渥肯建材 (VMC) 2003 Q1 法說會逐字稿

Ladies and gentlemen, welcome to our first quarter earnings release call. At this time all lines are in a listen only mode.

My name is Bernie and I'll be your coordinator today. If during this call you require assistance press star zero. If at any time you would like to queue up for a question press call star one. As a reminder this call is being recorded for replay purposes.

Now your host Mr. Don James.

Good morning thank you for joining the Vulcan Materials conference to discuss our first quarter results as well as our current outlook. I'm Don James, Chairman and Chief Executive Officer of Vulcan. With me are Mark Tompkins our Senior Vice President and the Senior Vice President of Construction Materials, Brad Rosenwall.

Before I begin, let me remind you that certain matters discussed in this call contain forward-looking statements which are subject to risks assumptions and up certainties that could cause material results to differ materially from those projected.

Descriptions of these risks, assumptions and uncertainties are detailed in the company's SEC reports including the report on form 10-K for the year.

After I make a few brief comments we'd like to spend most of our time responding to questions from those who dialed into this call. We hope this dialogue will be helpful to you and others who choose to listen to this call through our web broadcast. Let me remind you a replay will be available approximately two hours after this call at our website.

Now let's begin by discussing the results for the first quarter. Net sales in the first quarter were approximately $550 million up 3% from last year's $535 million.

Net earnings, excluding, through cumulative effect of accounting changes were 1.3 million or 1 cent per diluted share as compared to $11.6 million or 11 cents per diluted share in the first quarter of 2002. During the first quarter of 2003 the company adopted SFAS 143 which requires recording the estimated fair value of asset depreciation obligations, when incurred.

The implementation of this accounting standard results in a one time non-cash charge to earnings of 18 cents per diluted share. Including the cumulative effect of adopting accounting statement SFAS-142, in last year's first quarter last year's first quarter loss was 9 cents per share.

For the quarter our construction material segment earned approximately $19 million compared to $44 million in the prior year. Net sales were 392 million, down 2% from last year's record first quarter sales. Aggregate pricing improved 2% on a 3% volume decline from prior year.

This is a marked improvement from the last three quarters of 2002 when aggregate volumes were 7, 9 and 12% respectively from the second third and fourth quarters of 2001.

Aggregate pricing and volumes were better than we expected even though February weather was harsh in many of our key markets. Aggregate shipments in March increased significantly over last year's March but not enough to offset the impact of severe weather earlier in the quarter.

Lower asphalt volumes and higher liquid asphalt costs in California operations reduced segment earnings. The unfavorable volume variance was due in part to last year's unseasonably dry weather, particularly in Los Angeles and a re-deduction in highway project for the current quarter.

Turning to the cost side of operations. Our unit production costs were higher in the quarter due to increased medical and pension costs, higher unit cost for diesel and liquid asphalt and the impact of lower production volume on cost absorption.

Diesel costs were up over 70% compared with prior years first quarter and liquid asphalt was up over 20%. The total cost impact for these two energy related materials was over $8 million for the quarter. Medical and pension costs impacted segment earnings approximately $5 million in the quarter.

Other operating costs for the segment increased 4.8 million from the prior year due mainly to an asset impairment charge referable to the closure of a line plant near Chicago.

We had significant improvement in our chemical segment results in the quarter particularly in light of the spike in natural gas and feed stock prices which occurred in the quarter. Segment earnings in the second quarter improved approximately $10 million from last year's first quarter to a loss of $5 million.

Pricing for chlorine and caustic soda continue to improve as pricing in the first quarter was up from both the first quarter of last year as well as on a sequential basis from the fourth quarter of 2002. Pricing for chlorine showed particularly strong comparisons from the quarter a year ago increasing over $100 a ton on a per ton basis.

Operating rates in our [inaudible] plant improved to 97% from the prior year's first quarter of 90% this. Improved on stream time resulted in an 8% increase in our production volume. As a result, sales volumes for chlorine in the first quarter increased significantly over both the first quarter of last year as well as from the fourth quarter our most recent sequential quarter.

Energy and hydrocarbon base raw material cost were up for the quarter. Spike in natural gas costs were somewhat mitigated by our hedging program that we had in place.

During the first quarter we completed the sale of the performance chemicals municipal waste water business. The gain on the sale of this transaction is included with both other income and the segment earnings for chemicals.

Overall, our construction materials outlook for the full year has not changed. We continue to expect that aggregate demand will remain relatively flat the full year and pricing will increase modestly.

