渥肯建材 (VMC) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the first-quarter of 2005 Vulcan Materials earnings conference call. My name is Andrea and I'll be your coordinator for today. At this time, all participants are on a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded for replay purposes. I will now like to turn this presentation over to the host of today's call, Mr. Don James, Chairman and CEO of Vulcan Materials. Please proceed.

Good morning, and thanks for joining our first-quarter conference call. I am Don James, Chairman and Chief Executive Officer of Vulcan Materials. With me today are Mark Tomkins, our Senior Vice President and Chief Financial Officer; Mac Badgett and Jim Smack, our Senior Vice Presidents of 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 that are subject to risk and uncertainties that can 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 Web site.

Yesterday after the markets closed, we reported record results for the company and increased our earnings guidance for the full year. First, I will make a few comments about the quarter's results, and then I will provide you with an update on our outlook for the remainder of 2005. First-quarter net earnings were $54 million, or $0.52 per diluted share, compared to $15 million, or $0.14 per share, the prior year. Earning from continuing operations were $0.21 per share, compared to last year's $0.20, and earnings from discontinued operations were $0.31 per diluted share, a marked improvement from the $0.06-per-share loss reported last year. First-quarter net sales from continuing operations increased 11%, on higher pricing and record volumes for aggregates. Aggregate pricing improved over 4% from the prior year, as aggregate demand in our markets was strong.

Despite very wet weather in our two largest markets, California and Georgia, shipments increased approximately 8% from the prior year. Excluding acquisitions, shipments increased approximately 7% in legacy operations as most markets experienced solid volume growth from the prior year. Gross profit from continuing operations increased 10% from the prior year, despite higher costs for diesel and the effects of wet weather in California and Georgia.

Because our products are both produced and consumed outside, adverse weather, particularly in the first quarter, causes inefficiencies in production and shipping and postpones demand. Excluding California and Georgia, sales increased 20% and gross profit increased approximately 40%, indicating the favorable earnings leverage in aggregates from higher volumes and solid pricing. Gross profits in California and Georgia were approximately $11 million less than the prior year. In California, sales volumes for aggregates and asphalt were 15 and 21% lower than last year, respectively. January and February were among the wettest months on record for Southern California. Eight inches of rain fell the last five days of December in Los Angeles and set the stage for very wet conditions during January and February. Los Angeles experienced 20 inches of rain in these two months as compared to normal rainfall amount of about six inches. In Georgia, sales volumes were down about 6% due to wet conditions in March.

With the underlying strength and demand in these key markets, we expect to recover the volume shortfall over the remainder of the year. Unit prices for diesel fuel increased 40% from the prior year and reduced earnings approximately $6 million for the quarter. While we achieved higher asphalt mix prices in the first quarter, the benefit was more than offset by the effects of lower volumes and higher costs for liquid asphalt. Liquid asphalt costs increased 24% in the quarter. Earnings from continuing operations were $21 million, up slightly from the prior year.

Selling, administrative and general expenses increased approximately $7 million, due to higher performance-based compensation, and pension and health-care expense. Higher performance-based compensation is the result of the shift we made three years ago to replace half of our option awards, which were not expensed, with three-year performance-share awards, which are expensed, and which are marked to market quarterly. We now have the full three years of performance-share awards outstanding and for continuing operations, the number of performance shares outstanding should remain relatively stable going forward. Other operating expense increased approximately $3 million due to higher environmental accruals and lower gains on the sale of real estate. Lower net-interest expense in the quarter was partially offset by a higher effective tax rate due to higher estimated liabilities for open audit years. In the first quarter, the effective tax rate was 34.2%. However, we expect the full-year rate to be in the range of 31.7%. In the first quarter, earnings from discontinued operations improved to $33 million, an increase of $39 million from the prior year's loss.

