渥肯建材 (VMC) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen. And welcome to your Quarter 02, 2004 Vulcan Materials Earnings Conference Call. My name is I'll be our conference coordinator. At this time, all lines are in a listen-only mode, and towards the end of the conference call we will be accepting questions. If during that point you would like to ask a question, please key star one on your touchtone phone to ask a question, and please key star two to remove it. If you ever need operator assistance please key star zero. At this time, I'll turn the call over to your host Don James, Chairman and Chief Executive Officer. Sir, over to you.

Good morning, thank you for joining our conference call to discuss our second quarter results, as well as our current outlook for the reminder of this year. I am Don James, Chairman and Chief Executive Officer of Vulcan Materials Company. With me today are Mark Tomkins, our Senior Vice President, Chief Financial Officer; Mac Badgett, Senior Vice President, Construction Materials; and Brad Rosenwald, President of our Chemicals Division. Also with us today for the first time is Jim Smack, Senior Vice President of Construction Materials. Jim has completed various successful tenures first as President of our Mideast Division, and most recently as President of our Western Division where over the past five and a half years he integrated our CalMat acquisition in California, Arizona, and New Mexico into Vulcan. Before I begin, let me remind you that certain matters discussed in this conference call will contain forward-looking statements, which are subject to risk and uncertainties that could cause actual results to differ materially from those projected. Descriptions of these risks 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 today responding to questions from those of you who have dialed into this call. Let me remind you that a replay will be available approximately two hours after this call at our website.

Now let's begin by discussing the results for the second quarter. Net sales increased 6% to $739m, and net earnings increased 57% to $88m or $0.85 per diluted share, this is a record for the second quarter. Net earnings from continuing operations were $0.85 per diluted share compared to last year's $0.65 per share. But sharply however, our second quarter earnings from continuing operations came from improvements in both segments. On April 1, of this year we retired $243m in five-year notes with available cash. And as a result, interest expense decreased approximately $4m from the prior year second quarter. For the quarter, the effective tax rate was 25.4% compared with 30% in the prior year. This decrease reflects a reduction in estimated income tax liability for open audit years as well as a tax refund. Selling Administrative and General expenses increased $4m due primarily to higher cost for healthcare and incentive compensation. Let me explain briefly what comprises the higher incentive compensation. Under the Company's long-term incentive plan, we began in 2003 replacing about half of our stock option grants with performance share grant. As a result that portion of our long-term incentive compensation now it's expense.

In addition, our short-term incentive accrual increased due to the improved year-to-date earnings performance in both segments. Other operating income net above other operating cost increased about $5m due primarily to higher gains on sales of real estate in our Western Division, and the lower environmental remediation accruals in chemicals. Other income net above the charges increased approximately $4m due mostly to liability insurance reimbursements and accrual. During the first six months of the year, free cash flows increased $42m from the prior year due mainly the higher earnings, and to flat capital spending for property plans and equipment. In the quarter, Construction Materials had sales of $585m and increase of 5% from the prior year. Segment earnings, increased to $121m up from an $119m reported in the same quarter last year. Sales and earnings were favorably impacted by a 6% increase in aggregate shipments, and a 2% increase in aggregate pricing. During the quarter, aggregate volumes very particularly strong in our California, Georgia, North Carolina, Tennessee, and Virginia Markets. Whether, however negatively affected volumes at market along the gulf coast and in Texas.

As for volumes were down 9% from the prior year due to lower highway spending in California and to the wet weather we experienced in Texas. Ready-mixed concrete volumes increased 10% due to strong demand in Southern California. Segment earnings were negatively affected by higher operating cost that for aggregate plants with major improvement and expansion projects have been underway in the core. Due to the nature of these projects, production was limited at various times resulting in approximately one-third less production at these plants than in the prior year's second quarter. Some of these projects are substantially complete now and should result in minimal interruption to plant operations in the third quarter. The other two projects should be completed by the year-end. Unit cost for Diesel rose sharply in the quarter when compared to the prior year and impacted earnings by approximately $3m.

Now, turning to Chemical results in the quarter, we are very encouraged by the segments $16m improvement earnings and net return to profitability in the quarter. Our plan to achieve significantly higher production levels with improved efficiencies and lower cost. What makes these earnings turn around more noteworthy is that it was achieved in the face of sharply lower caustic soda prices in the quarter. Second quarter prices declined from the first quarter of this year and were 46% lower on a year-over-year basis with the second quarter of last year. Despite this lower caustic soda price, second quarter net sales increased 12% from the prior year to $154m and segment earnings were approximately $4m. Volumes for caustic soda and chlorine were stronger in the second half and the second quarter versus the prior year. However, the decline in pricing for caustic soda more than offset the volume gains. Stronger volumes and better pricing for chlorinated organic products positively affected the segment earnings and sales versus the prior year. In total, energy and key raw material prices were slightly favorable in the quarter due to primarily to lower electricity rates and lower methanol cost versus the prior year.

