realize significant efficiencies from this investment. This quarry serves 14 states by barge with a significant amount of the tonnage going to Louisiana, which is a high-demand area. In addition, we will complete [recede] of 780 new rail cars in the second quarter, which will boost our delivery capabilities in the Southwest.

During the quarter, we repurchased 414,000 shares of our common stock for $40 million or an average of $96.51 per share. We continue to have a favorable view of share repurchase as a use of excess cash. Looking ahead, we expect an excellent year based on strong pricing, solid volume increases, and good cost management. In our Aggregates business, we expect volume for the year to be up 3 to 4%, with pricing up 11 to 12.5% assuming certain planned mid-year price increases. Aggregates operating margin is expected to increase by approximately 300 basis points. In Magnesia Specialties we expect operating earnings of 30 to $32 million versus our earlier forecast of 26 to $28 million. In Structural Composites we're targeting breakeven but a modest loss is more likely. Based on these assumptions, we currently expect net earnings per diluted share to be in the range of $1.50 to $1.70 for the second quarter. For the full year 2006 we currently anticipate net earnings of $5.30 to $5.60 inclusive of $0.05 to $0.07 per diluted share for the initial expensing of stock options. At this time, I would be pleased to take any questions that you may have.

[OPERATOR INSTRUCTIONS]. And we'll go first to Arnie Ursaner with CJS Securities.

Hi, good afternoon. Steve, can you try to give us a little bit of a feel for your SG&A run rate, so perhaps we can back out any, what I'm going to call "initial" or "one-time" expenses on stock option or stock-based comp?

We've got -- we've given you the increment for stock-based compensation. If you go beyond that and look at the run rate aside from stock-based compensation, it's going to be from 23.5 to 4% on top of last year.

Okay. And you mentioned in the body of your comment or in your prepared remarks that you've assumed some mid-year price increases, could you be a little more specific, particularly by key markets?

Yes, we have assumed the mid-year price increases that at this time we expect to put into effect. Some have been announced, most have not. But we have gone over in detail what it is that we're going to attempt to put into effect in most of our markets. And, in fact, most of our markets will be covered with some rate of mid-year price increase, that can range from low single-digits, and that would particularly be the case in the Northern tier markets where in some cases we'll have no increases and other cases it will be low single to mid single-digits. And then when you get to the Southeast and Southwest, you're going to see increases that range from typically mid single-digits to low double-digits.

I think the key thing here is that you need to understand that as we put these in, just as we did last year, we're going to protect our customers. Our customers have already quoted work. We're not there to cause pain to the customer. We want them to have an opportunity to roll those increases into their costing. So we will give our customers adequate protection to do that. And I think a major component of the thought process here is to make sure that we go into 2007 with a very solid rate of price increase, just as we did in '06 by teeing up mid-year increases.

Two more real quick -- I'm sorry.

Now, does that help?

That's very helpful. Two more real quick questions. Maybe it's the North Carolina accent, but the 4.4 million revenue that you indicated in Q1, in Q2 did you say it would be a like amount or light amount?

Light. It must be -- that's South Georgia accent actually, Arnie, North Carolinians speak more precisely. [Laughter].

So a light number?

Yes. We expect in the second quarter in composites we expect the order rate there, the production rate, sales rate to be lower than the first quarter. It will be a light quarter. And then based on the discussions that we're in we would expect to get some pick up in Q3 and Q4. We'll have to see if that materializes.

Okay, my final question, if you would, is that obviously weather in Q1 was a clear positive factor, and it was noticeable as your numbers kind of kept moving up, if you will, during the course of the quarter driven by weather, particularly as you mentioned in late March. Is there anyway you could attempt to quantify the positive benefit you received in Q1?

We've been through the exercise. I can't tell you that we can do it with precision, but making reasonable assumptions, as we would view them, you could come up with probably a minimum of $0.06 and a number that might range up to twice that, $0.12. So somewhere in that vicinity would probably be an appropriate number. The other thing I would tell you about the first quarter, we did get a lift. We preannounced at $0.52 to $0.58 and we obviously came in higher than that. We had a very good volume surge at the end of the month in our Aggregates business. We managed our cost in Aggregates quite well; cost came in better-than-expected. And our Magnesia Specialties business performed better-than-planned. So those were the components that gave us an extra lift.

I'll jump back in queue. I have some others but I'll jump back in queue. Thank you.

Okay.

And we'll go next to David MacGregor with Longbow Research.

Hi, Steve. Hi, Anne.

Hey.

Hi, Dave.

How much -- I'm just trying to zero in a little further on these pricing dynamics and I'm just trying to better understand what your pricing is so far this year. I mean how much, based on the pricing increases you implemented at the beginning of the year are you benefiting from already as opposed to benefits that maybe were initiated in the second half '05 that really just began getting traction in this quarter because you quoted forward?

