渥肯建材 (VMC) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the quarter two 2005 Vulcan Materials earnings conference call. My name is Annika, and I will 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. [ OPERATOR INSTRUCTIONS ] As a reminder, this conference is being recorded for replay purposes.

I'd now like to turn the presentation over to your host for today's call, Mr. Don James, Chairman and Chief Executive Officer. Please proceed, Sir.

Thank you and good morning. We appreciate you joining our second quarter conference call. I'm Don James, Chairman and Chief Executive Officer of Vulcan Materials. With me today are Dan Sansone, our Senior Vice President and Chief Financial Officer; and Mac Badgett, Senior Vice President, Construction Materials.

In May, as you know, Dan was appointed Senior Vice President, Chief Financial Officer and Treasurer. Dan joined Vulcan in 1988 as Corporate Controller and served as Vice President Finance and Chief Financial Officer from 1994 to 1997. Since 1997, he has served as President of Vulcan Southern and Gulf Coast Division in the Construction Materials Group. This successful track record as both a division president and as Chief Financial Officer and his substantial experience in both financial and operational roles will be invaluable for us as we focus on growth in our Construction Materials Business, going forward. We certainly welcome Dan back to the corporate office and to this conference call.

Before I begin, let me remind you that certain matters discussed in this conference call 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 some brief comments, we'll 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 2 hours after the end of this call at our website.

First, a few comments about the quarter's results and then I will give an update on our outlook for the remainder of 2005. Yesterday, after markets closed, we reported record second quarter results for the Company and increased our earnings guidance for the full year. Our Construction Materials operations achieved excellent earnings growth due to higher volumes and higher pricing, as well as improved productivity. Higher volumes and pricing led to record second quarter net sales and earnings from continuing operations, before income taxes.

Net sales increased 21% from the prior year level, while earnings from continuing operations, before income taxes, increased 32% to $148 million. Earnings from continuing operations were $0.98 per diluted share, compared to last year's $0.81 per share. Last year's second quarter earnings from continuing operations benefited from a significantly lower effective tax rate. The tax rate in the second quarter of last year was unusually low, due to an adjustment to reduce estimated tax liabilities for open audit years, as well as the completion of other audit years. There was no comparable tax adjustment in the current year.

Second quarter net earnings, which includes discontinued operations, were $122 million, or $1.17 per diluted share, compared to $88 million or $0.85 per share for the prior year.

Before I go to our Construction Materials results, let me first cover Discontinued Operations, which consists of our former chemicals business. As you know, in June we announced the completion of the sale of our chemicals business to a subsidiary of Occidental Chemical Corporation. For the 2 months of operation prior to closing the sale, earnings net of taxes were $20 million. Included in these second quarter earnings results were, approximately, $11 million of pretax, exit and disposal costs. Monthly operating earnings were in line with our expectations.

As for the accounting for the transaction at closing, let me briefly summarize what we described in the press release. Total proceeds, including contingent future earn-outs from the sale of the chemicals business, are expected to exceed the net carrying value of the assets and liabilities sold. Since accounting requirements preclude the recognition of contingent gains, the pretax value recorded at closing, referable to the two earn-out agreements, was limited to $128.2 million. Accordingly, no income or loss was recorded from the transaction.

In the third quarter, we currently estimate a charge of approximately $0.02 per diluted share in discontinued operations, referable to remaining exit and disposal cost. Ultimately, income or loss will be recorded as cash proceeds from the two earn-outs differ from initial amounts recorded at closing. Valuation adjustments to the ECU earn-out will be recorded in continuing operations, and the 5CP earn-out will be reported in discontinued operations.

Now, let's talk about the results of our Construction Materials business and our outlook for the remainder of 2005. Strong demand led to sharply higher prices and shipments of aggregates. Aggregate pricing improved, approximately, 8% from the prior year, while shipments grew 10%. Shipments from Legacy operations increased 9%, as most of our markets experienced solid volume growth from the prior year.

On the cost side, unit prices for diesel fuel increased approximately 45% from the second quarter of the prior year and reduced earnings $8 million for the quarter. Cost for certain operating parts and supplies, particularly those made of steel, were also higher than the prior year. Improved productivity in our aggregate plants, partially offset these sharp increases in prices for diesel fuel and certain parts and supplies. When you factor in this stronger volumes and pricing, as well as improved productivity, favorable earnings leverage results.

