渥肯建材 (VMC) 2004 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2004 Vulcan Materials conference call. My name is Patrick, and I will be your coordinator for today. Initially, all participants will be on listen-only, with a question-and-answer session to follow at the end. (Operator Instructions).

I would now like the pass the call over to Mr. Don James, Chairman and Chief Executive Officer. Please go ahead, sir.

Good morning. Thank you for joining our conference call to discuss our third-quarter results as well as our current outlook for the fourth quarter and the full year. As Patrick said, I am Don James, Chairman and Chief Executive Officer of Vulcan Materials. With me today are Mark Tompkins, our Senior Vice President and Chief Financial Officer; Mac Badgett, Senior Vice President, Construction Materials; and Brad Rosenwald, President of our Chemicals Division.

Before I begin, let me remind you that certain matters discussed in this conference call contain forward-looking statements, which are subject to risks 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 would like to spend most of our time responding to questions from those of you that have dialed into this call. Let me remind you that a replay will be available approximately two hours after this call at our website.

Let's begin by discussing the results for the third quarter. Net sales increased 8 percent to 840 million; and earnings from continuing operations were 99 million, or 96 cents per diluted share, a 5 percent increase from last year of 91 cents per share. These third-quarter results include our chloralkali business. Net earnings were 99 million, approximating 2003's results, which included a $5 million gain on discontinued operations.

Our businesses continue to generate strong cash flows. Through the first nine months of this year, operating cash flows less capital expenditures increased 10 million to 222 million due to higher earnings.

For the quarter, our effective tax rate from continuing operations increased to 34.7 percent compared with the 24.8 percent for the same quarter in the prior year. This increase reflects, principally, an increase in estimated income tax liabilities for open audit years as compared to a decrease in the third quarter of 2003 for similar items. The impact of these tax items was a 7 cent reduction in earnings per share compared to the third quarter of last year. For the fourth quarter, the effective tax rate is projected to be 31.7 percent.

Selling, administrative and general expenses increased approximately 4 million, due primarily to higher costs for health-care and performance-based compensation. Vulcan, like many other companies, has experienced higher health-care costs in recent times. To control costs, we have implemented changes to our health-care plans for 2005 and are reviewing further changes for 2006. Interest expense decreased approximately 5 million due to the retirement of 243 million of debt in the second quarter of this year.

As you know, on October 12th, we announced our intention to sell the Chemicals business to a subsidiary of Occidental Chemical Corp. Strategically, the divestiture enables us to devote all of our efforts in the future to construction materials. I will make a few additional comments about this transaction and its impact on Vulcan going forward in the outlook portion of my comments.

In Construction Materials, we were pleased with our ability to achieve earnings growth in a quarter in which four major hurricanes blew through four of our key Southeastern states. In the quarter, Construction Materials had sales of 649 million, an increase of 5 percent from the prior year. Segment earnings increased to a record 149 million, up from 144 million reported last year. The average unit price for aggregates increase over 3 percent when compared to last year's third quarter. Total aggregate shipments, which include both customer and internal shipments to asphalt and ready mix concrete plants, increased approximately 2 percent from the record level experienced in the third quarter of 2003.

The extreme weather in the third quarter had an adverse impact on shipments and operating costs. The hurricane experienced in mid-August and the three in September negatively impacted sales and plant operations in Georgia, North Carolina, Florida, and Alabama. As a result, double-digit drops in sales volume were experienced in September in most of these markets.

On the other end of the spectrum were major markets with strong shipments, including California, Texas, Virginia, and Arizona, which were not adversely impacted by weather. Most of these markets saw double-digit increases in aggregate shipments for the quarter.

Our coast-to-coast footprint and presence in many of the largest and fastest-growing metropolitan markets is a strength of this Company, and provides a means of diversification to dilute the extreme regional weather impacts which we saw in the third quarter of this year.

Asphalt volumes in California and Texas were up from the prior year, due mostly to stronger demand. Some of the volume gain in Texas was due to project delays experienced in the second quarter of this year because of wet weather in Texas. Pricing for asphalt approximated third quarter of last year, and operating results were impacted by higher unit costs for liquid asphalt. Ready mix concrete pricing was higher and volumes remained at high levels, with relatively little change from prior year.

Segment earnings were negatively impacted by higher costs for diesel fuel and health-care. Unit costs for diesel fuel increased 30 percent in the quarter when compared with the prior year, and impacted earnings by over $4 million. Additionally, segment earnings were negatively impacted by higher operating costs in certain plants due to heavy rains and flooding, as well as planned plant improvement projects. In many of the markets mentioned earlier, the hurricane-related heavy rains affected plant production and caused double-digit drops in sales volumes in September.

