渥肯建材 (VMC) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Q4 2004 Vulcan Materials Company Earnings Conference Call. My name is Anita, and I'll be your coordinator for today. At this time, all participants are in a listen only mode. We will be facilitating a question-and-answer session towards the end of today's conference. At that point if you wish to ask a question, please key "star" followed by "one" on your touchtone telephone. If at any time, during the call, you require assistance, please press "star" followed by "zero" and a coordinator will be happy to assist you.

As a reminder, this conference is being recorded for replay purposes. I'd now like to turn the presentation over to host for today's call, Mr. Don James, Chairman and CEO. Please proceed, sir.

Good morning. Thank you for joining our fourth quarter conference call. I'm Donald James, Chairman and Chief Executive Officer of Vulcan Materials Company.

With me today are Mark Tompkins, our Senior Vice President and Chief Financial Officer; Mac Badgett and Jim Smack, Senior Vice President for 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 will 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 my brief comments, we will be happy to answer 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 the end of this call at our website.

Yesterday, after the markets closed we reported record net earnings for the company. Fourth quarter net earnings were 85 million or 82 cents per diluted share, an increase of 46% from the prior year. Earnings from continuing operations were 65 million or 62 cents per diluted share compared to last year's 61 cents. Earnings from discontinued operations were $21 million or 20 cents per diluted share, an increase of 26 million from the prior year.

As a result of our fourth quarter announcement of a contract to sell our chemicals business, it is now included on an after-tax basis in discontinued operations. Continuing operations are now comprised of our construction materials business. Fourth quarter net sales for construction materials increased 5% on improved pricing and record volumes for aggregates. Asphalt and ready mix concrete prices increased while volumes were lower in both products. Ready mix concrete volumes were down due to the sale of our ready mix plants in Tennessee earlier in the quarter.

Aggregate pricing improved over 3% from the prior year and volumes were up over 2%. These solid gains in both price and volume reflect the strength of our aggregates business. Unit prices for diesel fuel increased 50% from the prior year and lowered earnings over $6 million for the quarter. Liquid asphalt costs increased 22%, squeezing unit margins in asphalt. The lingering effect of four hurricanes and an unusually high number of rain days in California, Texas and some parts of our southeast markets resulted in lower aggregate production and higher unit costs for the quarter.

Earnings in the quarter benefited from higher interest income and lower interest expense and a lower effective tax rate. Our businesses continue to generate strong cash flows. For the year operating cash flows, less capital expenditure increased $52 million to 377 million, due to higher earnings. Full-year net earnings increased 46% to $2.77 per diluted share, also a record for the company. Earnings from continuing operations increased 10% from the prior year to 261 million or $2.52 per diluted share and earnings from discontinued operations were 25 cents per diluted share for the year.

Lower net interest expense resulting from the retirement in April of 2004 of 243 million of debt was partially -- partly offset by modestly higher effective tax rate versus the prior year. Earnings before interest and taxes for continuing operations were a record 411 million compared to 385 million in 2003.

Let me use another perspective on the full-year earnings for those of you comparing to historical segment results. Construction materials earnings in 2004 on a comparable basis to last year's reported segment earnings would have been approximately 415 million compared to 389 million in 2003. This perspective may be helpful because certain overhead costs were reallocated from discontinued operations to continuing operations in the fourth quarter as part of the GAAP accounting for our chemicals assets held for sale.

Net sales for construction materials increased 6% to 2.2 billion for the year. We shipped a record 243 million tons of aggregates in 2004 and achieved price increases of almost 3% for the year. Net sales for asphalt were flat as slightly lower volumes offset modest price increases. Ready mix concrete volumes increased 4% and prices were higher on strong demand in our California and Arizona markets.

Earnings increases for higher volumes in aggregates and ready mix concrete and improved pricing for aggregates were partially offset by higher costs for diesel fuel and liquid asphalt. By year-end, the average unit cost for diesel and liquid asphalt were at very high levels. Average unit costs for both increased every quarter in 2004 or 24% for diesel and 7% for liquid asphalt for the year.