Natural gas costs were relatively unchanged versus the prior year. Earnings benefited from improved plant reliability and better operating performance. We achieved higher reliability and operating performance as a result of our program to improve plant efficiency, which has been executed over the past several quarters. Our joint venture with Mitsui also performed well due to improved plant operations and stronger sales volumes. Vulcan share of the joint venture earnings improved by about $5m in the quarter. Finally, we continued to be pleased with the growth of our 5CP product and its contribution to segment earnings continues to meet our expectation. Now, let me tell briefly about our outlook for the remainder of the year before opening the lines to your questions. Our outlook for Construction Materials earnings for the year is in the range of $415m to $445m. Our earnings outlook is predicated on residential construction approximating the high levels of 2003 on highways increasing modestly for the full year and nonresidential construction remaining flat overall. Our full year outlook for construction material is in for a modest increase in both aggregates volumes and pricing.

Aggregate shipments in the second half of the year should approximate the record shipments we experienced in the second half of the last year. As you may recall in the third and fourth quarters of last year, aggregate shipments increased 13% and 15% respectively due mostly to a sharp increase in construction activity but in part due to wet weather which we experienced in the first half of last year. We will continue our pursue of lower operating cost in our aggregate plans to offset higher diesel prices and increase healthcare cost. Finally, let me say a word about the Federal Highway bill negotiations. Late last week, before its recess, Congress passed a fifth extension that keeps funding in place for highways at $33.6b on an annualized basis through the end of September. Negotiations will resume on the overall funding level on September 7th, when Congress returns to Washington.

Additionally, the House Appropriations Committee recently passed its fiscal year 05 bill at 34.6b, a 3% increase over the fiscal year 2004 appropriation while the senate is yet to finalize its appropriation bill for 05. I think it is important to recognize that the Federal Highway Appropriation of 33.6b for 2004 is at a record high level. That money continues to flow to the state and will continue to be spent on highways. The 34.6b appropriation bill for the house will set a new record for annual highway appropriations for the fiscal year beginning October 1 of 2004. With respect to chemicals, we are revising our guidance mostly to improving prices for caustic soda. Segment results should continue to benefit from better plan operating performance and higher volumes from those products. Caustic soda prices have begun to strengthen from the weak levels in the second quarter. Previously, announced price increases totaling $95 per ton have been widely accepted by the market. And this price recovery should benefit third and fourth quarter chemical segment results. We are encouraged by the favorable effect on second quarter earnings from our program to improve the reliability and efficiency of our chemical plant and we expect a continuation of these operating improvements in the second half of the year.

Furthermore, our second half outlook is seen somewhat higher in energy and raw material costs that reflect current pricing trends in natural gas and hydrocarbon-based raw materials. As a result, we are projecting chemical results to be in the range of 5m earnings to a loss of 5m for the year. For the Company as a whole, health care costs are forecasted to increase approximately 20m for the year. We project pension costs in 2004 to be flat with 2003. Based on our current economic outlook, we expect our earnings to range between $2.45 and $2.65 per diluted share. For the company we expect strong free cash flow performance again in 2004. The $42m increase year-to-date is certainly a nice start on that increase. In addition, we are maintaining steady increases in dividends. Our opinions, we are using our cash includes discipline capital spending on internal projects with returns well above the cost of capital. Attractive construction materials both on acquisitions and share repurchases. Year-to-date, we have acquired four aggregate operations to complement our existing businesses in Tennessee and Virginia.

In the third quarter, we expect to earn between $0.90 and $1 per share with both segments reporting improved earnings versus the third quarter of last year. Sales volumes in both segments should remain strong. We expect diesel prices to remain at current high levels in the third quarter increasing our costs $2m to $3m over last year's third quarter. Our effective tax rate for the remainder of the year should be 30.9% or compared to last year's third quarter rate of 24.8%. For the full year, our tax rate should be 29.2% based on our current projections. Now we would be very happy to respond to your questions.