Residential construction we believe will remain at current strong level with no year over year change in aggregate demand. Non-residential construction we believe will remain at current low levels for the rest of the year.

Highway construction we believe will remain flat or slightly down compared to last year. While most states continue to struggle with general fund deficits, highway award activity on a trailing twelve month basis has varied across our markets.

For example, states such as Alabama, Illinois and Texas have been pushing ahead with their programs with year over year increases in contract awards while other states particularly Virginia and North Carolina have slowed significantly in the level of highway awards.

Fiscal year-to-date federal highway funds obligated is lagging the prior year. However the approval in March of the 31.6 billion in federal highway funding for fiscal year 2003 should now allow the states to move forward with obligating money for projects.

Some of the fiscal year 2003/2004 budget crisis appears to be informational in nature. California's budget, for example, was prepared based on projected federal funding level for highways of $27.7 billion for the current fiscal year.

Governor Davis is now preparing a revised budget that will be presented in May and will likely include California's share of the increased $31.6 billion actually approved by congress.

Diesel fuel prices should moderate during the next three quarters from the sharply higher level of the first quarter with prices for the last half of 2003 approximating the second half of last year. In light of these assumptions we continue to expect construction materials earnings for the year to be in the range of $350 to $380 million.

With respect to chemicals we believe that the timing of economic recovery in the industrial sector is still in question. However, when it does improve, product demand and higher pricing for caustic soda and chlorine will certainly result.

We are encouraged by the progress made in the first quarter to address plant efficiencies as well as manufacturing and overhead costs and will continue our focus on these efforts throughout the rest of the year. Furthermore our outlook assumes somewhat higher energy and raw material costs from their current levels for the balance of the year.

As a result of these assumptions for chemicals we're maintaining our projected loss in the range of 20 to 40 million for the year. Based on our current economic outlook and these segment results we plan to take our earnings guidance of $1.85 to $2.15 per share.

Furthermore operating cash flow should remain strong as we pursue vigorous cost control and discipline capital spending. In the second quarter, we expect construction materials earnings to be down slightly from the second quarter results in 2002 due mostly to higher costs for pension and medical, liquid asphalt and other energy related costs. Chemical second quarter results should be favorable to 2002.

Favorable comparisons to the second quarter of last year should result from higher prices for caustic soda and chlorine and increased operating rates in our plants. However higher natural gas and [inaudible] base raw material costs are forecast to offset part of these favorable operating rate assumptions.

Chlorine and caustic soda prices should continue to tend upwards from their first quarter levels. However segment earnings from the second quarter are to be much less than the first quarter.

The improvement in pricing will be more than offset by increases in energy and raw materials costs and the impacted of a scheduled maintenance outage at our largest plant which is currently scheduled for the second quarter. As a result, we expect to earn between 60 and 70 cent percent share in the second quarter compared to 64 cents last year.

As mentioned in our fourth quarter press release we'll revise quarterly and annual earnings guidance. Subsequently we will issue press releases to revise earnings guidance if new information indicates earnings per share on either a quarterly or annual basis are likely to be outside our last published guidance. We believe this will be a more efficient process than commenting on analyst consensus estimates.

Now we would be happy to respond to your questions.

Ladies and gentlemen, this begins your question and answer session. If you would like to ask a question please press star one on your telephone keypad. If you would like to withdraw your question or your question has been answered press star two. Questions will be taken in the order they're received.

Your first question comes from Jack [ ] of BBT Capital Markets.

Thank you. Good morning.

Good morning, Jack.

You gave the total DNA of the quarter I was wondering if you could break that up between construction and chemicals?

I am sorry I didn't understand your question.

The total de-appreciation and amortization in the quarter.

Okay. Sure Mark will answer that.

Okay.

It's about 12 to 15 million for chemicals and the rest is construction materials.

Okay and the tax rate of a little above 30% in the quarter, would we expect that to remain in that range with chemicals improving?

Yes.

Going forward.

Yes.

Okay. And did the March momentum that you described Don, in aggregates carry into April?

If I answered that question I would be giving you information about the second quarter which we aren't prepared to do. So I think I better stay away from that question.

Okay. That's all I have for the moment thanks.

Thanks, Jack.

Your next question comes from Stephen Kim of Smith Barney.

Good morning, Stephen.

Jack's question about the March strength just a little bit here. Is there any thing that you saw in the strength that would lead you to believe that a portion of it was sort of make up from February whether it be because of you know stuff that couldn't get done in February that was sort of pent up, or did it seem to be sort of more just, you know, over an overall strengthening as some of the volumes improved as a result of the federal funding?

