May 6, 2008
Executives
Stephen P. Zelnak Jr.
- Chairman and CEO C. Howard Nye - President and COO
Analysts
Arnie Ursaner - CJS Securities Todd Vencil - Davenport & Company Garik Shmois - Longbow Research Stuart Friou - Hunter Global John Kasprzak - BB&T Capital Markets
Operator
Please standby, we are about to begin. Good day and welcome to the Martin Marietta Materials Incorporated, First Quarter 2008 Financial Results Conference Call.
Today's call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to the Chairman and Chief Executive Officer, Mr.
Stephen Zelnak. Please go ahead, sir.
Stephen P. Zelnak Jr. - Chairman and Chief Executive Officer
Thanks for joining us this afternoon. I have with me Howard Nye, President and Chief Operating Officer; and Anne Lloyd, our Chief Financial Officer.
We were very pleased with our first quarter results in what is a challenging environment. Expected slow start to the construction season was exacerbated by server winter weather in our northern states along with drought ending rains in March in North Georgia and North Carolina.
Revenue of $399 million was down 3% with volume in our Heritage aggregates business declining 8% versus a planned decrease of 5%. Heritage aggregates pricing was up 4% exceeding our expectations, which anticipated a geographic and transportation mix at favored lower priced areas.
Earnings per diluted share was $0.50 versus $0.73 in the prior year period. Even with volume weaker than expected in our aggregates business, we were able to generate better than planned operating earnings through excellent cost management.
Also we were able to reduce SG&A at 2% compared to the prior year period. Energy costs reflected the run up in oil pricing with diesel fuel up $6.2 million or 35% compared to the prior year period, this reduced earnings by $0.09 per share.
The big positive for us was the performance of our Specialty Product segments with both, our dolomitic lime business and our magnesia chemicals business performing at a high level. The segment contributed record first quarter sales and earnings with revenue up 11% and operating earnings up 23%.
We also achieved a 210 basis point improvement in operating margin. During the quarter we completed two small acquisitions.
We acquired assets of the Specialty Magnesia Division of Morton International in February, which will enable us to produce and market ElastoMag, which inhibits premature hardening of rubber components in the molding process. We also purchased a small quarry south of Asheboro, North Carolina.
This quarry has 40 million tons of reserves and will enable us to provide a full range of high quality products to customers in the area. In April, we completed the purchase of five active quarries and one green side location from Vulcan Materials.
Four of the quarries are in the greater Atlanta area, which roughly doubles our presence in North Georgia. The other active quarry is well located to serve the Chattanooga, Tennessee area.
The integration of these operations into Martin Marietta has been seamless to-date. This reflects the high quality of our people along with the flexibility of our information systems in accommodating growth opportunities.
And looking ahead we continue to have a positive outlook for our business in 2008 despite the challenging economic environment. Based on the sharp increase in energy cost we anticipate more mid year price increases than originally planned.
Accordingly, we are raising our target for aggregates pricing to increase in the 6% to 8% range. We continue to expect volume to be in a range of up 1% to down 3% for the year.
We also continue to expect record operating earnings from Specialty Products in the $36 million to $38 million range. With these expectations, we reaffirm our range for net earnings per diluted share of $6.25 to $7.
At this time I'd be pleased to take any questions that you may have? Question and Answer
Operator
Thank you ladies and gentlemen. [Operator Instructions] We'll go to Arnie Ursaner with CJS Securities.
Arnie Ursaner - CJS Securities
Hi, good afternoon. Steve could you try to quantify whether there was any revenue contribution from the business, Specialty Products business you bought, and if so perhaps give us some feel for an annualized revenue number?
Stephen P. Zelnak Jr. - Chairman and Chief Executive Officer
Annualized revenue number will probably be, plus $5 million, so it's not a big acquisition. It's a niche opportunity that fits very well with what we already do.
Revenue in the first quarter was inconsequential.
Arnie Ursaner - CJS Securities
Okay. And again on the acquisition you made of the granite quarry in North Carolina, you mentioned it had 40 million tons of reserve.
What sort of annual production are you expecting from that mine?
Stephen P. Zelnak Jr. - Chairman and Chief Executive Officer
It's going to be relatively small. It's in a more rural market area.