Our gross margins increased approximately -- from approximately 28% in the prior year, to 30% in the second quarter of this year. Asphalt volumes in the second quarter were also up significantly from the prior year, due to strong overall demand in Arizona, California and Texas and favorable weather comparisons in Texas. Pricing for asphalt was up, but was offset by higher raw material prices, particularly liquid asphalt, which increased 20%. Asphalt operations recently acquired in Arizona from U.S. Materials also contributed positively to our Construction Materials results.

Selling, administrative and general expenses increased to approximately $6 million, due mostly to higher stock-based incentive compensations. As a percentage of net sales, S&G expenses decreased from 8.6% last year to 7.9% this year.

Last year in the second quarter, we sold excess real estate in several states, including California and Arizona. We had no comparable sales in this year's second quarter. The net effect was a $5 million reduction in pretax earnings for the quarter.

Turning now to our outlook, we remain very optimistic regarding the outlook for full-year earnings growth. Overall demand in our markets has continued to grow. As a result, we now believe Vulcan's aggregate shipments should grow 5 to 7% above last year. Within this overall demand increase, both private and public end-markets continue to show strength. Private, nonresidential construction continues to improve while residential activity remains solid.

On the public side of the construction spending, highways are showing signs of growth. Higher state tax revenues experienced in the first six months of 2005 appear to be providing a catalyst for new priority highway projects. For example, in California, which is our largest state in sales, the Governor has signed a 2005 budget act, fully funding Proposition 42, which directs an additional $1.3 billion from gasoline sales tax into much-needed transportation projects in that state. In a press release dated July 14, the California Transportation Commission is projecting to earmark $4.1 billion for transportation during FY 2006, which started July 1 of this year.

This compares to $900 million earmarked for the fiscal year just ended. Additionally, the California Transportation Commission noted that all projects being funded are ready to go to construction, meaning the engineering is done and construction is ready to start. Additionally, increased federal appropriations should result in higher spending for the year for highways. A new multiyear federal highway bill appears headed for passage by the end of this week and should add stability and predictability to highway construction activity over the next several years.

We are raising our full year outlook for aggregate price increases to 6%, based on the pricing levels we achieved in the first half of this year. We are including cost increases for diesel fuel and liquid asphalt in our forecast for each of the remaining quarters for 2005. In light of these changes for our assumptions, we are raising our earnings guidance from Continuing Operations to a range of $3.00 to $3.25 per diluted share for the full year. In the third quarter, we expect to earn $1.10 to $1.25 per diluted share from Continuing Operations.

Earnings growth in our Construction Materials Business for 2005 should lead to another strong year of operating cash flows. We are focused on utilizing this cash to add value to our shareholders. This will come from investing in plant improvement projects with high rates of return; investing in acquisitions, such as the recently completed acquisitions we have announced in Arizona and Georgia; increasing dividends and repurchasing shares.

During the first 6 months of the year we have repurchased approximately 1.2 million shares, at a total cost of approximately $69 million. The number of shares remaining under the repurchase authorization is $7.3 million. Now, if our operator will give you the required instructions, we'll be happy to respond to your questions.

[ OPERATOR INSTRUCTIONS ] Our first question comes from the line of Dave Macgregor of Longbow Research. Please proceed.

Yes, good morning.

Good morning, David. How are you?

Good, thanks. Is it fair to think about cash from operations in the second half as being approximately $250 million?

Let me ask my financial guys to take a look at that and I will get back to you on that, David.

Okay. I guess where I'm going with this is just given the cash you've got on the balance sheet now. And you've got some current portion of debt. Do you use that cash to pay down that debt? And what you do about putting the balance sheet more to work in the future?

Well, that's a key strategic issue for us. With respect to debt reduction, I think we have about $240 million that's due in the February of '06. We will certainly pay that off with available cash. We have another small amount of debt, I believe due late this year or maybe end of '06.

Clearly, we do not wish to have a lazy balance sheet. We continue to work very hard on the internal plant projects that will yield very high returns on the cash utilized. We continue to work very hard on acquisitions that we believe will be value creating for shareholders. But we recognize the issue and it is a strategic goal of ours to put our balance sheet fully to work.

Okay. Can you talk a little bit about the acquisition market? And if possible, can you give a sense of how valuations prevail in that market right now, particularly with respect to aggregates?

Well David, as you know, we've made two good sized acquisitions, bolt on acquisitions. Earlier in the year we bought U.S. Materials in Arizona, which had substantial aggregate and asphalt operations. And, most recently, we bought a quarry in one of the growth corridors growing out of Atlanta.