Ladies and gentlemen, if you would like to ask a question, please key star one on your touchtone phone. If you would like to withdraw your question, please key star two. Questions will be taken in the order they are please hold for your first question. And it is coming from the line of Stephen Kim with Smith Barney, please go ahead.

Thanks very much. I had a few questions Don, if you could give us an idea; you mentioned Asphalt volumes and concrete were down a bit. I think Asphalt was down a bit; can you give us a sense how much it was down percentage terms in dollars?

Asphalt was down and concrete was up. Asphalt margin was down about $4m to $5m for the quarter and that our volume and as we said Texas was rained out in the second quarter and that impacted our Asphalt volumes there and then I think overall Asphalt volumes were down about 9%.

And on sales?

Yes, and in California as we have said in the comments Hawaii spending has been limited there because of the budget situation.

And so, you said the sales were down about 9%. The profit was down about 4m to 5m was the --

Market volumes were down about 9%. Yes.

Okay, so not dollar volume, you mean unit volume.

Yes, unit volumes.

Okay. Was pricing pretty much, you know, did it change dramatically?

I think it's relatively flat Steve.

Okay, so sales were probably down somewhere around 9% or 10%. The income you said was down about $4m to $5m was that -- is that a kind decline of around 10%. to it. Does the margin in asphalt go down as well?

No, the margins I think were relatively flat.

Okay. All right that's great. Second do you have any -- can you give us some kind of color for how concrete did?

Well, concrete volumes were up 10%, obviously housing is strong and a lot of the concrete is going into housing. In individual markets there some pick up in commercial projects, but that's very spotty.

Okay.

And that in term that volume added to our margin.

In a comparable way, you think about 10% to the income?

I don't have that information in front of me.

Okay, that's fine. Did you mention where your projects were that you were sort of doing these extra events and sort of what precipitated it at these plants?

Well, we have -- we had two projects in South Carolina. We had one project in Kentucky, and one in California that were underway in a major fashion in the second quarter. Two of them are essentially plant rebuilds of the entire plant in one case and of the secondary and tertiary plant in the other case. Both of those are as I said essentially complete. The other two projects are a combination of plant modification, but more importantly I would say our pit reconfiguration projects where we are doing changes to the pit configuration in order to reduce cost going forward. Those two projects will continue probably to be completed by the end of the year. The impact of those is of loss production -- our reduced production the economic impact of those would be in the $5m to $10m margin range depending upon what all you count.

Okay, so that's a $5 to $10m impact to income for the full year basis?

For the quarter.

For the quarter okay. And that was on an income basis right.

Yes, it's on a segment pre-tax segment basis.

Yes, pre-tax got it and so, you know, you might think that might get cut in half -- that's right might be cut in half going forward right?

That's a reasonable thought.

I guess when I listen to that I mean not knowing nearly as much about the operations you guys do. Those kind of things seems like they are kind of going on all the time. Was there -- is that sort of not really the right way to look at it, where these really exceptional because just it seems I did visit some of our quarries and it's sounds like your kind of always have some kind of improvement going on with the plant reconfiguration maybe some rebuild going on. Am I wrong on that?

We have projects going on all the time. These were unusually large in their impact in the quarter.

Okay. Great appreciate that. Last question, I have relates to I guess the tax rate. As you go forward into '05 obviously chemical earnings recovering and what not. Should we expect to see your tax rate increase from the roughly 31% that your forecasting in the back half of the year. If chemical's income recovers as it looks it might in '04 -- in '05?

Steve, I'll ask Mark Tomkins to respond to that question.

Morning Stephen.

Hi.

It should stay in the 31% to 32% range.

Okay, 31% to 32%.

As chemicals profitability moves up the rate will move up a little bit close to 32%.

Okay, great. Well, great I appreciate. I'll let someone else get some questions in. Thanks

Thanks, Steve.

We will take our next question from Jack Kasprzak of BB&T. Please go ahead.

Okay, good morning everyone congratulation on a nice quarter.

Thank you.

You bet. Don, I know -- I think you said this in your comment and I just missed it so can you if you did say why the other operating cost line was positive in the quarter?

Well, other operating costs include gain on sale of land, primarily large part of that in Calmat, and then we had lower environmental remediation cost in Chemicals. On a quarter, comparative basis from last year's -- second quarter of this year. So, those two items are the principle reason.

Okay, great. Second question is, and you mentioned your debt paydown, which you'd been committed to for a number of quarters, and use of free cash flow, perhaps going forward, will you remind us if you have a share repurchase authorization in place currently?

We do have a share repurchase. It's about 8.5m shares.