I don't believe the March volumes reflected the increase in federal funding. It doesn't happen that fast.

Too soon right.

Obviously it's too soon. We'll see the impact of that increase in federal funding later in the year.

Right.

But in terms of weather catch up certainly there was an impact. As you know February was awful from every respect in weather. I am certain there was a catchup there.

Also believe there is a -- the other factor that is working here is not the increase in highway funding but I think it is hopefully some improvement in demand generally as we pointed out in our comments, our overall volume in the first quarter on a sequential or quarter to quarter basis from last year's quarter really has been the best quarter we've had in the last year.

So I think in that regard we are encouraged by some firming of demand. Although obviously we were still down 3% for the quarter. I think we are encouraged by that volume trend.

Okay. With respect to the waste water treatment operation, precisely what was that gain this quarter?

The gain was about $2 million. It was a very small service business. It had total assets of under 1 million dollars and the gain was about 2 million. It was really unrelated to our basic business.

Were you sort of marketing that as sort of a stand alone entity to sort of get rid of it.

Yes.

As a one off.

Yes.

Okay. With respect to the maintenance that you've talked about here I guess occurring in the second quarter, do you have -- is that something you had planned heading into this year? And what kind of you know earnings impact do you anticipate that would probably have on a stand alone basis?

Stephen, we schedule our plant outages months and months and months in advance because a lot of planning is necessary the do those. That's been scheduled for at least six months. The impact from an outage like that is both in the expenditure of maintenance cost as well as in lost production from the time the plant is down.

I don't have a good figure to give you on what the impact will be. But we've indicated in terms of actual, total dollars. But we have indicated that as a result of that while our - we expect chemical earnings in the second quarter to be significantly better than the were in last year's second quarter they probably won't be as -- at the same level they were in the first quarter because of the impact of that outage.

Okay. I guess just a final question with respect to the aggregates volumes. You mentioned for the year you are thinking that you might come in roughly flatish. Which seems fairly conservative. Given the fact that the back half of last year heritage shipments really fell off quite sharply. Actually even beginning the second quarter. Would it be fair to assume that imbedded in your assumption for roughly flatish heritage shipments in aggregates that you are assuming you are going to exit the year up mid-single digits?

I am not sure -- you mean that volumes will improve in the second half?

Well specifically in sort of, you know, the early part of the fourth quarter or sort of the end of the season.

I think we're -- we would hope to see certainly quarter over quarter our comparisons get easier as the year goes on.

Right.

We would expect to see relatively stronger shipments compared to last year in the second half.

Okay. Great.

Not focus on the fourth quarter necessarily but focused on the second half.

Okay. Great. Thanks very much.

Thank you, Stephen.

Your next question comes from Fritz [inaudible] of Sage Asset Management.

Good morning, gentlemen. Just a couple of questions. One real quickly - in a typical year do you see your end market mix in the aggregates business change seasonably? Highway is such a seasonal market do you see that rise in the mix in the summer or something like that?

Fritz if it does it's not enough for us to comment on. There may be some slight mix variation from quarter to quarter.

But generally we're in warm weather markets and you know when you got 40 degree and rising temperatures highway contractors can put down asphalt. There's not a material variation from quarter to quarter in our demand.

Okay. And number two, another quick one. Do you have -- what's your natural gas price forecast for the rest thof year that's built in your guidance?

Well we're looking at a full year of about 521, something like that. In that 521, 525.

Okay. And in California --

That's got the benefit of some hedging in it to get to that.

That would be your realized price forecast.

Correct.

Okay thank you. I understand. Lastly, California I guess it's pretty big state for you. Could you just talk about the you know the state budget issues there and how you might see them impacting your business or not.

Well as I indicated earlier California highway awards have been down year over year. That is through the twelve months ending March 30.

California highway awards are down about 13 to 14% in dollar terms. I think the good news in California is that their projections were based on the lower number for federal highway spending of $27.7 billion. They have not yet updated their projections to take into account the, you know the significantly higher amount of money they're going to get from the federal government through the $31.6 FY '03 appropriation.

That will amount to -- they'll probably get something in the range of 7 or 8% probably of that increase. And we understand that the governor's staff is now building that increase into their updated budget projections which will probably come out next month.

So hopefully there's some upside to the California outlook on highway construction. Certainly the projects are sitting there ready to be built once they get comfortable with their funding levels.