And probably we'd get that one up into the 0.5 million ton range or so, in a not too distant future.
Arnie Ursaner - CJS Securities
Okay. And my final question if I can, is obviously the pricing of aggregates.
You've moved up your target a little bit. Is that for hope for price increases and increases you've already announced and specifically with the properties you are buying in Georgia, which have probably been a little under priced have you built in an expectation for increases in Georgia in that number?
Stephen P. Zelnak Jr. - Chairman and Chief Executive Officer
In some cases, we have already announced some increases that were not originally planned. In other cases, we are planning to do that.
Areas where we think we have some opportunity, we'll continue to look at Florida. South Carolina is an opportunity, Alabama is an opportunity, North Georgia, certainly we think is an opportunity.
At the same time we are looking across the board in our company, because what we've seen is a tremendous price escalation on diesel, and we would certainly like to recover that if at all possible. So we are looking at it a little bit differently than we were prior to the diesel run-up, even though markets are tough in some places, we've got some cost that we need to pass on.
Arnie Ursaner - CJS Securities
On diesel, are you hedging your position?
Stephen P. Zelnak Jr. - Chairman and Chief Executive Officer
No.
Arnie Ursaner - CJS Securities
Okay. I'll jump back in queue.
Thank you.
Operator
Thank you. We'll go next to Todd Vencil with Davenport & Company.
Todd Vencil - Davenport & Company
Hi, Steve.
Stephen P. Zelnak Jr. - Chairman and Chief Executive Officer
Good morning. Good afternoon rather.
Todd Vencil - Davenport & Company
Yeah. It goes quick, doesn't it?
Have you… and pardon me if you've disclosed this, and I just can't remember, we talked about the volume expectations from the quarter that you guys got from Vulcan?
Stephen P. Zelnak Jr. - Chairman and Chief Executive Officer
Yeah. The volume expectations there on annualized basis are going to be in roughly four million ton range.
Todd Vencil - Davenport & Company
Okay. And just in general, I mean, you gave some color obviously I think in the release.
But you talked about what you are seeing out there probably speaking of the state budgets I mean is it in the last three months has there been kind of a major shift in your expectation there on the highway side?
Stephen P. Zelnak Jr. - Chairman and Chief Executive Officer
Certainly states are under more pressure. I don't think that's a mystery known to all of us.
What we are seeing is some states that are really beginning to struggle with that, we have seen other states that have stepped forward and done some things to improve their funding situation. Notable recently Louisiana which has increased funding coming out of a special session and we think that's going to very positive for us in the second half of the year on out through the next five years.
Minnesota which is not an area that we are big in, but one where we have a nice presence. Minnesota legislature recently increased their funding sharply over $600 million annually.
So we are going to see some kick there. Our highway projects are going better than expected.
The big worry for us is that North Carolina continues to lag in its highway program. There is an effort underway to address that within the state, but I am not sure that's going to happen until 2009.
So that's probably the biggest concern that we have.
Todd Vencil - Davenport & Company
And in Louisiana I think you talked about Minnesota, the gas that's increased in Minnesota, is that correct?
Stephen P. Zelnak Jr. - Chairman and Chief Executive Officer
They had a package of different entries as of our [inaudible]
Todd Vencil - Davenport & Company
How they swing it in Louisiana? Was there also a package?
Stephen P. Zelnak Jr. - Chairman and Chief Executive Officer
Yes, they had a surplus to start with which is a very good place to start from.
Todd Vencil - Davenport & Company
Absolutely.
Stephen P. Zelnak Jr. - Chairman and Chief Executive Officer
So they allocated some surplus and went from there.
Todd Vencil - Davenport & Company
Okay and then just in general on the non-residential side, I mean I guess expectations there soft in the last two months as well?
Stephen P. Zelnak Jr. - Chairman and Chief Executive Officer
Its very similar to what we have talked about for the last six months or so. You have what I call the capacity driven projects, which continue to go well, there is a lot of activity.
And then you have the retail sector, and to some degree the office construction sector, that cooled off and probably will continue to do so. When you look at capacity projects, we've mentioned the FedEx hub in Greensboro.
