渥肯建材 (VMC) 2003 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to your Q3 2003 Vulcan Materials Conference Call. My name is Gene. I'll be your conference coordinator for today.

At this time all participants are in a listen-only mode. We'll be facilitating a question and answer session throughout the conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I'd like to turn the presentation over to your host for today's call, Don James, Chairman and CEO. Please proceed Sir.

Good morning and thank you for joining the Vulcan Materials conference call to discuss our third quarter results as well as our outlook for the remainder of 2003. I'm Don James, Chairman and CEO of Vulcan. With me today are Mark Tomkins, our Senior VP and CFO, Mac Badgett, Senior Vice President of Construction materials east and 0.

Before I begin, let me remind you that certain matters discussed in this conference discuss contain forward-looking statements, which are subject to risks and uncertainties and assumptions that could cause actual results to differ materially from those projected. Descriptions of those 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 on the quarter, we would like to spend most of our time responding to questions from those of you who dialed into this call. We hope this dialog will be helpful to you and others who choose to listen to this call through our web broadcast. A replay will be available approximately two hours after this call at our Web site.

Now let's begin by discussing our results for the third quarter. We are very pleased with the improved performance of both of our business segments in the third quarter. Net sales in the third quarter were $748 million, up $68 million from last year's third quarter. Net earnings were $99 million or 96 cents per diluted share. Consistent with our out ward revision into third quarter guidance issued, earlier this month, earnings from continuing operations were $94 million, or 91 cents per diluted share.

On a comparable basis, last year's third quarter earnings were 75 cents per diluted share. This performance was driven mostly by record aggregate shipments and also by improved pricing for most chemical products. As a company, we continue our focus on cash generation from operations. Operating cash flow my opinion news capital spending was approximately $209 million year-to-date. A $100 million increase from the first nine months of last year.

For the quarter, construction materials reported record net sales of $616 million, an increase of $50 million from the prior year. Segment earnings were $144 million, compared to $132 million last year. Aggregate volumes drove the record sales for the segment. Shipments benefited from favorable weather conditions, after being impacted by significantly wet weather in the first half of the year.

Overall, aggregate sales volumes were up 13% from last year. Several markets showed particular strength, including Georgia, North Carolina, Virginia, Texas and the Gulf Coast. Pricing for ago graduates was relatively flat with the prior year.

Compared with last year, the mix of aggregate sold in the quarter was weighted more toward lower priced products in geographic markets with overall lower pricing. Aggregate margins were up significantly due to stronger volumes and despite higher cost for diesel pension and healthcare. Diesel unit costs were up approximately 27% from the prior year, adding almost $3 million to the cost in this year's quarter, increased healthcare and pension costs impacted segment earnings by approximately $4 million in the quarter.

Asphalt volumes were slightly lower than the prior year, while prices increased slightly. However, unit cost for liquid asphalt were up 10% increasing cost approximately $2 million in the quarter. Turning to chemicals, net sales increased $ 18 million from the prior year to $131 million. Segment results improved $10 million in the quarter to a loss of $6 million.

The sales increase was due primarily to higher chlorine and caustic soda prices. Pricing for both caustic soda and chlorine were up substantially over last year's third quarter. Additionally, increased volume from our new 5 CP plant contributed to the higher sales and improved earnings for the segment. This plant was commissioned late last year to produce the feed stock for a new non-ozone depleting foam blowing agent.

Results from ongoing plant cost reduction efforts also had a favorable impact on chemicals earnings in the quarter. Natural gas prices increased over 30% from the prior year. Prices for methanol, a key raw material increased 29% versus third quarter of last year. Together, higher prices for natural gas and methanol impacted chemicals earnings by approximately $4 million in the quarter.

In the third quarter, we sold performance chemicals, industrial water treatment and pulp and paper businesses. This transaction substantially completes our exit strategy for performance chemicals. Accordingly, financial results referable to those businesses are reported in discontinued operations. And the quarter-discontinued operations added 5 cents per diluted share to earnings.

Moving to our outlook for the fourth quarter, we expect construction materials earnings to improve over last year. For the year, we now expect construction materials to earn in the range of 360 to $370 million, assuming normal weather patterns in the fourth quarter.