Let me go at it a little different way and see if I can help you with some information that might give you a better handle on the pricing trend.

Okay.

First of all, we reported a 15% increase in first quarter pricing. That in my view is something of an anomaly number. And the reason it is, is because we had an incredibly strong level of shipments in the Southern tier markets in the first quarter; inordinately so. And those are our highest priced markets. So if you were taking that 15% and normalizing that, that normalized number is likely going to be somewhere between 13 and 13.5% if you had a typical balance between Northern tier business and Southern tier business.

Okay.

Truck business versus long-haul delivery business. Those are the key components. So I think the place where you start with pricing is the normative numbers between that 13 and 13.5. As you go forward, in the second quarter, our rate of increase is going to begin to push down toward that, assuming nothing out of the ordinary in terms of the product mix or the geographic mix or the transport mix. When you get to the second half of the year, if you'll recall last year in the first half we averaged a 7% rate of increase. By the time we got to the fourth quarter, we were at a 10% rate of increase.

Right.

So what you have is a significant upward trend line in the back half of the year that we're going to be working against. And we will have mid year increases, but the rate of mid year increases will not be as extensive as last year. Although, they're going to be good. And, in fact, they're going to be better than I originally anticipated. So we'll just be working against tougher compares, but the reality is that a lot of this mid year is in fact trying to tee up for 2007 where we eliminate the carryover that customers already have in their backlog. We're already telling customers what the expectations are for 2007. And telling them to begin to reflect that in their quoting as they go out in time. So we're both increasing prices mid year and we're also providing expectations on '07.

Can you share with us just what you're telling your customers for '07?

I'm not ready to tell you that. I think it's premature for me to do that.

Okay. The percentage of your business that's quoted forward, is that increasing here by any measure?

Not really. The mix is staying about the same. The business that stretches out is infrastructure business, which by its nature is bigger jobs that tend to be done over longer periods of time. Typical highway job, 18 to 24 months. Some of them stretching out 36 to 48 and beyond. We still have some work coming off the books from earlier periods where we quoted in recessionary times or just coming out of recession. And the other thing to keep in mind is that we're going to get some automatic lift going forward, even with higher rates of prices quoted in the last two years because those price levels are significantly below where we are right now. So we've got some baked in price increase going forward just based on the aging of the mix.

So the rolling over of business? And you talked a little bit about the volume surge at the end of the quarter. 8.5% is pretty impressive volume growth. And it seems now as though you are saying that that was somewhat extraordinary and we're going to be moving back down towards more the low single-digit-types of growth rates. What was driving this late in the quarter? Can you talk a little bit about that and --?

We've got some markets that if contractors went to work at a higher level, I think is the bottom line. But we've got some markets where business levels are very robust. We had some asphalt people that kicked off a little early, and that gave us a boost quicker than we would normally get that. The places, we had highlighted in the press release the places where we got the big boost. But I'll try to give you a little more information.

North Carolina was particularly strong, and by that, I mean rates of increase in the high teens. The North Carolina market for building construction, both residential and non-res is exceptionally strong. And even though the housing market nationwide is weakening, in North Carolina in the quarter we actually saw a boost in housing in the key markets. So that was a real plus for us.

If you go to the River area, the River area was exceptional, that also was a high teens rate of increase. And that relates to rebuilding, just as we had predicted. That's getting under wood. And then Texas was exceptionally strong. And what we're seeing in Texas is also a very good building construction market coupled with excellent infrastructure. Housing in Houston was up in the first quarter. Housing in San Antonio was up. And the Dallas market housing market was very good in the first quarter. Coupled with that, you had very good commercial construction in all of those areas. So those are where the strengths are. And as you would expect in the Northern tier, the automotive-related states and the farm belt not nearly as robust.

Good. Thank you very much.

Sure.

And we'll go next to John Fox with Fenimore Asset Management.

Yes, hi. I have a few questions. One, can you talk about the CapEx, which is a little bit larger than I expected, and can you talk about what is the CapEx budget for the year at this point?

Sure. The CapEx ramp-up in the first quarter really relates to a couple of large projects that we have underway. And the timing of those hit quicker, and that relates to good weather. Good weather also allows you to build plants faster.

Okay.

Which I have a very positive view of. Beyond that, we see some opportunities to invest some additional capital this year at what we think will be high rates of return. So as opposed to 225 million, which we have discussed as the capital target, we think that number is more likely to be around 240. We think we've got about $15 million worth of additional expenditure that would be very productive. That compares to about 32 million that we added to the plan last year about mid year.

Okay. Now the question, you may have just answered this in the previous one, but in the press release you say good demand for road building, commercial and residential, and selected markets. So the selected markets were, that's Carolina and Texas on the residential side? Is that fair interpretation?