What sort of trajectory of California highway spending state and federal together does your guidance assume? You know ballpark numbers.

I don't know that I have that number for you.

I mean do you guys think it will be kind of flatish or up a little bit, down a little bit?

I expect it will be down year over year.

Okay.

It was certainly down in the first quarter. Now whether -- you know by the time they realize they've got more money and issue contract awards and those go out and projects get built it's not likely to show up a great deal of that is unlikely to show up in the current calendar year for us.

Okay. Thank you very much, gentlemen.

Sir, your next question comes from Jeff Peck of [inaudible] Montgomery. Just as a reminder, ladies and gentlemen, if you would like to queue up for a question please press star one on your telephone. Again that is star one. Go ahead Mr. Peck.

Thank you. Good morning. Couple of questions. First on the chemical side. Can you talk about you mentioned the hedging activity. Can you tell us first of all just to refresh what the hedging activity was for the first quarter then if you have any hedges what they are for the remainder of the year.

And then my second question is on the chemical side on the maintenance outage, have you built up any inventory to -- so that you have product to sell when the plant is down and how would that have affected the first quarter? Thanks.

Jeff, we were on your question about hedging we were about 72% hedged in the first quarter. And our hedge was at about 406. So our net gas costs were about 471.

Okay.

The first quarter. We were about 35% hedged in the second quarter. 37 in the third. 37 in the fourth. And the hedge prices range from 434 in the second to 452 in the fourth. Obviously those hedge positions will change almost from day-to-day as we watch the market.

Okay but that's the decent prices you've locked in.

Yes.

Okay then on the maintenance if you have done any inventory build ahead of that.

Certainly. I mentioned earlier that we planned for maintenance outages months and months and months in advance. Part of that planning is to build inventory in anticipation of our customer's needs and shifting requirements and certainly we do that routinely and have and will for this outage. So there will not be any interruption in shipping.

It will only be with respect to the - on the production side that it impacts our -- its' the cost of the maintenance and the lower production that has an impact on cost and margin in the quarter in which we take a large main of that.

Then one other question on the construction aggregate side. The 31 billion that was authorized, we've seen in the past where there's been a tremendous lag in when states actually you know allocate that and let that money go and I am just wondering on the timing of this, especially with the new 6 year highway transportation bill to be debated at the end of in the second half of this year you know to be signed you know at the end of this year.

Is there something where we may not see that money come through until you know potentially even 2004? Or do you expect or is you expecting that to start actually getting the states to let that money go and award projects earlier than that?

Jeff, I think that many state DOTs have been on hold until that FY '03 appropriation was settled. I think our information is many states have projects that are relatively ready to go. So I would expect that 31.6 to get obligated relatively soon over the next several months.

Obviously they have to let highway contractors know which projects going to be bid in order for the contractors to develop their bid. So there is a delay of some time in getting the bidding done and then there's some mobilization time.

But I would expect to see the benefit of that 31.6 not just the increase but just the fact that states now know what they've got to spend and are willing to let projects be let.

With respect to the next six year highway bill, obviously we and the whole industry are currently working very hard with members of congress and the administration to build a case for continued increases in highway funding. We would not expect final passage of that until the fourth quarter of 2003.

But once that gets passed and the projected funding levels for the next six years we think that will give the states the ability to move forward promptly with their longer range projects. The 31.6 of course is a one year amount compared to the six year amount for the new highway bill.

But the impact on volumes for us, from the 31.6 FY '03 appropriation, should begin to be seen in the second half of this year. Of course it will carry over into '04 really into' 05.

Okay. Great. Thanks a lot, Don.

Sir, your next question comes from Jack Kelly of Goldman Sachs.

Good morning, Don.

Good morning, Jack.

Just a follow up on this spending issue. I know it's tough to determine, but what we're hearing from some of the states was prior to the 31 billion dollar bill being passed that they were operating at on the assumption that they were going to get at least 27 billion and you know so they're kind of funding projects on that basis with the assumption they were going to get the money and et cetera.

I agree with that. That's consistent with our information.

Okay. So the real impact of the bill then and I just want to clarify what you just stated. The real impact of the 31 is really the increment rather than that everyone's kind of sitting around on their hands waiting for the bill to be passed to spend it at 27 billion dollar rate. Is that -- is that a fair way to look at it. I know it's state by state kind of deal.