We have a pipeline with other acquisitions in it at various stages of development. We, I believe, are appropriately disciplined in our approach, both from a financial and other due diligence standpoint. I think acquisitions remain available, they aren't -- people don't walk into your door and put them in your lap. I think you have to work hard to identify those that make financial sense. And you can't build the kind of relationships necessary to do a series of acquisitions overnight. So it is a long-term process for us. We don't believe acquisitions are all too highly priced these days.

I think the key for us today is, as it has always been, and that we have to be able to improve the operation and add margin to an operation in order to create value through acquisitions and, certainly, we are continuing to pursue that.

Right. Is it possible for you to give us a range of where transactions are occurring, in terms of dollars per ton, or some other metric that we could use, going forward?

I'm going to try to explain why that -- we don't look at it that way and I'm not going to give you guidance on that. If there are some markets in the country where aggregate sells for $15 a ton and there are other markets where aggregate sells for $5 a ton, and what you pay for an operation will vary dramatically from -- on a per ton basis. And EBITDA multiple is something many people look at. If quarries all have the same life of reserves, an EBITDA multiple may be an appropriate measure. But I don't think we're seeing, by any measure, pricing on acquisitions today being dramatically different than they have been historically.

Interesting. Thanks very much.

And our next question comes from the line of Jack Kelly of Goldman Sachs. Please proceed.

Good morning.

Good morning, Jack.

Welcome back, Dan.

Thank you.

Don, just in terms of pricing -- going back late last year, early this year, you were talking -- and this is in the aggregates area -- talking 2 to 4% pricing. At the end of the first quarter you had indicated it might be 4 to 5% for this year and now, 6%. Could you give us some feel for how much of this might be kind of cyclical in the sense that you are doing it because of fuel costs, et cetera; versus something that might be a little bit more of a secular turn, i.e. the industry's realizing that what's in the ground is kind of a scarce commodity, et cetera.

And also, just in terms of pricing, I think most of the people in the industry took up prices up earlier this year than they would typically do it -- what the price increases were? And looking out over the next six months if there could any additional prices.

Jack, I think the price increases -- certainly, our strategy is to price our products based on value we bring to the customer and market demand. And I believe our price increases about 6% year-to-date reflect quality, service, location and demand. As well as, as you point out, a recognition on our part and, hopefully others, that reserves in metropolitan areas are finite and the replacement material coming into the metropolitan area will be dollars per ton higher than that which is produced locally.

So while certainly diesel fuel costs are up, as well as in the second quarter at least, certain of our steel-based wareparts(ph) and other supplies are up, we do not price our aggregate on the basis of our production costs. So I believe the pricing is on what I would consider to be a very sound basis; and that is service, quality, reliability and demand.

But on that score, Don, and if I'm remembering the numbers right, if 2 to 4 was kind of what you for all that was worth in January; meaning value, et cetera, and now it's 6, that's a pretty dramatic change.

You know, we didn't get 6% price increases in one quarter. We started strategically, very early, working with our customers to implement price increases. As we've said before, we don't get 6% on every product in every market. It is very product specific and market specific.

But strategically, we believed we had the opportunity with the growing demand in our markets to be able to earn price increases. Fortunately, that has taken hold faster and more extensively than we thought at the end of the first quarter and we are very pleased with that result. We are not surprised by it, but it has materialized very well. And so it is on that basis that we have increased our price projection.

And just a final question on the pricing. So as we look ahead then, will this spread to more marketplaces? I'm trying to get a sense of if 6 could still be a conservative number because we have had a very rapid ramp up to date.

Certain markets will be much higher than 6 and some will be less. And some products, it will vary; and it really is a market-by-market issue. In coastal markets where supply is constrained and demand is robust, we will see much higher price increase than 6% for the full year. In other markets that aren't growing quite so fast, we probably will not see a full 6%.

Just a second question on the new federal funding bill. To the extent that -- the states, now, have a more stable source of funding, when the bill passes here, short-term -- how does that manifest itself? It seemed like, prior to the bill passing, maybe more money was put in repair and maintenance, and maybe there was some holding off on the new projects. So I guess the question is -- if it goes to new major projects, are they ready to go? Or do we get a lag as the money shifts to that type of project?