Yes, they were quite good. The Charleston market, South Carolina is a market that's booming -- going very well. Those were the big highlights on residential.

Okay. And on the Magnesia business do you see the topline growing the same rate as this quarter?

We're not providing a topline forecast. We've given you an earnings forecast. But certainly to get to that earnings forecast we're going to have to continue to have robust topline growth.

Okay. Thank you.

Sure.

[OPERATOR INSTRUCTIONS]. We'll go next to Jack Kelly with Goldman Sachs.

Hi, Steve.

Hey, Jack.

You had talked about capacity additions earlier in the call. Can you, on a run rate basis, maybe tell us where we're going to be by the end of the year in terms of tonnage that you will have available for shipment next year? And then secondarily, on the volume forecast that you have for this year, the kind of 4% kind of number. Your commentary sounds more positive to that. In other words, the only thing that was kind of negative in your commentary, is the auto-related states and maybe Indiana aren't doing well. But everything else sounds like it's doing well. So I guess the thrust of the question on your volume forecast is, are there any areas that are really going to be down a lot that would kind of drag down that overall number?

I think the best thing to do conceptionally is to divide the Company into two pieces, the way we look at it. Southeast/Southwest, which is 70%, probably this year going to be better than 70% of our revenue and our volume. And clearly those areas are going to be very strong, very robust. I don't see anything negative in those areas at this point. The Northern tier states is a different story. And at this point, I would expect that volume in the North Central area, which is very much automotive-related, is probably going to backup a little bit. It's not going to be sharply down. But I think it's likely to be an unfavorable year-over-year.

Okay.

Likewise, the core Midwest farm belt states, I think are going to be slightly negative to flat. So that's where the demunition of volume comes in. The reality of the volume, Jack, in capacity is that we could ship and sell more material in the Southeast and Southwest if we could get it to market. And one of the reasons I highlighted transportation is that it's absolutely key and critical to have additional transportation resources. Now that's going to give us a nice positive coming out of Nova Scotia because we have the plant capacity to kick it up another million plus tons and now we'll have the shipping. But it will come in incrementally during the year, one ship in May and another ship in August if we hold to the schedule. As we go into '07, we're going to get the full impact of that, which ought to be a nice upper. And we think we'll sell all of that capacity.

And how much is that?

It will be another million, 1.25 million tons.

Annually?

Yes. The problem with giving you capacity numbers is that where we have capacity available is where you don't need it. Where the business is hot in the Southeast and Southwest, we're basically sold out just about everywhere. So all of these additions that we're bringing in are things that will go very quickly. The one that's different in terms of being in a slower area is the sand plant in Des Moines, and Des Moines happens to be a very sand short area. We think we're going to sell that 500 to 600,000 tons as fastly as we can turn it out. So that's why I mentioned that.

The big one that I haven't talked about I've mentioned before, but haven't talked about in detail because we've been quietly mobilized and hard at work is the 5 million ton plant in Southern Oklahoma. When we first embarked on that, that was a 3 million ton plant. And we got started on that in the third quarter of last year. This is going to be the fastest project we've ever put up in terms of a plant. And by the time we have it up and running late in the second quarter, we will have 5 million tons of capacity and we think we're going to sell the significant majority of that out pretty quickly. Now the key is what's going to impede all of this is just getting it to market on railroads and by barges. With our new project up at Three Rivers we've got 8 plus million tons of capacity. The sales are there, the question is can we make the barges move? So I'm a little bit cautious just based on the transportation component. The market is there for more. And you're right on with that.

Okay. Just last question, on the pricing, without getting into what you might raise prices in January of next year. As of December 31st of this year, based on the carryover from this year and what you might do in the middle of the year, what's going forward? Assuming you didn't raise prices in '07 -- which I realize is unrealistic -- but if you didn't based on what you've already done and what you're going to do at mid year, what would be the price increase kind of flow over into '07?

Well, I think you're going to have a flowover that's going to be in the mid single-digits.

Got it. Okay, thank you.

And we'll go next to Thomas Russo with Gardner, Russo & Gardner.

Hi, Steve.

Hey, Tom.

Hi. I missed the comment on the Nova Scotia transportation facility that you've established. Could you describe the process there?

Sure. Currently what we operate out of Bahamas is two dedicated ships and we've chosen to do the same thing out of Nova Scotia based on increasing demand up there. We've had those ships under construction now for well over a year. Had contracts on them. The first ship is scheduled to move into our port this month. And we will begin to use that ship on a dedicated basis to move granite to our Southeast/Southwest Gulf Coast markets and down into the Caribbean.