During the year, improvement projects at four large plants had an adverse effect on earnings, particularly in the second quarter when volumes were approximately 1/3 less than the prior year in these four plans. For the year these projects reduced earnings a total of 15 million. These projects have all now been completed and we expect improved performance from these plants in 2005.

Selling, administrative and general expenses increased approximately $18 million, due partially to higher costs for healthcare, performance-based compensation. Vulcan, like many other companies, has experienced higher healthcare costs. To slow the rate of increase of these costs, we have implemented changes to our healthcare plans for 2005. The anticipated savings from these changes is approximately 4 million in 2005. Overall, we expect healthcare costs to increase about 8% for full year 2005.

In the fourth quarter earnings from discontinued operations improved to 21 million, an increase of 26 million from the prior year. Pricing for most products was up versus the fourth quarter of 2003, led by caustic soda and chlorinated organics. Pricing for chlorine, caustic soda and chlorinated organics also improved on a sequential basis from the third quarter again led by strengthening caustic soda prices.

We continue to be pleased with the growth of our 5CP product. Fourth quarter sales volumes were up versus the prior year. The company's joint venture also benefited from higher volumes and higher pricing for caustic soda, more than offsetting higher cost for raw materials, electricity and natural gas. Unit costs for natural gas and electricity increased 16% and 9% respectively versus 2003.

Certain key raw materials particularly methanol were higher in the quarter, reducing earnings approximately 2 million. Approximately 11 million of the earnings improvement versus the prior year was due to lower environmental accruals and depreciation. For the year, earnings from discontinued operations were 26 million, an increase of 50 million from the prior year. As a result of plan improvement projects started in 2002, we ran our plants at higher rates in 2004 and took advantage of strong demand and higher pricing for our products. Higher prices for Chlorine and chlorinated organics more than offset lower average prices for caustic soda.

For us, caustic soda pricing has two sides to its story. With the steep drop in pricing in the first half of 2004, average pricing for the full year is down versus 2003. However, prices as reported by CMAI have now tripled since hitting bottom in the second quarter. Chlorine prices increased steadily during 2004.

As a result of strengthening caustic soda and higher chlorine prices, 2004 ended with record high ECU values. Improvements in plant cost and higher operating rates more than offset higher costs for key raw materials and natural gas. Higher natural gas prices lowered earnings approximately 2 million for the year. Chemicals business was tested for impairment at December 31, 2004, comparing the fair value of the anticipated sales proceeds to the carrying value of the net assets of the discontinued business and there was no impairment.

Finally, before I discuss our outlook for 2005, I would like to acknowledge the performance of our chemicals employees in the area of safety and environmental performance. OSHA injuries were 40% lower than our previous best year and at a rate that is among the best in the chemicals industry. Additionally, our plants operated without an EPA reportable environmental release for the entire year.

Looking to our outlook for 2005 we see another good year for aggregates demand and as a result growth in earnings and strong operating cash flows. Demand for Vulcan's aggregate should increase 2% to 4%, above the record 243 million tons shipped in 2004. Construction spending should continue to benefit from economic growth. Our forecast is based on residential construction remaining at high levels and a modest recovery in private, nonresidential spending.

Highway construction should benefit from improving state and local tax receipts while the passage of a new multiyear federal highway bill should add stability to construction activity. Aggregate -- average pricing for aggregates should increase at a similar rate to 2004 and more than offset projected cost increases for diesel and liquid asphalt. Plant efficiencies and lower operating costs in all of our plants should provide additional improvement to earnings in 2005. Referring back to my earlier remarks about higher health care costs, changes to our company's plans for 2005 should have slowed the rate of increase and we are evaluating other changes for 2006 and beyond.

In light of these assumptions, we expect earnings from continuing operations to be in the range of $2.80 to $3.10 per diluted share for 2005. In the first quarter we expect to earn 30 cents to 53 cents per diluted share, 10 cents to 25 cents per share from continuing operations depending of course on weather conditions in the first quarter, and 20 cents to 28 cents per share from discontinued operations.