At the end of the second quarter, I reported on the impact of plant improvement projects underway at four large plants. These projects were significant because the disruption to operations resulted in approximately one-third less production in the second quarter than in last year's second quarter. I'm pleased to report that three of the projects are substantially complete now, and margins improved in these three plants in the third quarter compared to the second quarter. We're continuing to make good progress on the final project and it should be complete this quarter.

Turning to Chemicals, we were very pleased by the segment's results. The 11 million of earnings in the third quarter continues the trend of improving quarterly results in our Chemicals business. Year-to-date earnings are now at $7 million, a $28 million turnaround from this point last year. Third-quarter sales were strong, increasing 18 percent from the prior year. Pricing for most products improved year-over-year. Chlorine and chlorinated organics accounted for most of the favorable earnings impact from pricing. Third-quarter prices for caustic soda were 5 percent lower than the prior year, but were up over 50 percent from the second quarter of this year. A major contributor to the improvement in segment earnings was the higher sales volume in 5 CapEx (ph), reflecting the increased demand for our customer's product in the marketplace. We continue to be pleased with the growth of our 5CP product and its contribution to our Chemicals earnings.

Let me talk briefly about our outlook before opening the lines for your questions. Our outlook for Construction Materials earnings for the full year is in the range of 415 to 425 million. Our earnings outlook is predicated on demand in all three end markets, residential, nonresidential, and highways, remaining steadily at their seasonally adjusted annual levels, subject to normal fourth quarter weather variations. Year-to-date price improvements should offset higher costs year-over-year for health-care, diesel fuel, and liquid asphalt.

Aggregate shipments in the fourth quarter should approximate shipments in the fourth quarter of last year, resulting in modest second-half increases above last year's record second-half levels. As you may recall, in the third and fourth quarters of last year, aggregate shipments increased 13 percent and 15 percent, respectively, due mostly to an increase in construction activity, but also in part due to wet weather in the first half of 2003. We will continue to pursue efficiencies and lower operating costs in our aggregate plants to offset higher diesel prices and increased health-care costs.

Before I discuss our fourth-quarter outlook for Chemicals, I want to say a brief word about the status of the federal highway bill. On September 30th, President Bush signed an eight-month extension of 221. This extension includes several measures important to the industry.

First and foremost, annual funding levels continue to increase. The extension provides for 24.5 billion of contract authority over this eight-month extension, which would annualize to 36.8 billion. This amount compares favorably to the fiscal year '04 number of 33.6 billion for highways. With the appropriations committees of both the House and the Senate proposing fiscal year '05 increases in highway spending, it is likely that highways will receive at least another 1 billion in fiscal year '05.

With respect to Chemicals, we are increasing our earnings guidance due primarily to improving pricing for the caustic soda and chlorinated organics. Segment results should continue to also benefit from better plant operating performance and higher volumes for most products. Caustic soda prices continue to strengthen from the low levels in the second quarter. Previously-announced price increases have been widely accepted by the market, and this price recovery should continue to benefit segment results. As a result, we are increasing Chemicals earnings outlook to a range of 15 to 25 million for the year. Approximately 65 percent of our fourth-quarter natural gas requirements are hedged at $5 per MMbtu. As a result, energy costs are projected to approximate third-quarter levels.

Until we conclude the divestiture of our Chemicals business, we will continue to give earnings guidance for both Construction Materials and Chemicals. Subsequently, we anticipate providing estimates of the income to be received from the earnouts referable to the sale of Chemicals. Based on our outlook for ECU values, natural gas prices and marketplace performance for 5CP, we expect undiscounted earnout proceeds of approximately $145 million.

As reported on October 12th, we estimate a maximum non-cash charge of approximately 70 cents per share, assuming no contribution from earnouts related to the transaction. Whether the transaction will ultimately result in a charge depends on the expected performance of the earnouts.

As mentioned in my earlier remarks, our effective tax rate for the fourth quarter should be 31.7 percent compared to last year's fourth-quarter rate of 31.1 percent, due mostly to higher earnings in chemicals. Based on our revised economic estimates, we expect earnings, including Chemicals, to range between 70 cents to 80 cents per share in the fourth quarter and $2.66 cents to $2.76 per diluted share for the full year.

And we would be pleased to respond to your questions.

(Operator Instructions). Our first question today comes from Jack Kelly with Goldman Sachs. Please go ahead, sir.

I know it's difficult to give us precise guidance on some of the variables for the divestiture. But maybe if you could just share a couple thoughts with us. Number 1, I guess, you have the $145 million of the earnings stream over the next couple of years. On average, over that period, what would that assume in terms of operating earnings? I mean something we could identify with in terms of your past history, you know, in relation to let's say the 15 to 25 million you mentioned for the fourth quarter. What would that be on an annualized basis that would justify 145 over time?