We would have a second ship that currently is scheduled to come online in August. And at that point, we would transport virtually all of our materials by dedicated ship, contracted solely to Martin Marietta both out of Nova Scotia and the Bahamas. And that would give us something in excess of 11 million tons of annual shipping capacity that would be just totally dedicated to us. We put into place in Nova Scotia last year a plant capacity expansion. We've also upgraded our docking facility, which was a critical component. So as opposed to moving 3.5 to 3.8 million tons out of Nova Scotia, we're capable of moving something in the vicinity of 4.8 to 5 million tons once we get these ships online.

Okay, so you would be 5 million out of Nova Scotia and then this 7 million from the Bahamas?

That would be 6.

6 million from Bahamas? Okay, good.

Now that's the dedicated shipping. We still have the ability to add some additional shipping if we need it.

Great. Also with the upped bid for Lafarge, I'm curious if there's anything that investors ought to know about the Lafarge properties that make them special or unique? Or whether the transactions are sort of describing for the markets new levels of acquisition prices and what you make generally about the state of the market for quarries for acquisition?

I'd have to defer to Lafarge on that one. They know their assets a whole lot better than I do, and they've obviously been through the exercise.

Yes. General tone of market if one were buyer or seller of quarries?

General tone of market is that we haven't seen any acquisitions that are attractive to us.

Yes.

And that's just our singular view.

Okay, thank you. Good quarter.

[OPERATOR INSTRUCTIONS]. We'll now go to a follow-up from David MacGregor with Longbow Research.

Steve, in light of the fact that weather conditions were very good in the first quarter and people were clearly shipping it above normal rates, what can you say about the level of inventories going into the summer months? And what might that portend for supply demand fundamentals this summer?

Well, ideally, we would have like to have built some significant inventory based on what we think is going to be a very busy year. Unfortunately, we weren't able to do that. We were able to build a little bit of inventory but not much. So I think for us what it says is that we're going to be pushed, that will cause us to run hard at our plants, which typically is productive mode for us. We run extended hours, that's when we get our best cost. So I would expect that we're going to be very, very busy. We'll be pushed as far out as we can see all year. So that's a good problem.

Is it possible this may lead to a subsequent price increase in the fall?

I don't think so, David. There are a few places where we've indicated to customers that prices will be good for 90 days as opposed to 180. But those are relatively few.

Okay. You've got a lot going on here in terms of capacity ramps. What's the impact of the P&L in terms of start-up costs, ramp-up costs, so on and so forth?

And I don't think it's going to have significant impact to the P&L, positive or negative this year. We will have some start-up costs, but we will also have some nice profitability coming right behind that. I think it has much more pronounced implications for '07 because we'll have the opportunity to run all those and have transportation in place for the full year. So it just tees us up for next year.

For '07 upside?

Yes.

And then what can you say about, if anything, about what's happening in Florida with these permits? And what are the implications for Martin Marietta in the event that supply should be disrupted?

Well, obviously, we're not all that close to it because we don't produce down there. Our producing locations are in the panhandle of Florida and aren't impacted by this court ruling. My understanding is that you've got about 50 million tons of production capacity down there of which maybe 10 to 12 goes into cement. So if you look at the aggregates component, which is the part that we would be interested in, maybe the number is close to 40 million tons. I could tell you that we've been through the exercise to try to figure out how much of that -- if you were to have a disaster scenario down there where it gets shut down, but which by the way would plunge South Florida, most of Florida, into a deep depression. We probably in the short and intermediate term could boost our capacity and get another 10 to 12 million tons down there by rail and water, long-haul truck.

That scenario says to me that you're looking at prices in South Florida that go up by multiplication factors as opposed to maybe $10 at the quarry [Ethel-B] Miami. You may be talking about materials in that area that might go to 40 to $50 in order to get them there. So nobody could come close to meeting the demand. No combined group of players could come close to meeting normal demand in any reasonable period of time. We would optionally be a big beneficiary, but you would destroy the economy in that -- the Southern half of the state and probably even further north.

Right.

So we don't want to see it happen.

Absolutely. Are you at all concerned or are there any thoughts that you might have with respect to your own mining permits?

No the issues in that lake belt, I think are unique.

Right.

And they've been underchallenged for a long time. We just -- we're not operating anywhere where we have those kinds of issues.

Good. Thank you very much.

Sure.

And we'll go next to Clyde Lewis with CitiGroup.

Good afternoon, Steve and Anne. Two questions if I may on pricing. First, I'm intrigued to know whether you're getting much push back on the price rises that you put through and then are talking about now? So maybe coming through in the mid year and then maybe a little bit further out and whether that varies by geography, which I suspect it does, but maybe also part sort of end testimony, whether it's infrastructure or whether the sort of housing or nonres areas? Now that was the first question.

The second question on the competitive pricing side, are they following what you're leading in terms of prices, or is there actually maybe a little bit more competition creeping through on the pricing front at the moment?