Is that what might be left or the total, or?

That's what is left.

That's left. Okay. And I assume you have not bought any shares this year, will that be correct?

We've not bought shares year to date, and our practice has been to advise you at the end of each quarter as to what share repurchases we made in the quarter.

Okay. With regard to California, you mentioned also that weak public spending there, highway spending, what's the outlook? I think there seems to be perhaps a budget agreement in California now. Is there any hope that you might start spending money on highways again?

I think it's important. I mentioned that our volumes in California were up significantly, and I think that's important to realize that even with a weak highway program in California there is a substantial growth in private sector demand largely housing that continues in Southern California, and that has boosted our volumes and even in the face of lower public infrastructure spending. The most recent news of course is that the -- two good things are happening. One is, a bond issue that will be funded out of additional Indian gaining revenues that will be used to repay the transportation account that has been borrowed against by the general fund, and that's about $1.7b, $1.8b that based on the current program should go back through the bond issue into the transportation fund and be spent on various highway projects. Apparently, the California Legislature and Governor Schwarzenegger will enact, I gather today, the new budget for California, which certainly adds stability to what's going on there. We are sure that California will have adequate resources to match all of the Federal highway fund-matching requirement. As you know, California gets more and keeping that money flowing in California is important. It maybe -- it will be longer than the next 12 months before we see a recovery of robust highway spending in California, but the things are moving in the right direction. I think we have turned the corner, is our view on that.

Okay, and from what you guys said, looking at California, is there any indication that the pace of residential construction, which as you said has been quite strong, is there any indication of the pace there is slowing down in any meaningful way?

We haven't seen it yet.

Okay, thanks a lot Don.

Again as a reminder, that's star one on the touchtone if one of you would like to ask a question. Our next question is from Jack Kelly with Goldman Sachs.

Good morning Don.

Good morning Jack.

Just coming back to the other income items. The explanation you gave when sale and lower review cost, was that an explanation before the higher operating -- other operating income or you also have other income?

That was the other operating income. There's another category called other income, net of other charges, that was up $4m due primarily to the inflow and outflow of reimbursements for liability insurance claims and accruals for claims.

Okay. Because if you look at the aggregate, I know there are lot of things going to make in a quarter, but you look the aggregate of those two others? That was $0.07 swing positive in the quarter.

It was about $9m of pretax.

Right. Yes, so about $0.07 maybe after -- all right, and so when you kind of talk about guidance for the second half or maybe even comment on the second quarter is that -- would that kind of affected into the second quarter when we gave a guidance and when we're looking at full-year guidance, can you give us a sense of how big those items will be? I know it's tough to predict, but it was pretty important in the second quarter since it was positive.

I'll give you my comments on that and Mark Tomkins can also comment on that Jack. One of the reasons we give you a range is because some of the stuff is very difficult to predict, liability claims and accruals and refunds from insurance carriers and all of those things are just whatever they are and they come in and we woke up. So, we try to recognize that there will be ebbs and flows in those numbers and the guidance we give you is in a range, which allows for that ebb in flow. Real estate gains have been -- we've had a relatively consistent flow of real estate gains, I think we've now sold something like $236m of real estate from the CalMat acquisition and we still have a fair amount of land to go. Predicting in which quarter those gains are going to occur is very, very difficult and they'll close when they close and we'll record the income when they close. So, that's -- and that's hard to predict, but we generally again kind of look at that, but to predict it precisely from quarter-to-quarter is very problematic. I'll ask Mark Tomkins to comment further.

Jack, you asked about the second half, there's nothing material that we've estimated for the second half in those line items, that it's drastically different than last year, other than the tax rate.

Got it, okay. Also on just going down to chemicals and caustic. Don, you mentioned a 46% year-to-year decline, could you give us a sense of what it was sequentially? The decline in caustic soda prices maybe in dollars per ton, is it second quarter versus first quarter?

Okay. Second quarter versus first quarter, let me take a look at this. Probably about $20 bucks from the first quarter to second quarter was down about $20. Now as you know, I'm sure there was a price increase announcement of $50 a ton in April and another $45 a ton in May. That $95 is flowing through and as I mentioned in my comments, that's been widely accepted by the market and it will flow through our system as our contracts allow it to flow through. Additionally, I think just in the last few days, PPG, Oxydio and Pioneer have all announced an additional $65 a ton price increase for caustic soda. The trend is certainly very favorable, I think that demand is strengthening and everybody's plants are, as you probably know, running at full capacity certainly have been, as we've done our operating rates up and as a result of that, this is a favorable environment over the next at least few quarters going forward for caustic pricing. One reason for that of course is above 12% of the US capacity has been taken off the market over the last two to three years, and that's not coming back on. So, at least in the near term.