Secondly, as we look at the tax rate with that divestiture, I guess you could argue over a period of time, it would drive your tax rate down, because I would think that maybe the crushed stone business would have a lower tax rate. So any thoughts maybe, market you have there.

And then three, in terms of corporate overhead, I'm sure there's some absorption now that it's taking up. Any sense of what that is? And would that then have to be absorbed by the Construction Materials business?

Jack, let me give some preliminary comments and then I'll ask Mark to fail in more if he would like. Maybe one way to talk about the tax rate is that we would project say the tax rate in Construction Materials for the full year '04 to be something like 30.8 percent; and in Chemicals, more like 33.2 percent. So you're correct; there is a lower tax rate in Construction Materials on an ongoing basis than in Chemicals.

With respect to corporate overhead, we are currently reviewing that. We can give better guidance on that at a later point. We have not completed our review. There is, of course, a fair amount of corporate overhead that is involved with the Chemicals business, and we'll give some better guidance on that at the end of the fourth quarter.

With respect to the accounting treatment for the earnouts, we're reviewing the accounting guidance to determine the most appropriate treatment for the timing and recognition of the amount of these two earnouts. If we take a charge, then earnouts are more likely to be included in operating earnings. If we don't take a charge, then they are likely not to be included in operating earnings, if that makes any sense. So there's a trade-off between taking a charge up front in operating earnings later or not taking a charge up front. And frankly, at this point, we're continuing to try to determine what the appropriate accounting and the timing of that accounting is. Now let me ask Mark to sort of (multiple speakers) --

Just on that point though, Don, I wasn't so much focused on the accounting, how it's accounted for, but let's just assume your $145 million forecast is right. What would that entity have to earn over that period of time on average for you to get that? Just to give us some sense of how realistic (multiple speakers)? In other words, (multiple speakers) 50 million a year in operating income as we know it now? Or 30? I know you can't be quite that precise. But just kind of some sense of --

Jack, I understand your question. And I like to think about things in terms of cash flow and economics rather than the accounting result. What we will do going forward -- we're not prepared to do that today. But we will give you a calibration of how those earnouts are likely to be achieved with ECU values. Our gas prices -- they are very sensitive -- much more sensitive -- to ECU values than to gas prices. And we recognize we need to give you and other investors a calibration of that, which we will do. We're not prepared to do that today.

Okay.

Jack, on the tax rate, you can -- as a rule of thumb, you can use 31 percent without Chemicals, on a go-forward basis. The reason our rate has been lower than that in the last few years is because Chemicals was running at a loss. And that higher rate on the loss brought our total effective rate down.

Good. Great. And just one last question. Is there any way you can quantify the impact of the weather in the quarter? Clearly there was a volume impact. And then secondly, I guess, there was some additional cost you incurred that you otherwise wouldn't have. And then relating that to the fourth quarter forecast of flat volume, I know you all are generally conservative. But that -- assuming there's some bounce back in the fourth quarter, even though it was a tough comparison last year, you were up 2 percent in the third. And that was a difficult comparison too. So just wondering if there are any other -- is this any kind of feeling on your part that the market is slowing down?

Jack, we don't believe the market is slowing down. I think the best evidence of that is in the markets where we had good weather, we had double-digit volume gains, which is remarkable given the big gains we had third quarter last year.

As we indicated, third-quarter volumes in our Florida plants were down in the 20 percent plus range. And as you probably know, Florida is in a mess right now. We expect there will be volume recovery from the hurricane effect. Whether that happens in the fourth quarter or the first quarter or second quarter of next year is still unclear, because there is so much effort now simply to clean up debris as opposed to actually initiating construction projects that use aggregate.

The impact was also profound in Georgia and North Carolina, which I think most people do not have a true appreciation for. But we had huge and consistent rains throughout Georgia and our markets in North Carolina in September, which took volumes down in both of those states by about 20 percent.

We have attempted to quantify it. I would say it is several million dollars. If I try to give you a precise number, what you include and what you don't include gets to be reasonably subjective. But it was a several million dollar impact for us in the quarter. Obviously, that is one-time. And ultimately, we believe at least in Florida and the Alabama Panhandle, where there was great amount of destruction to both the highways, infrastructure, and buildings, that there will be a positive benefit from the hurricane, unfortunately, or fortunately for us -- unfortunately for the communities. A tremendous amount of insurance money is going to flow into those markets for housing and condos. So we expect to get the benefit of that. However, whether we see that in the fourth quarter is very speculative at this point.

Thanks for those answers.

Thank you. And our next question today comes from Jack Kasprzak with BB&T. Please go ahead, sir.