Pricing was an important earnings driver in the quarter. Pricing for most products was higher, versus the fourth quarter of 2004, as well as the first quarter of 2004. Caustic soda was particularly strong, increasing dramatically over the low levels of last year. Higher volumes in plant -operating efficiencies more than offset increased costs for natural gas and key raw materials. Earnings results for the company's joint venture were also higher.

Turning to our outlook for 2005, we are very optimistic regarding Vulcan's opportunities for earnings growth. Overall demand in our markets is strong. As a result, we believe growth in Vulcan's aggregate shipments should be at the high end of our previous guidance of 2 to 4% for the year. With this overall demand increases, the mix by end market calls for private, nonresidential and highways to provide the year-over-year increases over the high-end of our range. Residential construction should remain at high levels, with volume growth approximating the low end of our range.

The House of Representatives has passed its federal highway bill, calling for approximately $284 billion in federal highway funding, while the Senate versions of the bill are currently on the Senate floor at essentially the same, or in some cases a slightly higher, number. We, along with many other transportation-industry participants, are actively lobbying the Senate to pass a bill that can be sent to the President for signature before May 31. Passage of a new multiyear federal highway bill should add stability and predictability to highway construction activity for the next several years. We are raising our full year outlook for aggregate price increases to 4 to 5%, based on the pricing levels achieved in the first quarter. We are currently forecasting cost increases for diesel and liquid asphalt in each of the remaining quarters of 2005.

Plant efficiencies and lower operating costs in all our plants should provide additional improvements in earnings in 2005 and help to offset the projected increases for these energy-related expenses.

We are encouraged by the changes to our health-care plans for 2005. Our outlook for health-care costs assumes a full-year increase of approximately 8% versus the prior year. In the first quarter, the rate of increase was approximately 5%, giving us encouragement that we have the opportunity to reduce the rate of increase for the year. We still have a lot of work to do in this area and are evaluating other changes for 2006 and beyond.

In light of these changes to our assumptions, we are raising our earnings guidance from continuing operations to $2.95 to $3.20 per diluted share for the year; our prior guidance was $2.80 to $3.10 per share. Effectively, we are increasing the low end of our range by $0.15 per share and the high end by $0.10 per share. In the second quarter, we expect to earn $0.90 to $1 per diluted share from continuing operations and $0.30 to $0.40 per share from discontinued operations.

Earnings from discontinued operations, and therefore 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 mid-year. 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 realized 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 the CMAI Chlor-Alkali market reports for ECU values and an index for natural-gas products.

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 of our press release, we have included information to help you understand 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 5CP product through 2012. On an undiscounted basis, we currently estimate approximately $50 million from this earn-out.

Earnings growth in our construction-materials business for 2005 should lead to another strong year of operating cash flows. We are focused on using this cash to add value for our shareholders. This will come from investing in plant-improvement projects with high rates of return, investing in acquisitions, such as the recently completed U.S. acquisition in Arizona; increasing dividends and repurchasing shares. Our new quarterly dividend represents a 11.5% increase over dividends paid in 2004 and marks the 13th year in a row we have raised dividends for our shareholders. Here in the first quarter, we resumed our share-repurchase program and we plan to continue to purchase shares depending on market conditions and investment opportunities. As reported in the first quarter, we purchased approximately 872,000 shares on an average cost of $56.74 per share.

Now if our operator will give you the necessary instructions, we'll be happy to respond to your questions.

Ladies and gentlemen, this is your question-and-answer session. Please give me a moment to compile a list of questions. Our first question comes from Jack Kasprzak from BB&T.

Good morning, Don.

Good morning, Jack.

How are you?

I am great.

Very nice quarter. Congratulations.

Thank you.

My first question is can you tell us what percent of your sales are from California and Georgia?

Let me try to give you a more precise number -- [PAUSE] 32%. That of, course, will vary somewhat by quarter.

But that would be basically for an annual run. Right?

That's for the quarter.

For the quarter.

Yes, so it would be higher than that on a normalized basis.