Okay. In your forecast for full-year profits for chemicals, lets say the breakeven number, which I guess is the midpoint, in rough terms what have you assumed in terms of price increases for caustic in other words, if we were down $20 in the second quarter sequentially and not forgetting about this most recent price increase, but looking at $95, I mean are you assuming may be a third of that effectively gets through in the second half. So we would say, second half prices go up $30?

I think a little more than a third of that $95 increase would flow through by the -- in the second half.

Okay. Great. I guess that was it, thank you.

Thank you Jack.

And again as a reminder, star one on your touchtone phone, if you would like to ask a question. I will take the next question from John of Citigroup. Please go ahead sir.

Hi thanks. John Carnegie for Citigroup in London. If I could just ask couple of questions about prices, clearly there has been lot about upward pressure on cement prices. So what's going to be your strategy for rest of the year? These are the prices in the ready mix segment. And also perhaps in asphalt given the increasing oil price and also do you have any plans for rest of this year to lift your aggregates prices?

Let me start with aggregate prices and work back. We expect the aggregate prices will continue to increase probably 2% to 3% range for the remainder of the year, compared to second half of last year. Certainly, there has been a great deal of discussion about cement prices. We've not experienced difficulty in our markets, obtaining cement. Generally cement price increases result in ready mix concrete price increases, and I think generally we see that in our market and around the country, where we are not in the concrete business. Asphalt, liquid asphalt, oil prices has been relatively stable, notwithstanding the crude oil price changes we are seeing, we've -- year-over-year have and basically stable liquid asphalt prices and we are not foreseeing any -- kind of material change in that in the second half of the year.

Okay, just a follow up. If we are assuming that prices are going to rise again in cement, in next few weeks, and you would probably put your ready mix prices up as well?

Well that would certainly be our plan.

Okay. Thank you very much.

Our next question is from Leo Larkin of Standard & Poors.

Good morning. For interest expense going forward, should we be using -- should we just take the second quarter and plug that into the model?

Yes, yes. Our -- the vast majority of our debts to expirate and so then -- we are not going to pay off any significant piece of debt. So that's a good assumption.

Okay. Also if you could just review the DD&A and Capex for this year and also if there is any preliminary estimates for 2005?

We don't have a preliminary estimate for 2005 at this point, Capex is probably in the $200m to $230m range for the full year and DD&A -- Mark, is about 260, 270?

That's 250 to 260 for the full year.

Thank you.

I'll take our next question from Fergussa of Schwab Capital Markets.

Are you still there? Good afternoon.

Good afternoon.

Quick question. Could you briefly address the highway bill and obviously the status of that is kind of up in the year and there are still lot back and forth on it. And in terms of your projections going forward, I guess as of last fall, when it initially expired and then with each additional extension, how much of that -- how much have you been counting on the highway bill going through at a -- somewhere between the House and Senate incentive version, which is a substantial increase -- in the Senate version there is also an increase but -- what had been the projections on that?

While our current projection for the remainder of the year essentially assumes no impact from a passage of New Highway bill. As I said in my comments, there are record amounts of appropriation dollars flowing through the Federal Highway Program, and but we are not assuming any increase in Highway demand for the remainder of this year from the passage of Highway bill at sometime in the fall.

Okay. Excellent, thank you.

We will take our next question Jack Kelly of Goldman Sachs. Please go ahead.

I just want to follow up, Don you had mentioned in the second quarter diesel resulted in $3m higher cost and then similar number I guess for the third maybe $2m to $3m. Are those unrecovered cost? Or how should we think about that?

Well, we raise prices and we hire diesel and we don't hire our prices generally to production cost, and so are they unrecovered, directly they are unrecovered, indirectly they are recovered. So I don't know -- that we don't have a diesel fuel pass through to our customer in any direct sense.

Okay, so there weren't any meaningful price adjustments in the second quarter to a kind of try to $2m to $3m whatever price increases you had were basically done before the second quarter?

Right and they are -- our pricing strategy is not based on our production cost.

That's fine. Thank you.

I show no questions at this time.

Okay. Thank you very much for your interest, we look forward to speaking with you again at the conclusion of the third quarter. Have a good day.

Ladies and gentlemen, thank you for joining us in this conference call You may now disconnect.