We expect aggregate volumes to be up over last year, and pricing to remain relatively flat. Costs for diesel fuel and liquid asphalt are expected to be higher than the fourth quarter of last year. Compared to 2002, highway construction in 2003 has been flat or slightly down, and should remain so through year-end. However, the outlook for highways remains positive going forward. Key 21 officially expired on September 30 of this year.

However, funds are being made available to the states for highways through a continuing resolution by Congress until February the 29th of 2004. This will allow congress additional time to negotiate the final amount for the next six-year authorization bill. During this interim 5-month period, through the fourth quarter of '03 and the first two months of '04, highways should be funded at the $33.8 billion level, which is the amount provided in the fiscal year 2004 budget resolution.

Last week, key senate committee leadership announced an agreement on a new six-year authorization bill for highways at $255 billion. This represents an increase of approximately $82 billion for highways above the key 21 level and perhaps more importantly moves the senate closer to the house transportation and infrastructure committee figure of $300 billion.

It appears, both the house and the senate are working towards a common goal of finalizing a new highway bill, they can send to the President to sign before the extension expires at the end of February. The state of North Carolina has recently approved a bond issue for highways in the amount of $700 million; Georgia has also recently approved a $424 million bond issue for highways. Increased spending in these two key states is also very good news for Vulcan.

Chemicals fourth quarter results should be significantly favorable to the fourth quarter of last year. The timing and strength of sustained economic recovery in the industrial sector in the United States is still in question. However, we expect pricing for cost accelerating in the fourth quarter to be somewhat better than the fourth quarter of last year.

Our outlook assumes higher energy and raw material cost in the fourth quarter versus the prior year. We are encouraged by the improved operating performance of our plants and we'll continue our improvement efforts. Our new 5 CP plant has contributed significantly to earnings year-to-date, and we look for additional contributions from that plant in the fourth quarter.

As a result of these assumptions for chemicals we are now moving the range of the projected segment loss to 25 to $30 million for the year. This guidance excludes the discontinued operations discussed earlier. For the year, discontinued operations are estimated to reflect a loss of approximately 10 cents per diluted share. For the company, increased pension and healthcare costs of approximately $20 million from prior year are included in our full-year segment projections.

As a result of our revised guidance for each segment, we now expect the company to earn between $1.95 and $2.10 per diluted share from continuing operations and before accounting changes. This is an increase from our previous guidance of $1.85 to $2.05 per share. We plan to improve our outstanding debt considerably over the next six months as we make scheduled payments of $35 million in December of this year and another payment of $243 million in April of '04. This will reduce our debt to total cap ratio to approximately 27%.

With regard to next year's outlook, we are in the process of analyzing economic and business conditions within each of our markets. As is our historical practice, we will present views on the upcoming year in greater detail with our fourth quarter report in February. Now we will be pleased to respond to your questions.

Thank you. Ladies and gentlemen. (Operator Instructions).

Your first question comes from Steven Kim of Smith Barney. Please proceed.

Hello. Actually, this is Michelle for Steven. My first question is related to pricing. Now, for the last two quarters, pricing has been held flat kind of by a varying product mix. And you see that going forward into the fourth quarter as well. Do you see these as, do you see this as a temporary trend or do you think it's, and is it something that will reverse kind of going forward, or do you think it represents something that will continue kind of in incoming quarters.

Michelle pricing has been impacted by product mix and geographic mix. We believe we'll have the opportunity to continue to raise prices on individual products, all be it at a relatively modest level going forward. As product mix changes back to more expensive asphalt stone, we're likely to see average price moving up, but it really is a geographic mix and a product mix issue. Markets where stone is relatively less expensive have tended to be reasonably strong, and that's another factor. So, we, overall pricing is not down. It is simply a matter of product and geographic mix.

In the long-term, you don't expect that your kind f capacity to increase prices has really fundamentally changed?

No, we do not. In fact, certainly we had a 13% volume gain in the third quarter, as volumes recover the ability to get better pricing certainly improves.

OK. Next question is just on the outlook for highway spending. Now, there's certainly been some positive indicators in terms of the reauthorization of T 21. But the data, the kind of contract awards data by state seems to indicate that states have been reluctant to award contracts. Now, considering the multi-year nature of contract awards, do you think that -- do you see an effect, maybe a negative effect on aggregates demand in the upcoming years?