First quarter earnings from discontinued operations assume ECU values increase from the fourth quarter as market demand for Chlorine and caustic soda remain strong. Earnings from discontinued operations and for the company as a whole in the second quarter will depend upon the timing of the completion of the chemical sale. Subject to regulatory approval, we currently anticipate the completion of the sale by midyear. Until such time, we will continue to give earnings guidance for continuing operations and discontinued operations.

Subsequently, we anticipate providing estimates of the cash to be received from the two earn-outs referable to the sale. Payments referable to the ECU earn-out will begin 12 months after the close. This earn-out is based on CMAI Chlor-Alkali market reports for ECU value and an index for natural gas prices. When we announced the sale of chemicals in October, we anticipated additional information would be useful to investors estimating potential cash proceeds from the earn-outs.

In attachment A to our press release, we have included information which we hope will be beneficial to understanding the drivers of value and the magnitude of sensitivity for the ECU earn-out. The second earn-out is based on the performance of our five CP product through 2012. On an undiscounted basis we currently estimate approximately $49 million in proceeds from this earn-out.

Many of you have asked about option exercises by Vulcan employees over the past few months. As we have disclosed in our SEC filings, each year since 1996, Vulcan has issued employees stock options with 10-year expirations. The 1996 options will expire in 2006 and we expect employees to continue to exercise those options. The total outstanding options for the eight-year period as disclosed in our most recent 10-K filing were $7.2 million. Now, if our operator will give the required instructions, we would be pleased to respond to your questions.

At this time, ladies and gentlemen, please key "star" followed by one, to ask a question. If you wish to withdraw, please key "star" followed by "two." One moment while we compile a list of questioners.

Our first question comes from the line of Jack Kelly of Goldman Sachs. Please proceed.

Good morning, Don.

Good morning, Jack. How are you?

Good. First question, you had mentioned maybe unit volume in the fourth quarter was trimmed a bit by kind of a hangover from weather, etcetera. Should that show up in the first quarter, number one, and, number two, how much do you think it trimmed fourth quarter volume? And then secondly, Mark, the continuing ops forecast you gave 280, 310, obviously didn't include any benefit of the cash you might receive in the second half of the year. I just wanted to make sure of that, because obviously that's going to increase the 280 to 310. I mean, at some point that interest savings, etcetera, or interest income becomes part of continuing ops. I just wanted to make sure I had that right. And then, secondly, with regard to earn-outs, do all the earn-outs begin to hit in '06 or do we get a portion of the second earn-out in 2005?

Jack, fourth quarter, sales volume in construction material versus production volume, I think it's important to distinguish between those two. Our sales volume in the fourth quarter was actually very good, given the weather. We were up as you know in the fourth quarter in sales volume. The major impact of the weather was in production volume, and we were down almost two million tons of production in the fourth quarter compared to the fourth quarter of 2003 and that was driven by really bizarre and adverse weather conditions. I think southern California got more rain in the last part of the fourth quarter than they normally get in a year which is unusual circumstance and that really impacted our ability to produce and to produce efficiently what we did produce. We also had some weather impact and flooding in Texas and in some of the southeastern markets. So we had a tough production quarter although sales were good and whenever our volume falls that much in a quarter, we see it in an increase in unit production costs because of the reduced absorption on the one hand, plus just the higher cost of operating when it's really wet, our material just doesn't flow as well through the production process. Before I turn it over to Mark to answer your question to him, the earn-outs -- the cash from the earn-outs, from the ECU earn-out will begin one year after closing which would be we expect mid year '06 and cash from the five CP earn-out should begin in '06, in Q1 '06. So with a mid year projected closing date, cash flows from the five CP earn-outs should begin in Q1 '06 and probably in Q3 '06 for the ECU earn-out. And Mark, you want to take the other question?

Good morning, Jack. The -- you're right. The 280 to 310 does not include anticipated usage of the 155 net cash proceeds from the sale.

Thank you.

And our next question comes from the line of Jack Kasprzak of BB&T. Please proceed.

Thanks. Good morning, Don.