Okay. Well, those are very good questions. I've never known a customer that liked a price increase. There's always some push back, but the degree of push back is measured because in the areas where pricing is going up significantly, those are also the areas where freight costs, in particular, is going up sharply. And the customers know that, so we have to go in and make sure that the customer has a good explanation of what we're doing and why we're doing it. And the reality is that in order to get supply to these markets it's going to take more money to do it. So that's just a fact.

Certainly it does vary by geography. I indicated that the slower markets in the Northern tier, the automotive areas, which for us is Indiana, Ohio, and then on out into the farm belt of the Midwest. Customers are much less accepting of price increases and the reason is that it's all a function of the ability of that customer to pass them on in their pricing. So it's not just the aggregate players or some other type of material people passing on prices, the customer has to be able to move that price increase into the market. So you get what an economist would expect, robust market supported, less robust, you get stiffening resistance.

With respect to customer type, the laggard in recent years has been the ready-mix side because they went through some incredibly difficult times when commercial construction backed up. Their business in general was quite good, and therefore, the rates of price increase on concrete products have been a bit sharper than on other products. And I would expect that, it's going to even out now over the next year or two between what we're doing product line wise, between asphalt and concrete people and general contractors.

You asked about home building and home building, the contractors there who work on building homes are small contractors, generally. And most of those contractors are picking up stone at list price because they're not large enough in our world to get some type of volume pricing deal. The person who pays the asphalt road to subdivision or lays concrete will have some type of volume pricing as a large fix-based customer. So that's how that works.

Okay. On the capacity front are the competitors following or are they actually being a little bit more aggressive at the moment?

Competitors do different things based on their best interest, I'm sure. And we see some competitors who are putting in, as far as we understand, what appear to be some pretty sizable increases, others are putting in no increases. They do what they're going to do and we do what we're going to do.

Okay. Thanks so much.

And we'll go next to another follow-up from Arnie Ursaner with CJS Securities.

Hi. First question is end of quarter share count fully diluted. I went back and checked my notes. It seems as if you, I guess had a fair amount of options that kicked in in the quarter?

Yes. Based on the 414,000 shares purchased, the reality is that that was basically offset with option exercises.

Okay. What is the end of share count fully diluted, please? Not average, but end of quarter?

Arnie, I'll give you a call with that, I don't have it right -- well, yes, I do hold on. If you'll go on to the next question, I'll get it right back to you.

That's fine. And next question is your tax rate for the year, I think you had guided a little lower than where you reported in this quarter. What should we expect for the balance of the year for tax rate?

Your 31 to 32 is about right. The initial guidance, quite honestly our pretax earnings expectations were lower than -- in December than they are today. The actual fully diluted shares at March 31 was 46,785.

Okay. In your cash flow, you have a new line item that I haven't seen before called "Rail Car Construction Advances" and you mentioned on the call as well you're, I guess, purchasing 780 rail cars, so two different questions. Can you comment a little bit about the financial element related to the rail car construction, but then also follow it up with a strategic discussion of how you plan to use these cars on a go-forward basis?

Yes, I'll answer part of it and then Anne will take part of it. The reality is, this is going to be an operating lease arrangement, that's the way we take down these types of transportation assets. It's the way we get the opportunity to use them. In the interim, the cars needed to be built, and we have put up cash to handle the building of the cars and to pay the vendor. And then that will be financed under an operating lease construct and we will get that cash back. So that's what's happening there.

This is a timing issue, Arnie, with the vendor getting the cars ready prior to the master lease agreement being ready.

Okay.

It would have been very clumsy to do these things in traunches. So we just decided to make it clean and then put it all into a master lease and handle it in one time.

The cars are employed in a couple of different ways. One, we have some opportunities out of our Arkansas locations. One in particular, to move material into Louisiana and into Northeast Texas, and a portion of those cars had been dedicated to that Arkansas quarry. The second thrust of the cars is to provide additional highly efficient cars that can move material out of Southern Oklahoma on the BN Railroad into Dallas, a little bit South of Dallas into Corsicana, and also down to Houston. Again, on the BN. So those are the strategic thrusts of what we're doing. Both those are high-growth markets. What we're trying to do is to make sure that we take advantage of the ability to move rail fright by both of our major railroads in that area, UP and BN, and we're just trying to make sure we have an adequate number of cars to tee them up so that they can haul.

Was that the limiting factor or might more have been track availability and locomotive availability?

It's both. But if you don't -- in this particular case we were a car short. And we thought that the ability to take down the additional cars was going to be very productive when we cost it out with the discharge capabilities and also the additional tonnage that we can get on these particular cars. Difference in per car rates versus tonnage rates is advantageous to us.

Okay. Final question from me. I've been getting a number of questions from clients about your future guidance given the strength we've seen and what appear to almost be -- I'll use the word "illogical," but some extremely conservative assumptions if one were to buildout the numbers on a go-forward basis. In the body of your Risk Section, you speak to, particularly negative impact potentially from weather. I guess is that the single biggest factor holding back a little more enthusiastic view relative to the, both volume and price increases you're seeing, especially in light of these very substantial incremental capacity additions?