I think our take on the highway awards at the state level, obviously the data, as you look at it, is generally down. Some states are up, others are down. Overall it is down. I think to put that in perspective, you need to think through the federal funding cycle, you know, we've wound down T 21. There's a lot of uncertainty until the new six-year bill is finally passed and the dollar levels are established.

As a result of that, I think it would be normal to see contract awards being very cautious during this period of transition from one six-year bill to the other and I think we're seeing that. I mentioned the state bond efforts in North Carolina and Georgia and that money I think -- I think none of that money shows up in the through September bid letting. I think North Carolina probably had the first bid letting this month, which doesn't show up in the numbers.

And they're at a $700 million bond issue. Georgia has yet to let in projects with their $424 million bond issue. So, our view is that, this is a transitional issue and once Congress passes the six-year bill, states are certain what the funding levels will be, we will see a, certainly a recovery in state bid letting.

And so what kind of time lag would you foresee, let's suppose that something close to the 255 proposal from the senate EPW committee passes, something along those lines. When would you expect that to have a positive impact on your aggregates volumes?

If that would allow the states to award contracts that have been on the shelf during this transition period, that could, the contract award would likely be beginning in the second quarter and then, depending upon the nature of the project, if it is resurfacing, that goes very quickly. If it is new construction, it goes from an aggregate standpoint relatively slowly. So I think certainly by the end of '04 we would begin to see an aggregate demand, the impact of the new six-year highway bill that we are hopeful will be significantly higher than the T 21 amounts.

Finally, one question on chemicals. We've seen over the last couple of quarters, fairly strong prices in the color alkali business and still you're reporting net operating profits from the division. Obviously part of that is the effect of natural gas and methanol. What is it going to take to get the chemicals business back to positive profitability?

I think it would be a combination of several factors. Michelle one is going to be industrial recovery in the U.S, another will be some moderation in energy costs and the third will be the results of our internal cost reduction and plant operating improvement efforts. I think it will take improvement on all three fronts for us to get our chemicals business back to the level of profitability that we certainly are trying to go.

OK. Thanks.

Your next question comes from John Fox of Fenemor Asset Management.

Hello. Good morning everyone. Two questions on pricing. Do you have any more data you could help us with, maybe same on same, you know in either product lines or geography, just to understand whether there are price increases and I guess related to that, the fact that highways are flat, if highways come back, how does that affect prices? And my second question is just next year, as the cash flow is really emerging from this company, would you consider a stock buy-back. Thank you.

Same on same aggregate prices are generally flat to up. And that's very market-specific. We make literally hundreds of individual pricing decision on individual products and individual markets. But overall obviously with the geographic split, mix and product mix, we could have price increases on every product line and yet our average sales price could be down.

Of course the reverse of that could be true, too. So we think same on, same prices are good, continuing to improve slightly. Obviously it's easier to get price increases in a period of rising demand, such as we had in the third quarter, compared to a period of following demand, which we had through, all throughout 2002 and through the first quarter of 2003.

With respect to the impact of pricing of highways, as highway projects recover, that gives us a great deal of pricing opportunity, both in terms of mix, because specs on federal highway projects tend to be tougher and tighter and it is higher-priced material that certainly goes into asphalt mixes, because of the tighter specifications and the difficulty of making those mixes.

Secondly, as highways recover, it will certainly help our business in higher-priced markets. And certainly Georgia and North Carolina, among others, are very good states for us in terms of aggregate pricing. The last question was on share buy back.

Correct.

When we pay down our debt, we get our debt to total cap ratio and our credit rating in a position where we would certainly be able to consider share buy backs, as you know it's been our history, going back to the mid-80s, to be involved in share buy-backs when that was in our view the most efficient use of our cash in terms of creation of shareholder value. And that will remain in our range of options. So, without having prejudged whether we will or will not buy shares back following the repayment of the debt in April that will certainly remain a viable option for us.

OK. Thank you.

Your next question comes from Trip Rodgers of UBS. Please proceed, sir.

Hello, Don.

Hello, Trip.

Can you comment on what you've seen thus far in October as far as volume trends?