And the amount of debt that appears as a current portion on your balance sheet this quarter. Do you anticipate retiring that this year? Mark Tomkins will answer that. .

Good morning, Jack. Good morning, Mark. That's due next February and that's when we will retire it.

Okay. Great. Mark, while I have you can you update us on the "Cap Ex" plan for this year?

That's still 200 to 225.

200 to -- 2

25.

And the decline in California and Georgia is kind of startling, particularly in light of the performance for the rest of the company. And I was just curious what you are seeing. I mean you kind of alluded to it -- housing is pretty strong; nonresidential is coming back. But any other color you guys could give would maybe be helpful. Again, given that decline in such a large part of your business, you were able to post such a nice quarter. Is it more broad-based strength that is emerging, generally speaking, or what other color can you maybe give us?

Jack, the markets are strong everywhere, and they are strong in California and Georgia. If you look at weather, any weather statistic for California and particularly Southern California, shows that we had the wettest January and February virtually since weather statistics have been recorded, and not just by a little bit. But it was -- that was huge. March was a better month in California, and we had -- virtually all the money we made in California, we made in March. In Georgia, we had a relatively good-weather January and February and we had a great quarter going, and then we got rained out in the month of March.

So the demand is strong. Certainly we believe that the volume that we lost in those two key markets in the first quarter will be recovered as we go forward in the year -- probably in Q2, maybe some carrying over to Q3. But the market is -- markets are very good now, and it is broad -based. And as we said, private non-res is recovering; highways -- not withstanding the long extensions of the highway bill, given the appropriations in place and the improving state and local budgets -- highways and roads are growing steadily; and residential, although we expect some flattening there, will continue to be a strong demand driver, we think, throughout 2005.

Okay. Great. Thanks a lot.

Our next question comes from John Fox from Fenwick. Please proceed.

Don, I wanted to clarify -- in California and Georgia, that was 32% of this quarter's sales?

Right. And it is about oh, 35% of full year would be a normalized number for those two states.

And 32 for this reported quarter.

Yes.

And can you refresh my memory on the acquisition you made out west. Did -- can you give the size or any metrics around that?

We bought U.S. materials -- New West had three aggregate operations and three asphalt operations in Phoenix and two aggregate operations and two asphalt operations in Tucson. That was a both-own acquisition. We could run it out of our existing management structure in Arizona. We gained approximately 4 million tons of aggregate on an annual basis and about 1.3 million tons of asphalt on an annual basis. We paid in round numbers about $50 million for that and we have been well pleased with the first month's success of that business.

Okay. Your cash-flow statement says $47 million for acquisition. That was basically just the New West?

Yes.

Thank you so much.

[OPERATOR INSTRUCTIONS] This is from Jack Kelly from Goldman Sachs. Please proceed, sir.

Good morning, Don.

Good morning, Jack.

Mark, this might be a question for you. Maybe I didn't get the math right here, but ... You had mentioned ex California and Georgia, gross profit would have been up 40%. Then you singled out those two states, saying they hit gross profits by $11 million. If I add that $11 million back to the gross profit that you reported of -- $92 million, and then kind of, which gave us $103, and you calculate that as per ... last year ... You come up with a little over 20% gain in gross profit , adding back that number. So I am just wondering where the 40 came from?

Jack, give us a second.

Okay.

While we are working on that, do you have other questions, Jack?

Yes, if we look at the -- and then the thrust of this question is maybe why I didn't raise your forecast even higher. If you look at the first-quarter sales gain, you were up about 11%, and that's with Georgia and California taken away from the overall picture, and you indicated you expect to get the volume back. 11% is maybe a conservative number. But it looks like your forecast, if I pick the high end, is for revenue increase of about 9%, meaning, I would say, 4% from volume and 5% from pricing. I know you want to be conservative, but given the way things are going, it really looks very conservative. So maybe it's a year-over-year comparison thing that I'm missing, but just your general comments on that.