My first question relates to a comment you just made about the markets where you had good weather, you saw double-digit volume gains. Just a little additional color there. Would that be generally across the board in all sort of segments of construction? Or was one segment maybe, for example highway construction, maybe a little stronger than you had thought? Can you just tell us what you saw there?

Well, in California, Jack, we saw strong asphalt sales, aggregate sales, better pricing for concrete. That's driven primarily by private sector spending. When we look at Texas, we saw very strong gains in both aggregate and asphalt; a lot of catch-up work from the second quarter in Texas, where it was very wet. There, you know, there's a little stronger mix from highways, but also from private sector work. Probably Texas and California, we're seeing recovery in the private non-res sector on a spotty basis. But that's where it's beginning to come back faster than maybe in some other markets.

If we look at -- we mentioned Virginia was a very strong -- had a very strong third quarter in shipments, and that's a lot of highway work, as well as pretty good growth in residential and some non-res.

So we're seeing the markets strengthen. I guess our projection for the fourth quarter is, we will see reasonably steady continuation of what we saw in the third quarter, hopefully without the weather effect that we experienced in the third quarter.

Okay. Great. Secondly, you addressed the weather issue and the impact. But the press release also mentions diesel, asphalt costs, health-care costs. Can you quantify the year-over-year impact there?

Diesel increased about 30 percent. That cost us a little over $4 million for the quarter. I'll defer to my colleagues for health-care increase year-over-year.

Jack, the health-care increase on a quarterly basis was about $3 million.

And the third item you asked about? Was liquid asphalt? Liquid asphalt was also up.

It cost us about a million and a half.

Okay. Thanks a lot.

(Operator Instructions). Our next question today comes from Nishu Sud (ph) with Smith Barney. Please go ahead.

First question, I just wanted to look at the tax rates again. Now there are a couple of factors that you've mentioned here so far. The Chemicals differential, the losses, as well as the seasonal fluctuation in the materials business. I just wanted to get a little bit more color on the audit issue. I think you referred to them as open audits in the release and the commentary. Can you give us a little bit more color on what's behind that and what effect that it's having on your tax rates?

It is an adjustment, projected adjustment, to our taxes in 2001, 2002. It's not a go-forward issue. It's just an identification of some adjustments to our tax liabilities in those two years; that is not a going-forward issue. And that's the largest piece of the tax adjustment.

Nishu, we look at that every quarter. And we are required to adjust up and down based on what we identify as potential issues on ongoing audit basis.

Okay. And I'm sorry, you mentioned for the Chemicals that, a kind of average tax rate for that business since we were around 33 percent. Is that correct?

That's -- yes -- about 30 --

That will be what it -- that's what it is year-to-date for 2004. That one bounces around more because of the smaller income or loss number. So if there's something that's either taxable or nontaxable in their numbers, it will have a bigger fluctuation on the effective tax rate than it will for the total Company.

And I think it's a fair statement that as Chemicals earnings improve, the tax rate will tend to go up.

Okay. And now, moving onto a broader question, the last couple of quarters, you've been linking your discussions of the price increases that you've been able to achieve with the higher level of other costs, for example diesel, asphalt, health-care. Now I assume you're doing that just for the sake of quantification to give us a sense of quarter of (indiscernible). I just wanted to make sure that it's not reflecting something different; that you're not seeing in your pricing environment more pressure on your ability to pass through price increases. Or in other words -- another way of putting it would be, as these costs begin to mitigate, would you see a decline in your ability to raise your prices going forward?

We have said consistently, which is that our pricing is not linked to our cost. Pricing is determined by market demand, quality, any number of factors, which is -- and to the extent we mention price and diesel fuel costs and health-care costs in the same commentary should not be read as any view that they are linked. They are done totally separately. We do not go to our customers and say, diesel fuel is up, so we're increasing prices. That's just not our strategy, and it has not been for all the time I've been at Vulcan.

Okay. Just wanted to make sure. And final question on the closing date for the sale of the Chemicals business. I know it's just a few weeks ago that you mentioned that. Is there any update on the timetable for that? I mean what are the explicit steps that remain? I know that regulatory approval is one of them. And so, is it still the case that the closing would follow close after the achievement of the regulatory approval?

Our best guess at this point is that closing would take place sometime in the first half of 2005. Obviously, regulatory approval is the principal issue in the timing. But at this point, we have no better estimate than to say the -- sometime in the first half of 2005.

Okay. Great. Thanks.

Thank you. Mr. James, it would seem that we have no further questions in queue at this time.

Well, thank you very much for your attendance today in the conference call. We look forward to talking with you in January -- I believe it will be in January instead of February this year -- and at that point, giving you our full-year results and our outlook for 2005. We look forward to visiting with you then. Thank you.

Thank you. Ladies and gentlemen, this does conclude your call for today, and you may now disconnect.