No. We said in our outlook we expected fourth quarter volumes to continue to be strong and that's what I'll say.

OK. It was worth a try. How about California, can you talk about kind of what you're seeing out there? Do you still think we're on a down slope there or have you seen any kind of bottom there?

You know, California is in such a state of transition, from the Davis administration to the upcoming Schwarzenegger administration, that we clearly are in a transition period. Our shipments in California remain good. We've certainly not seen them fall off the table. Year over year, in the third quarter, in California, I think we had improved shipments. So you know the evidence on the ground is that things are still doing well in California. Of course, housing is a huge factor there. Asphalt volume on the other side is down slightly because there's not been a tremendous amount of highway work. And liquid asphalt costs have been up.

I think going forward, if you or others haven't read what Governor Schwarzenegger's transportation policy is, it is published on his web site. And it is among the more encouraging things I have read about the future of California highways. He points out that in his view California has the worst highways in the nation, which is supported by the Federal Highway Administration; that California spends less per capita today on highways than any other state in the nation. That they need a $12 billion program and he beliefs they will get there through the following plan.

Number one, they'll stop the diversion of existing highway funds to the general fund. Number two, they will redistribute transportation revenues from, as he says, costly transit programs to pay for adding lanes on the freeways, something that we strongly endorse and we believe the vast majority of citizens of California would benefit from.

The third portion of his plan is to direct the sales tax on new and used vehicles into the highway fund. And the fourth part of his plan is to take 1% of the general fund and move it to the highway fund, all of which would roll up to about a $12 billion highway program in California. Certainly we think that is a very wise program. We support Governor Schwarzenegger's effort to get there. And we certainly hope he can persuade the Legislature in California that that is the path the state should follow.

OK. On your Georgia bond issue, is that going to be including the Atlanta area or in the outside as well?

It will cover the entire state, Trip. As you know, a lot of the money in Georgia over the last couple of years has been spent in the rural areas. And Atlanta is behind. But this will continue the spending throughout the state, including the Atlanta area.

OK. And Mark, can you give us an update where you stand as far as hedging?

We're about 60% hedged for the fourth quarter at 485. And about 50% hedged for next year at about 455.

Great. Thanks a lot.

Thanks, Trip.

Your next question comes from John Kasprzak from BBT Capital Markets.

Good morning. To back track to your comments to the beginning, make sure I got the number. You said diesel prices were up, I believe 29%. And then you gave a dollar figure for the impact. What was that?

It was $3 million, about $3 million. Per gallon prices were up about 27%. And that was about $3 million to the quarter over quarter change in cost.

OK. And then $4 million for healthcare was the number I think you gave there?

That's correct, $20 million for the year and that's spread equally over the four quarters.

Health and pension, John.

Thanks, Mark.

So on that subject, what is your view on that cost item for 2004? I mean are we in a situation where we probably have born the brunt of the increase, or will it level out or are we expecting more sort of significant gains?

On pension, you know, we're heavily invested in equities. And our pension funds and certainly equities have recovered, and that is a major factor in the accounting liability, which is what we're talking about here. So, we see a significant recovery in the asset side of our pension plans, which will certainly have an impact on the accounting charge going forward, assuming those increases hold.

With respect to healthcare, we, like everyone else, are looking very hard at what we're doing and trying to find ways to better manage healthcare. And that simply means that, most all of us who are employees of the company, that's where the discipline has to occur.

And we're looking at ways to give us all an incentive to better manage our own healthcare costs and hopefully that will have the impact of lowering the, it won't in all likelihood reduce the healthcare costs, but it will moderate the amount of the increase.

OK. And can you give us any guidance on what you think the company's SG&A run rate is now? We've been through obviously some cost cutting initiatives. But some other costs have risen. Is there any sort of, or maybe you could talk about it in terms of your goal, if you have one, in terms of either an absolute SG&A level or as a percentage of sales.

John, I think that question we can answer better when we complete our budgeting process for '04. And we can give you some guidance. We look at that in absolute dollar terms as well as a percentage of sales. And at this point, to be talking about '04, I don't think we've completed our roll-up and our homework and our analysis of that.