Hi Jack. How are you?

I'm well, thanks. Congratulations on a great year.

Thank you.

I was wondering, first, if you could tell us what ECU prices were at the end of the quarter and whether there were any price increases announced in the industry specifically in caustic soda?

ECU prices I believe for the fourth quarter, CMAI's report was about 640. They were probably a little higher than that in December, but for the quarter they were at 640. There has certainly been price increases in caustic soda that have been announced and have been accepted by the marketplace. There is some rumor of additional caustic soda price increases, but none have been announced so far in first quarter of 2005. But caustic remains in great demand and in short supply, which is a result of recovery in demand as industrial production is continuing to pick up and short supply driven by the closure of a substantial portion of the US Chlor-Alkali capacity in the last downturn

Okay. Great. Turning to construction materials, you mentioned 2 to 4% for your 2005 outlook. I think that was referring to a volume increase of 2 to 4%.

That's correct.

Okay. So, can we expect pricing to be up on the order of 3% again?

Yes, 3 to 4%. We said pricing would be -- price increases would be comparable to 2004, so 3% is a good target.

Okay. And with regard to SG&A, basically for modeling purposes, what would you guide us, if you could, to an SG&A level perhaps as a percentage of sales for 2005 or a range; just any guidance you could give?

Well, for continuing operations, SG&A will probably be up 2% in 2005 over 2004.

So total SG&A up 2%. That's in dollars I assume?

Yes.

Okay. So you're looking for a 2% increase in dollars.

Right.

Okay. And did you guys; two more questions, did you buyback any stock in the quarter, and what is your CapEx expectation for 2005?

We did not buyback stock in the quarter. Our CapEx for continuing operations for 2005 would be in the range of $200 million, $225 million.

Great. Thanks guys.

Thanks Jack.

And our next question comes from the line of Brad Coltman. Please proceed.

Good morning, and thank you. On the chemical side of the business, I believe the pending sales are subject to some regulatory approval. Is there any progress on that or impediments that have come up?

It is pending before the Federal Trade Commission. We expect that to be handled in due course and we expect to close by the middle of the year.

Okay. So no major issues yet. With regard to the earn-outs, I know you gave the timeframes for them to begin but could you remind me? I thought one or the other was weighted a little bit earlier in the timeframes, the longer term.

The 5CP earn-out goes through 2012, and payments under it will begin in Q1 '06. The ECU earn-out runs for five years, and payment -- it has $150 million cap; there is no cap on the 5CP earn-out, and payments under the ECU earn-out should begin in the third quarter of '06, based on a mid-year close from 2005. Let me ask -- Mark Tomkins has a comment on that.

Just to clarify, the cash payments begin a year after the closing, but the -- but that's in arrears. So the earn-out -- we start earning right after close and that payment is for the prior 12 months.

What I was getting at, I thought for one of the earn-outs it was a fairly equal payment over the lifespan of that.

That would be the 5CP earn-out, and it is -- the main driver there is volume. And we are, in '04, we certainly increased volume and we have a -- we believe the volume in that product should be relatively stable over the earn-out period.

So the ECU is the one that could possibly be weighed a little bit earlier in that five-year time period.

Yes. The ECU we would expect to pay out faster than the 5CP. All of this assumes, of course, that we actually hit the numbers to get the earn-outs. But the ECU earn-out is based on market prices of ECU and market prices of gas, not the actual performance of the business.

Okay.

And the 5CP is essentially based on -- the major factor there is volume.

Do have you a preliminary estimate if things stay steady from today what the ECU payment would be in '06?

We gave you a table so that that is predictable. If we look at based on current prices, and that's the only way we can predict it, as I said, I think Q4 ECU prices for contract low as published by CMAI was $624 per ECU and natural gas prices for the fourth quarter for the South Louisiana Henry Hub were 707, and if you plug that into the chart, you would -- if those numbers held for the first year of the earn-out that would put you somewhere in the -- between 78 million and 96 million for the year based on the type.

Okay. I'll get back in queue. Thank you.