There is a product-mix issue that works through there. And in California, we are -- have a large asphalt business, which we generally don't have in other markets in the east. And asphalt revenues are relative; obviously asphalt sells for much higher per ton than aggregate, so that can distort somewhat. And I think , our Mark and Ejaza Kahn and have come up with an answer to your first question.

Jack, we've have adjusted both years to get at that.

So -- what do you mean? Why would you have adjusted last year, Mark? In other words, the $82 million you reported, or 83 last year, was it?

Last year's numbers included earnings from Georgia and California.

The $83.9.

Right. So you have to deduct the earnings from Georgia and California from that number to compare to the same base number for this year.

The $11 from year to year. In other words, Jack, we are taking our non-California/Georgia results versus our non-California/George results.

I see.

So if you took the change in those pro-forma results, so to speak, you get a 40% change in those markets.

But both of those states in the $92.2 -- those states did contribute some profit?

Yes.

Yes.

Got it, okay. And finally, on share repurchase. You purchased close to $50 million in the quarter. Don, you said you were going to continue, depending on market conditions, and you could be getting $155 million here somewhere around mid-year. Can you give us, without putting a precise number on it, can you give me any order of magnitude, because $50 is very substantial and maybe it is an anticipation of getting the $155. But is that something we can kind of expect on a quarterly basis for the next couple of quarters, assuming the market conditions are right?

Well, as we said in our prepared statements, we expect to continue share repurchases. The magnitude of that will be dependent on the outlook for other investment opportunities which we might find attractive, and market conditions. So, I can't at this point give you any more precise guidance as to the magnitude of that going forward, simply because it can well change for us. And which we have substantial liquidity, as you know, and we can buy shares back with available cash, even without or receiving the cash proceeds from the sale of the chemicals business.

But, if an acquisition opportunity didn't show up on your doorstep over the next three or four quarters .. and so if I kind of took that out of the equation ...

We would prefer not to have large amounts of cash on our balance sheet, and we think returning it to shareholders is the right thing to do if we do not have better investment options available to utilize that cash.

Alright.

Good.

Thank you.

[OPERATOR INSTRUCTIONS] Our next question comes from Jeff Smith from Sanford & Bernstein. Please proceed.

Yes, I was wondering if you can talk and give us a little more color about the pickup in nonresidential construction, maybe talking a little bit about where you are seeing it, where you are not seeing it -- color on the magnitude, and how much it helps in the quarter?

Well, as you know, Jeff, private nonresidential took a very steep drop basically beginning in the second half of 2001 with the downturn in the stock market , 9/11 and the downturn in the economy. As we look at that performance or that in use market, it dropped further faster and has stayed down longer than in almost any other downturn in over the last several decades. We are seeing it come back. It has has been reasonably strong in retail, particularly big-box retail, which are wonderful projects for us; certainly industrial activity, as it relates principally to energy, In the energy states, primarily Texas and Louisiana; a number of projects are underway there which are large aggregate users -- liquid natural gas products being certainly one of those. Vacancy rates in office buildings are variable greatly from market to market, but we are seeing vacancy rates tighten up and actually some construction getting underway in office buildings, although that is probably the lagging portion. Another on the -- this is housing and not private non-res, but in a surprising number of metropolitan markets, there are downtown sort of condominium projects being built, and that is sort of a new factor for us, in addition to the normal growth. And it is a suburban single-family housing that it is strong -- very strong over the last year, year and a half or two years.

Thank you.

Thanks, Jeff.

Ladies and gentlemen, this concludes your question and answer for today's call. I will turn it back to Donald James for closing remarks.

Thank you all for joining us. We were very pleased with the quarter. We believe we have, as we indicated, a lot of opportunity for earnings growth in the remaining three quarters of 2005, and we look forward to talking with you again at the end of the second quarter. Thank you. Have a good day. .

Ladies and gentlemen, thank you for your parts in this conference call. You may now disconnect. Good day.