Fair enough. One last question. You talked about despite the rise in healthcare and pension costs and asphalt costs and diesel costs, your aggregate margins were up and so I guess your quarry sort of operating costs you obviously made progress there.

Yes.

Could you talk a little bit about, is that, tarmac has been a source of that improvement, I'm sure. But has it been more company-wide as well? Can you talk about just a little color on the progress you've made there?

If you roll up the increase in pension, medical and diesel costs in our aggregates business, our operating guys have been able to offset not all of that cost but a significant portion of it through basically operating efficiencies at the plant. So they have done, in my view, a very good job of managing the costs in our plants through a period of downturn in volume.

And that's hard to do. And I think we probably have done a better job in this downturn than we did in the last two downturns in '82 and '91. Certainly when we saw volumes recover as they did in the third quarter, in aggregate, we saw margin expansion and we certainly are going to work very hard to continue to manage our costs so that in a per of rising demand, we continue to get margin expansion, not only through price, but also through costs.

OK. Great. Thank you very much.

Your next question comes from Leo Larkin of Standard & Poor's. Please proceed.

Good morning. Could you give us guidance for CAPEX and DD and A for '04?

Not at this point, Leo. We're still working on all of our budgets. We obviously have done a lot of work on capital budgeting for '04. But as our custom is, we will give you guidance on that in our conference call after year-end.

OK. May be for '03, those numbers.

'03, we're probably looking at $210 million, plus or minus.

And DD and A?

Mark Tomkins will -

About 268.

Interest just expense for the next year, can you project that at least, ballpark that?

It will be about $13 to 15 million less than this year's, Leo.

All right. Thank you.

Your next question comes from Fritz Van Karp of Sage Asset Management.

Good morning, gentlemen. On the T 3 stuff you're talking about, the T 21 replacement stuff. Are you feeling that -- last we spoke about this, the big sort of break point on governing the extent to which they could raise funding was whether they would raise the gas tax. Are you saying that you're coming around the idea that republicans are going to raise the gas tax or is leadership opposed to this.

I don't believe I'll see a gas tax increase.

You do or do not.

I don't believe we'll see a gasoline tax increase at the time of reauthorization of the highway bill which I guess is called safety, hopefully at some point in the next six years we will get a gasoline tax increase, but I do not foresee it at this point.

Thank you.

Again, ladies and gentlemen, it's "* 1" if you would like to ask a question. We have a follow-up question from Trip Rodgers of UBS.

This is to discuss the tax rate in the quarter and what to expect going forward.

I'll let Mark address that, Trip.

We made an adjustment down to 27.1% for the year, primarily because we've got several audits in 99 through 2001 that we're wrapping up with the IRS. And they're coming out favorable to where we anticipated they would be. So, we took back about $4.4 million for the year, $3.4 million would hit the effective rate for the third quarter. But that full year 27.1% is where we expect to be.

OK. Great. And any idea for next year or, I know you haven't completed the budgeting there but do you go to a more normal rate for next year.

We're not that far along yet but that would be the anticipation, yes.

Great. Thanks.

Your next question comes from Steve Wieczynski of Legg Mason.

Are you seeing any impact by the buyers out in southern California by near businesses out there.

I'm sorry, could you state it again, please.

Have you seen any impact by the fires out in southern California in any of your businesses?

Principally in San Diego, yesterday the freeways were closed at least part of the day and our work force had difficulty getting to the plants, plus we couldn't get product out. So, yesterday, in a couple of plants in San Diego, we were impacted. I don't know what the status is today, but other than sort of a one-day, perhaps two-day impact on a couple of plants, no, there's been no impact.

Obviously, some of our employees there have had threats to houses. I'm told at least one of our people lost a house. But in terms of impact on operations, other than the closure of the freeways, there have been not any material impact.

Last question. Going to cost of chlorine prices. Can you give us an idea what you're modeling for the fourth quarter going with those?

We're on a fourth quarter to fourth quarter basis we are thinking that they will be up slightly over last year's fourth quarter. You know, the exact magnitude of that is speculative at this point. But slightly, I think, is the best way to put it.

OK. Thanks.

Your next question comes from Stephen Kim of Smith Barney. Please proceed.