I think weather is the risk. We were very fortunate last year in that with the major hurricanes that hit the United States, we did not have significant damage or disruption. They hit in the Gulf, most of the impact from Rita and Katrina. And that's an area where we distribute as opposed to have operations. We try to pay attention and do pay attention to the weather forecast. The forecast this year relates -- indicates that East Coast activity is much more likely. We've had the experience too many times where we get hit on the Eastern seaboard, South Atlantic area, and in that case we've got producing locations. And when that happens, we become water pumpers as opposed to rock producers.

And we just take into account the fact that there is some significant risk that that will happen. I've been at this now for 32 years, which probably exceeds the age of some of the people on this call, so I think I've got a fairly long view of it. It's going to happen. And I think we would be foolish to put some numbers out there that doesn't reflect at least some reasonable occurrence of those types of activities.

Would it be fair to say it another way that if we had, what I'm going to call either a "normal" or even "modestly better-than-normal" hurricane environment this year in your regions and you weren't harmed that there would be further upside to your estimates at this point?

Well, if all other things go well then there could be.

Okay. I know you were asked the question on revenue in Magnesia Specialties, I'd like to try to ask it a different way, if I could, because I know you don't give revenue guidance. Your actual revenue in the quarter was 37 million. There's no pattern of seasonality that I can uncover going back in the past. How much of, again, maybe how much of the positive revenue in magnesia may have been weather-related, and if not, why wouldn't we see a similar pattern where the following quarters would be up from Q1?

The Magnesia business, you're correct, the Magnesia business does not have anything like the seasonality of the Aggregate business. Typically it's a little lighter in the first quarter, a little lighter in the fourth quarter. On profitability, in particular, because we wind up with more outages and production issues related to the fact that we're trying to burn materials in places where it can get very cold. And that's not particularly efficient.

But from a revenue perspective, if you wanted to take the first quarter and use it as a four quarter proxy, I couldn't argue that that's illogical. I'm not going to forecast the number, but that's not an illogical way to approach it. We've given you an earnings range of 30 to 32 million for the year. You might say, Well, geez you earned 8 million below rate in the first quarter, why don't I take that as a proxy and maybe add to it a little bit? The reason is that we did not have any significant kiln outages in the first quarter. We do have kiln outages scheduled the rest of the year. This is a business where we're in -- we destroy a lot of kiln aligning brick and we have to take these kilns down periodically for realigning and repair. So it just reflects the normal maintenance schedule. And we try to be realistic about that.

Okay. And you have had -- you've been operating at kind of mid 80s capacity and obviously there's pretty strong demand. What do you think your operating rate may be for the balance of this year? And as you move up in operating rate what sort of impact might that have on mix?

Well, certainly the opportunity is there to get capacity utilization rate in magnesia up over 90%. And certainly that is our target. It bodes well for the magnesia chemical side of the business because that's where the capacity is. In our lime business we're basically maxed out with dolomitic lime. Our people tweak it and continue to get a little bit more out of it, but we can't do much more there. So you can assume we're sold out on dolomitic lime, with what appears to be a good outlook from the steel industry, certainly for the remainder of this year.

Magnesia Chemicals is a growth business and we do have capacity available there. We've got a very nice water treatment business, water neutralization. We've got a magnesium hydroxide powder business that's growing, which is a filler material that goes into rubber and plastics, in particular. We've got a new product for the paper mills called "CellGuard," which is taken off and that's a replacement for caustic soda. So we look at this business as a growth business for the next five years. And we don't see putting many significant amount of capital back in magnesia chemicals we just think we can put incremental capital back into that. In fact, we're doing so right now. So it looks very positive.

And you had a very, as [Times] talked about, the possibility of an additional plant in that area if you could line-up a customer who would take the majority of the output. We have not heard anymore about it so I assume that's not moving forward?

Well, that was the lime, an additional lime kiln at our Woodville location. And we have looked at that. We continue to look at it. The original justification on that was that we needed some long-term contracts from one or more steel mills in order to support that investment. And we did not see the opportunity to get the types of commitments that we wanted in order to invest. And frankly, we aren't going to speculate on the steel business.

But the more interesting play is that with growth in magnesia chemicals, that lime is a feed is to make magnesia chemicals. So what we're looking at now is what is our ramp-up in magnesia chemicals, and do we have an opportunity to feed increasing amounts of lime into that operation and does that in fact justify the building of a kiln? So the project is not dead, it's just been pushed off. And I'll say it again, we're not going to throw money at it just to grow. It's going to have to be a very sound investment where we think we've got our back covered on the downside.