Once again, ladies and gentlemen to ask a question please key "star" followed by "one" on your touchtone telephone. Our next question comes from the line of Ken Rumph of Merrill Lynch. Please proceed.

Hello gentlemen. If I could ask three quick questions; firstly, just on your 2 to 4% volume growth, for the -- I see what you say about housing and private nonresidential. For the public side of it, do your comments about state spending apply irrespective of whether the success of the C21 is authorized or does it assume that -- and basically just wondering, how the federal level affects that, maybe perhaps not this year I guess given the timing.

Second question, the growth you show, if we look at the continuing earnings, last year you had 4% of volume growth continuing earnings were up about 9%. Next year you're expecting 2% to 4% and continuing earnings are up depending on where you come in the range of 10% to 22%. Is the main reason for that the projects that you have? Because if I take that $15 million and take off tax, that, perhaps, seems to explain a fair bit of the difference in earnings growth despite the similar volume picture. But is there any other factor that you think is going to mean faster earnings growth next year versus this year? And maybe the healthcare one you mentioned.

And a final question was even before the chemicals disposal and earn-outs, your balance sheet looks very strong, whether it's a look at leveraged measures or interest cover. Can you sort of comment any further on your use of cash beyond the CapEx comment you already made?

Yes, Ken. Thank you. We certainly expect state spending on infrastructure projects to improve independent, largely, of the reauthorization of the federal highway bill, because state budgets -- state tax receipts are improving in most of our states, not all, but most of our states. The spending level, the federal spending level for '05 is largely already established in the FY'05 appropriation level and we believe that the federal highway bill, the multiyear federal highway bill, will be reauthorized but '05 spending levels we believe for highways are largely independent of the reauthorization of that for '05. Certainly, we are eager for that bill to pass, because it creates certainty for the state DOT's to let projects that are sitting on their shelves awaiting assurance that the money from the federal government will be available for multiyear projects.

With respect to earnings from continuing operations, which is an essence our construction materials business for '05 compared to '04, I think you are correct that we expect the four large plant projects that have been completed which impacted our earnings negatively in '04 to impact our earnings positively in '05 but there are certainly other factors that go into our projection for '05, certainly volume and price, but, also, better cost performance, not only at these four large plants but across the other 240 or so operations that we have, we do while we expect diesel fuel to be up somewhat in '05 and healthcare to be up somewhat in '05 we do not expect the rate of increase that we had in '04.

So it is a combination of volume growth, price improvement, bringing these four major plants online with good cost performance and other reduction and other costs of our operations in construction materials.

Your last question was on use of cash. We certainly believe that we can create value per shareholders by investing our cash flows in acquisitions in Greenfield projects and we remain dedicated to doing that, that's certainly in our strategic plan. We also believe as we have in the past that increasing cash to our shareholders is appropriate and we will do that through dividends.

Our board will meet in February to consider our dividend policy for '05. And we will have an announcement about that following the board meeting. Share repurchases, we believe is always an appropriate use of cash and we will consider that as a use of cash, as well. We are very likely to use cash for all three reasons or really all four, including internal reinvestment in our business, growth through acquisitions in Greenfield sittings, dividends and share repurchases.

Great. That is a full answer. Thank you very much.

Our next question comes from the line of Leo Larkin of Standard & Poor's. Please proceed.

Good morning. Could you give us the guidance for DD&A in 2005, also interest expense and the tax rate?

DD&A for 2005 for continuing ops should be about the same as in '04, about $210 million -- $210 million, $215 million. Capital spending for '05 for continuing ops should be in the range of $200 million to $225 million. I'm looking at Mark Tomkins as I say these to make sure I'm accurate on these. Leo, did you have another --

Yes. Just expense and the tax rate.

Okay. The tax rate for '05 for continuing ops, we project at about 31%.

Interest expense should be about $35 million and net interest should be around $20 million.

Thank you.

At this time, gentlemen, there are no further questions.

Well, thank you very much for your interest in Vulcan in calling in today. We look forward to talking with you after the first quarter. Have a good day.

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a great day.

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