Hello. It's Michelle again. Just a follow-up question on free cash flow. It's considerably stronger as you were saying in the first three-quarters of this year, as against last year now. Some of that is from CAPEX. Some of that is from cash from operations. I was just wondering if you could, in terms of both of those items, kind of describe what's behind that and whether you think that's sustainable in the long-term.

Michelle, capital spending is of course down this year compared to last year. We have put a lot of capital over the last several years in our aggregate plant in mobile equipment. And so we're in very good shape. We have the ability to operate and produce higher volumes in a recovery period without having to add a lot of incremental capital. So, capital spending is down.

On the cash from operations side, you know, chemicals is generating stronger cash flows this year, which is very helpful to our operating cash flow and construction materials is certainly doing better and improving. So with rising volumes, the cash flow from aggregates and construction materials certainly improves substantially. Can we maintain that low level?

There's always a trade-off, of course, between capital and operating costs and capital and the ability to serve markets during periods of rising demand. We have to make those calls on the move, I guess. We do have a five-year capital projection, but we do have the ability over several year period to substantially impact capital spending because of the flexibility we now have with the very good condition of our aggregate plants.

Can we sustain that level over an extended period of time? Yes, if we don't grow. If we add acquisitions where we can upgrade plants and reduce costs, then that will generally require some incremental capital above our base level of replacement capital.

Right. And in the work -- there was significant cash generation from working capital in the third quarter. I was just wondering if you could shed some light on what was behind that?

We reduced aggregate inventories in the third quarter significantly, which turns into receivables, of course. And then as receivables get collected, but I would think, I'll ask Mark if he has additional comment on this, I think the inventory reduction in our aggregate plants was a primary factor. Mark.

We took down inventory we were meaning to take down inventory but the higher sales volumes especially in September brought inventories down even lower than what we anticipated. We're not in a difficult situation or anything. But we brought it down a little bit more than we anticipated.

Right. Was that mostly resumption of normal weather plans.

Yes. We all have the urge to say business is improving but we're not saying that. So at this point I think we're benefiting from very good weather in third quarter, count demand from the first half.

Right. OK. Thanks a lot.

Your next question comes from Jeff Peck of Janney Montgomery. Please proceed.

Hi, Don.

Hello, Jeff.

The volume growth, can you give us your thoughts about what end markets residential, non-residential, highway, maybe market share gains, maybe some left-overs from the second quarter, how to break down that volume, what end markets are driving that number?

Jeff, obviously housing across our entire footprint has remained very strong, and that is a driver of aggregate demand, going into concrete and other projects. Commercial and industry continues to be weak. There are some spotty reports of recovery for various products as we've reported before. Some of the big retailers like Target Wall Mart. Public supermarkets in this world build to, and they're wonderful consumers of aggregate, not only in the building but primarily in the parking areas and infrastructure. So that remains, that has held up commercial to some extent.

And highways have generally been flat. So the big volume growth we believe is accounted for significantly by pent up demand that did not get shipped in the first half because of the very wet weather conditions in southeast. Now Texas and California, we had very good weather conditions in the first half. We had good shipments in the first half. A lot of the volume recovery as I indicated was in Georgia, North Carolina, Virginia, and the Gulf Coast.

And those were impacted by bad weather in particularly the second quarter and we had a flow through of that I think in the third. We believe the aggregate demand will continue to be strong in the fourth quarter. So there is some combination of recovery of pent up demand and hopefully some continuing strength in residential and some recovery hopefully in commercial.

So, you still see some of the first half bad weather, some of that will have also helped the fourth quarter as well, pent up demand as it continues into the fourth quarter?

Yes, Particularly on highways. A number of our highway customers have very large backlogs and they simply could do very little highway work in the second quarter. And have been working very steadily throughout the third quarter and are working steadily so far through October. So there is a substantial pent up demand I think particularly in highway work.

Thanks.

Thank you, Jeff.

We have no further questions at this time.

Thank you very much. In summary, we are very pleased with the quarter. We appreciate your interest in Vulcan. And we look forward to speaking with you again after the conclusion of the full year of '03. And to give you at that point our outlook for '04. We are hopeful to have more definitive news on the highway bill by that time and hopefully some better news on the outlook for the overall economy. But again we appreciate your interest and look forward to talking to you after the end of the year. Good day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.