At LNG projects, oil and gas drilling that requires stone for roadways. The energy component of that is just on fire with wind farms, ethanol has pulled back a little bit, but it's still a strong component in the mix.
In the Midwest, it was even there couple of years back. So I continue to like the vision between capacity driven projects, and those that are truly more deferrable based on the economy.
Todd Vencil - Davenport & Company
All right, thanks a lot.
Operator
[Operator Instructions] We'll go next to Garik Shmois with Longbow Research.
Garik Shmois - Longbow Research
Hi good afternoon. Just wondering if you could talk about pricing in the West Group is relatively flat year-over-year.
What are your expectations as we move through 2008 out there?
Stephen P. Zelnak Jr. - Chairman and Chief Executive Officer
It will improve. The pricing in the first quarter really reflects the mix of business we have.
We have some extensive tonnage relatively low price material, we mine a material out there called kalitchee [ph] which is used as base material, and that product may sell in the $2 to $3 range as opposed to normal aggregate prices. We've got some big work there with wind farm project that dominates in terms of western pricing.
Also the transportation mix more of the shipments there came from truck quarries as opposed to being transported and then resold at distribution yards. So the transportation mix tended to bring that down.
Garik Shmois - Longbow Research
Okay. And in the Mideast, another tough quarter with respect to volumes, and I imagine much of that is due to weakness along the Great Lakes.
But is there anything that you are seeing out there that could reverse the trend, either one way or the other, more positively or more negatively?
Stephen P. Zelnak Jr. - Chairman and Chief Executive Officer
Well, first of all, let's take the Great Lakes out of it, because we don't service the Great Lakes area. We do operate in Indianapolis and we operate in Dayton, Cincinnati area in the northern climates.
As we look at that area up there and look at this Mideast component, which also includes Virginia, Maryland, it comes down through North and South Carolina, we actually believe that the Indiana, Ohio component probably is going to bottom out about midyear. We've got some pretty good work coming in second half.
So, I would expect in the second half in that area we'd begin to see some positive volume comparison. In Virginia, Maryland, actually that business is going well.
We were up 3% on volume in the first quarter. We are expecting a good year up there, a positive year throughout.
North Carolina and South Carolina are much weaker. Part of that was weather in the first quarter.
We actually were down on volume in the Carolinas, 27%, which is mammoth. And I can tell you the economy has softened, but nothing like that.
So, a significant wet weather component. The interesting thing about that is that even though our volume was down 27%, our unit margin was up 18%.
So, you can intuit pricing and cost control out of that. We did an awfully good job of running that business.
So, I feel confident that we will put up good numbers in that area, albeit with a lesser volume than we would like to see.
Garik Shmois - Longbow Research
Okay. Thank you very much and good luck.
Stephen P. Zelnak Jr. - Chairman and Chief Executive Officer
Sure.
Operator
[Operator Instructions] We'll go to Stuart Friou with Hunter Global.
Stuart Friou - Hunter Global
Yeah, Steve, just a question. It seems like in the last two years, the first quarter has been about 12% of your annual earnings.
And if we kind of do that math this year, we get kind of well below where you are guiding to. What is so different this year about the seasonality that was not the case in '06 and '07?
Stephen P. Zelnak Jr. - Chairman and Chief Executive Officer
'06 and '07 were really the anomalies. We had an economy that was completely on fire, particularly with the homebuilding component, which even stretched over into '07.
If you go back in time and look at us as a public company, it was not unusual, but we lost money in the first quarter.
Stuart Friou - Hunter Global
Right.
Stephen P. Zelnak Jr. - Chairman and Chief Executive Officer
So, it was a negative contributor. So as you look at this year, the dynamic is that you have an economy that's softer.
The expectation was that there would be very little homebuilding activity, which is one of those things in most parts of the country that you can work on during the winter, because you can't pour winter concrete and put down winter base. We just knew that wasn't going to be there.
So, the work was going to be bunched up much more infrastructure work, asphalt-related big project. And we looked at the timing of those, and it was pretty clear to us that the first quarter was going to be a very slow start.
So, for planning purposes, we actually set up a plan to keep plants down longer in a non-operating status. We did that very successfully in the first quarter.