Well, there are two impacts. I think one is the state matching portion for federal dollars and as we've said before, no state gives up federal funding for lack of matching dollars. So a lot of the existing state money has been utilized to match federal dollars on really large interstate or federal highway-type projects. I think the benefit we will see from the increased state and local tax revenues come in non-federal matched projects. That is state and county roads and highways that are not part of the Federal Highway System.

States and local governments have cut back following sort of the economic downturn and 9/11. That's the place that highway spending was reduced, most notably, was in non federal matched state and local highway projects. And you've seen the same statistics, I'm sure I have, but state revenues are now relative or robust, certainly, in comparison to the 2002, 2003 timeframe. And we expect these dollars to be spent on backlogged state and local highway projects that are largely ready to go.

Thank you.

[OPERATOR INSTRUCTIONS] Our next question comes from the line of Jack Kasprzak of BB&T Capital Markets. Please proceed.

Thanks. Good morning Don.

Hey, Jack.

With regard to the pricing environment kind of following up on the last question, it is improving. In that, it looks like quarter to quarter it's accelerating a bit in terms of the rate of gain. And then when you consider that what's happening in California, as you mentioned, with the state fiscal situation improving and a lot of money appearing to go into highways. And that it's a coastal market, reserves are somewhat scarce and it's your largest market. –

Don't you stand to hopefully, sort of disproportionately benefit over the next couple of quarters from all that? And perhaps, particularly with regard to your operating leverage, even in the face of higher diesel and asphalt costs, we get a little better, hopefully, operating leverage than we saw in the second quarter? Or put it another way, sorry to be long-winded, but would you be disappointed if the operating leverage weren't a little better, given all that?

We certainly hope so. I think California is a big opportunity for us. As you know, in California, we're not only a very significant aggregate supplier, but we're also a very significant asphalt mix supplier and we're also have by far our largest concrete business in California. So I think the resumption of a normal highway program in California should yield very significant benefits to our business.

Can we safely assume that the rate of price increase in California on aggregates is higher, if not much higher than your overall average?

That is correct. And it's been that way for the last 6 years.

Okay. And with regard to -- well, a couple of questions. Tax rate, what can we assume for the continuing operations? And then CapEx, can you update us on your '05 budget? And do you expect, in the face of very strong demand to possibly start investing in the current operations to expand capacity?

Jack, let me turn your question over to Dan Sansone, and I'll also ask Dan to respond to David Macgregor's question about second half cash flows. Dan?

Jack, with respect to tax rates for the rest of this year, at this point in time we're not seeing anything materially different from the average rate that was booked in the second quarter. I think any deviation from that will be minor. Absent a conclusion, which obviously we haven't reached that there may be excess provisions or deficiencies that need to flow back through. If we knew about those, they would be factored into our effective tax rate planning for the rest of the year. So I think about where we were in the second quarter is in the neighborhood of where it's probably going to be full year.

Okay.

David, to your earlier question about operating cash flow -- a couple of ways to slice it. But through the first half of this year, we generated about $215 million cash from operating activities and that includes the flex upward both seasonal as well as cyclical in working capital. As the volumes rise, both because of the seasonal shipping season and also as demand is growing, we generated about $215 million cash from operating activities in the first half of this year.

The second half of the year, typically, is stronger in cash flow. We, typically, generate better earnings or more absolute earnings in the second half. And then also as we work down towards the end of the year, a lot of that early seasonal inventory build that's put on the ground to meet the busy shipping season tends to disappear. So I would expect a stronger cash generation picture for the second half of the year.

Jack, your other question was about capital spending. I think our guidance at the end of Q1 was about $200 to $225 for construction materials. I think we're tracking on the number year-to-date. So that still remains a good number.

Certainly, we continue to look for opportunities to get improved efficiency and productivity in our plants through capital projects. That is a -- and we have a steady stream of those that our operating divisions come with. We use the same disciplined internal rate of return cash flow based projections for those projects as we do for all of our other capital spending, including acquisitions. But those are our first priority, to continue to identify and implement efficiency projects in our plants. And we hope to be able to continue to find those projects which have very high returns.

[ OPERATOR INSTRUCTIONS ] At this time, gentlemen, there are no further questions.

Well, thank you very much for joining us. We appreciate your interest in Vulcan and we look forward to talking with you again after the conclusion of our third quarter. Thank you and have a good day.

Once again, ladies and gentlemen, we thank you for your participation in today's conference. This concludes today's presentation. [OPERATOR INSTRUCTIONS] Have a great day.