Looking forward towards '07, obviously you've been successful in finding incremental capital expenditures that have been very additive to shareholder value. What's your best guess, I think you have previously said you thought '06 might be a peak year in capital spending, is that a view you share today? Or are you seeing better opportunities to continue to reinvest in the business?

Well, I keep getting surprises, and fortunately they're positive surprises in terms of the opportunities that we are able to create or the market creates for us. However, you want to look at it. The biggest surprise in terms of capital utilization is the Texas market and the ability to absorb more capacity out of the new Southern Oklahoma location.

As I indicated, we have pegged that as probably a 3 million ton plant to start with and we're going with a 5 million ton operation to start with, with a view that we're going to sell in a well north of 4 million tons analyzed, not this year. Make sure I get that clear, analyzed. That requires additional capital, and in fact, much of that additional 15 million will go into that project. But we have some others we're looking at and where we see rates of return that are high rates north of 25% then I think we're foolish not to take advantage of those. So that's a high priority.

Final question. You've had a lot of improvement or control over headcount. What sort of trend did we see this quarter and what might we expect for the balance of the year on headcount?

Headcount up a little bit just based on the fact that our business is expanding lickety-split. We have some additional opportunities to pull headcount down as we go through transition over time with different plant constructs that we're putting up. So the thrust is no different. We will add headcount where that headcount is productive. But the clearer trend line is significantly up on tons per paid man hour, which is our productivity measure. And we're not deviating off of that. We've got a very nice trend line there. In fact, interestingly in our first quarter, labor unit cost was down, which I think is pretty remarkable in this day in age.

Okay. Thank you.

And we'll go next to Mike Betts with JPMorgan.

Yes, good afternoon. I had three questions, if I could, Steve. The first one, could I just come back to the issue of the delay in terms of recouping up price increases because obviously the contracts are in place? I mean is that lag on average three or four months or is it longer than that? I was somewhat confused when you were talking about the 90 days and the 180 days when you were fixing prices and for how long. I mean could you give us some indication of typically on average how many weeks or months it takes to get that price increase through?

Well, it depends upon the nature of the customer and what kind of backlog of work that they have quoted. How far out it goes. But for concrete guys it tends to be shorter. For the asphalt guys based on heavy consumption and infrastructure it tends to be longer. So it's just very customer and job specific. I can't give you anything more precise than that.

Okay, I won't push it. On the structural composites, second question, I mean you indicated probably a light course, a second course of and then some optimism about the third quarter, what sort of -- and fourth quarter. What sort of visibility do you have on that? Do you actually have orders now for the third and fourth quarter? I mean how much confidence do you have in that expectation?

We have orders when they show up. The nature of this business at this point is we have a lot of activity that we have performed for major military contractors where they have tested our materials, qualified our materials, specked our materials. And one thing we've learned is that the military and their contractors move to the beat of a different drummer than anything we're used to in the commercial world.

So they tend to show up at the last minute with a purchase order if they want something done. They tend not to make early commitments with P.O.s, yet at the same time they're constantly chasing us on -- getting ready for this, getting ready for that. So I'll believe it when I see the purchase order show up. Just like the $9 million worth of ballistic panel purchase orders that we got. We know that the military likes that product, we just don't know when the next slug of purchase orders comes. So it's almost impossible to predict at this point because it's not a long-term contracts by its nature. We are a subcontractor here as opposed to being prime. We're basically an off-the-shelf supplier. What's called a catalog supplier for this stuff.

Okay. I mean it sounds very volatile, though, is that a good business long-term to be so dependent on one area or is it the case that other products are going to start to come through maybe next year?

Well, what we would like to do and are having some success in doing, is creating an array of military products that's broad enough so that we get a real order flow. I don't think the nature of the business is going to change a lot. I think you just have to have more products in the game.

And, in fact, that's what we're doing. We're developing products or have qualified products for various branches of service for utilization and different types of weapon systems, transportation, equipment, ballistic panels, a wide variety of things. So we're trying to build a product array. Plus we do have some commercial initiatives that continue to look like they're going to go, but we've been frustrated in that. And I think volatile is a correct word. So nobody should count on that until it actually shows up. We're not counting on it until it shows up.

Okay. And the final question for me back on the mainstream aggregates business, I mean obviously it was a very good quarter. I mean you're still, though, being hit by some pretty significant increase in costs, particularly on the freight side. From memory, please correct me if I'm wrong, I think last year the big increase in freight costs -- sorry, the increase in costs occurred in the fourth quarter. Would I be therefore, right? First it was that, right, and therefore, are we still facing some particularly substantial cost increases Q2 and Q3 on the same period last year?

Well, I think -- yes, I think we're going to continue to see significant increases year-on-year for certainly Q2 and Q3, and probably Q4. Although, we did get a significant spike in Q4, you're correct. But Q2 and Q3, I think we're going to see substantial increases, that's certainly the trend. At the same time, we're pricing to cover it.