It is. And I think I agree with you. You know our information is some states anticipated a 27.7 billion dollar federal program but they were leery about going out with projects obligating the full amount of that until they knew exactly where it was going to come in.

Because as you recall the administration was then at about 23 billion and I think the administration then before the final passage indicated it would support the 27.7. And obviously President Bush signed the 31.6 appropriation bill.

So I would agree with you that the substantial impact will be the increment from 27.7 to 31.6 which is distributed to the states as they obligate those funds. But I think there is some momentum. And I think additional piece of the momentum ought to come from the fact that 31.6 that's we believe a baseline for the new 6-year bill which is a much better baseline than 27.7.

On the new six year bill, I guess to get to number meaningfully higher than 35 billion appears as if we would need to increase the federal gasoline tax. I know it's a tough call but what's your kind of take on the under-over of you know under 35 billion or you know substantially higher?

There are some new revenue sources that are projected to go in the highway trust fund that do not involve an increase in the fuel tax per se. Certainly we're working to make the case that highway spending is important not only for just the pure infrastructure but it's also important from the standpoint of safety of U.S. citizens and it's also a very effective economic stimulus.

In order to get to the kinds of levels of highway spending that Congress is talking about, that is moving up to the higher end of the discussed levels of ending up at a 60 billion dollar level at the end of the six year period, it will take either increased gasoline taxes or it will take some other form of revenue.

Either in the form of economic stimulus or safety driven, safety driven things. We're certainly for the rest of the week the whole industry will be in Washington talking to congressmen, senators, members of the administration trying to build our case for the impact -- the significance of the federal highway program on all aspects of economic activity as well as safety.

I think we've got a great case to make. Where those numbers come out, Jack, I would be speculating mightily to tell you where we think they're going to come out at this point.

Okay. Just a couple of specific numbers on the chemicals business. You mentioned chlorine prices first quarter over first quarter up $100 per ton.

Could you give the same number for caustic? And also as we look at full year over -- full year '03 versus full year '02 with regard to realizations per ton, what's built into your loss estimate for the year? In other words your -- I won't say your average price because you know that gets somewhat confidential but just the year-over-year change in chlorine and the year-over-year change in caustic that's imbedded in your full year forecast?

Caustic prices first quarter of '02 compared to first quarter '03 are relatively flat, up slightly, but not anything like you know nothing like the very significant increase in chlorine pricing. Full year, you know we think caustic pricing -- we're -- just a moment, Jack. People are handing me notes.

Okay.

Our forecast has built in it about a $50 per ton increase in caustic year over year. Chlorine year over year we're probably about $80 up year over year.

The market data indicates higher chlorine -- higher caustic prices than we've got built in our forecast. At this point we're trying to be cautious based on economic recovery and certainly economic recovery is going to drive caustic demand and therefore caustic price. So we have a relatively conservative caustic price increase built into our forecast. Our current forecast.

Okay. So caustic was flat first quarter over first quarter.

Yes. We have to be up 85 for the year. And that's based on the economy getting better then you guys -- Well caustic was moving down in '02 as the year from first quarter to second quarter. It will be moving up -- it will be moving up this year from first quarter to second quarter.

Jack, the 85 you just said was chlorine. We're expecting or predicting caustic up about 50 not 85.

Okay got it. So it was caustic up 0, chlorine up 85.

Right.

Maybe just another way to put it in terms of the caustic. Just based on the way things occurred in '02, you just need a very modest increase in current prices for caustic to hit the $50 number. Is that the way I should interpret that?

Well, we see the caustic values going up through the year. But probably from first quarter to the full year number $30, $35 a ton. Something like that. That's what's in our forecast. Again the numbers substantially higher than that.

Cap spending for the year you mentioned you were going be disciplined the first quarter was down. Can you give us a full year estimate for cap spending?

Probably 250 perhaps as much as 275. We have some construction materials, plant [inaudible] that have very attractive returns that we believe we certainly need to pursue and it would not make any sense to defer those. But at this point 250 is probably a good number.

Good. Thank you.

Sir, there are no further questions at this time.

Very well. Thank you very much for joining us for our conference call. As I indicated in the press release we were encouraged by the results in the second quarter both in construction material -- first quarter rather. Both in construction materials and chemicals.

We hope that there is some positive momentum as we move forward through the year in both segments. Our outlook for the remainder of the year obviously is unchanged at this point. But we look forward to visiting with you after the second quarter. Thank you very much for being with us today.

Ladies and gentlemen, thank you for your participation. This concludes your conference call. You may now disconnect.