And the other thing I would add on that is that as we bring on our dedicated capacity with ships and also as we bring on and get into service our new rail cars, we do get some advantage that helps to mitigate a piece of that. So we are doing some things on the cost front to manage the cost side of the equation.

Okay. But then as we look into '07, now who knows what oil prices are going to do and other costs. But at this stage the increases in costs would be significantly less by the look of it would they -- if they don't increase further from current levels?

We'll talk to you late '06 or early '07. We have no idea.

Okay. Thanks so much.

Sure.

And we'll go -- now go to another follow-up from John Fox with Fenimore Asset Management.

Hi, my question was answered. Thank you.

Thank you, Mr. Fox. We'll take a question from David MacGregor, Longbow Research.

Yes, you've talked before about the 450 basis point decrement associated with your long-haul distribution system. I'm just wondering with the investments that you're making in blue water shipping, what happens to that number? And also with the rail cars and everything else, what happens to that number for 2007 or when you finally have all of those assets in place?

First of all, with respect to investment in deepwater ships, we're not putting out any money. What we've done is we have contracted with the shippers for long-term supply of cargo hauling. And what we do in that case is we guarantee minimum volume, and they guarantee a maximum volume. And typically the spread is about 20%. So our risk there is that we can't move the minimum volume, and I have to tell you that based on everything we can see, we don't view that as much for risk at all. So we don't see any significant downside to that part of the equation.

On the rail cars, the key there, again, that's going to be operating a lease, we're not going to have direct investment in it. But the key on the rail cars is the ability to turn those cars very quickly, rapid discharge cars, higher tonnage where we're getting more tons in a rail car and we're getting a car rate as opposed to a per ton rate. So that we can get a little bit of leverage there, which tends to bring down our unit cost. So that's the way we're playing that particular game. We've said previously that with the growth in the coastal markets and the Southeast and Southwest we expect to see the long haul percentage of our business increase over time. And, in fact, from '04 to '05 it went from 23% up to 26%. It wouldn't be surprising to me this year if it's going to increase again. Exactly what that will be I'm not going to speculate on, but that's where the demand is heading.

So might we have at an increased basis point decrement -- it might be a little higher or a little lower. It's not -- I don't think it's going to change significantly. But what is happening there is that we are beginning to make some reasonable, and in fact, in many cases attractive profit on the distribution component. The distribution component is truly strategic and we think we have a competitive advantage with the way we've set it up, and that allows us to put large volumes through fixed distribution locations with very competitive freight rates and handling costs and with -- into markets where the pricing is attractive. So we're seeing some nice returns on our distribution yard assets at this point. And those are improving.

Okay. And then, I wondered if you could just help me to bring together all of this new capacity that you're talking about. In the aggregate, what would it represent in the way of 2007 over 2006 capacity expressed in tons?

The plants we're building, we've got the 5 million ton new plant in Southern Oklahoma. The increment of additional capacity at Three Rivers is about 2.5 million tons. The increment of usable capacity based on shipping at Nova Scotia, you can add 1.25 million tons, I think safely. And then you can add another 0.5 million tons in Des Moines for the new sand operation there. But we have other things going on, but those are some of the more interesting ones. And those will be fully in place for '07 and partially year '06.

So approximately 9 million tons?

And then the question is what do we get out of this transport construct where we're augmenting it. Part of it is Nova Scotia capacity which we related to tonnage. The question on the rail side is, how much more can we squeeze out in terms of moving materials that we already can produce?

What's your best --?

I don't know the answer to that yet.

Okay. Do you want to hazard a guess?

No. That's a function of railroads and I'm not about to bet my life or career on the railroads.

Okay. And then final question just has to do with, if you could remind us again, what percentage of your sales are quoted forward right now as opposed to business that you're selling on more of a spot or an immediate basis?

It's over 50% where we've got some type of agreement, but the key piece of it is infrastructure, a piece related to roads, and that's about 40% of our business. And that's the truly long-term piece. When you get into the large commercial projects, those jobs will be quoted individually. And large commercial projects can stretch out -- they can be anywhere from six months on out to 15 or 18 months.

Great. Thanks, Steve.

Sure.

And, ladies and gentlemen, this will conclude our question-and-answer session for today. I'd like to turn it back to Mr. Zelnak for any closing remarks.

Well, we appreciate you joining us. Obviously, we were quite pleased with our start to the year. We have a long way to go, but based on what we told you we're optimistic about the year, and what little we know about '07 we're certainly getting teed up for, and we'll see what that brings. And we'll report back to you after the end of the next quarter. Thanks for joining us.

And, ladies and gentlemen, this does conclude our teleconference for today. Once again, we do thank you for your participation and you may disconnect at this time.