Our sales were down 8%, but compared to prior year, our production was 13%. And normally, what we do in the first quarter is we outproduce the sales, because we are building inventory.
This year, we don't see the need to do that. So, we actually produced and sold it very close to same rate.
So, we just planned the quarter differently. And in fact, it worked out better than we planned, but nonetheless, different from the last two years.
Stuart Friou - Hunter Global
Okay. And what's kind of your view on, I guess, volume and pricing in that relationship?
I mean at what point does declining volume impact your ability to raise prices?
Stephen P. Zelnak Jr. - Chairman and Chief Executive Officer
Certainly, it's already impacted it, because if you look the rates of price increase we were getting last year and the year before, they are considerably higher than our estimate of 6% to 8% this year. So, directionally, you are seeing the opportunity for pricing come down just as you would expect.
The economy continues to drift downward. It would tend to reduce that opportunity.
At the same time, if you go back in history prior to this last run-up in the cycle, we only averaged 3%. And I would be very surprised if we go down to 3% with any kind of scenario that we think is foreseeable.
So, just back to the premise in aggregate, you have got a better pricing environment based on supply, demand. And certainly for the foreseeable future, we expect that even in a downturn.
Stuart Friou - Hunter Global
Okay. So pricing is up 4% in the first quarter.
What are you seeing out there in the second, third quarters that would get us to 6% to 8% for the whole year? I mean is there announced pricing rates you've already have taken or you are expecting the business to improve in the back half?
Stephen P. Zelnak Jr. - Chairman and Chief Executive Officer
Now, these are basically things that are put in place. What you get is a shifting of the mix back to something that is more normal in terms of where it's coming from.
The transportation mix will lean more heavily toward the long haul in the latter three quarters of the year. So, you will get out of the mix part of the issue.
And as I had mentioned earlier, we do expect to have greater midyear price increases than we had originally programmed. So, that would give a little impetus in the back half.
Stuart Friou - Hunter Global
So, the North Carolina, for example, pricing will get better in the back half of the year than it is today if we take the mix out of the equation, just look at apples-to-apples?
Stephen P. Zelnak Jr. - Chairman and Chief Executive Officer
Yeah, in North Carolina, what we've done is we've agreed that we'll only go and raise prices one time. So that's been put into effect.
And what will happen as you go is you get the impact of the one-time increase. But as jobs that you quoted in earlier times are completed, you're going to replace that with a higher price on new work quoted [ph] and shipped.
Stuart Friou - Hunter Global
Okay.
Stephen P. Zelnak Jr. - Chairman and Chief Executive Officer
So you get some continuing momentum based on the nature of this business.
Stuart Friou - Hunter Global
Okay. Thank you.
C. Howard Nye - President and Chief Operating Officer
Sure.
Operator
And moving next to Jack Kasprzak with BB&T Capital Markets.
John Kasprzak - BB&T Capital Markets
Thanks. Good afternoon, Steve.
Stephen P. Zelnak Jr. - Chairman and Chief Executive Officer
Hey, Jack.
John Kasprzak - BB&T Capital Markets
I wanted to ask about the Texas housing market in particular. What you are seeing in there, housing market that's relatively speaking held up well.
But with a slower economy and slower job growth, do you see any risk on the housing side in Texas?
Stephen P. Zelnak Jr. - Chairman and Chief Executive Officer
Yeah, it's pulled back, certainly no mystery in that one. You can look at the figures by major metro.
Houston held up about as long as anywhere, and it has pulled back noticeably. San Antonio, likewise, the area that continues to be the strongest at least where we are and the areas where we ship is Dallas-Fort Worth market.
So, we continue to see strength there, although it is down. There are no major metro markets in Texas, but it's better than the rest of the country by and large.
John Kasprzak - BB&T Capital Markets
And the state DOT there seem to be wrestling with whether or not to toll road projects, what... they seem to be a back and forth there.
What's your view on Texas Public Works?
Stephen P. Zelnak Jr. - Chairman and Chief Executive Officer
They've caught the North Carolina virus. They've hit [Inaudible] accounting.
If you recall, North Carolina a couple of years ago had a major accounting mistake. Texas finds that it's not accounting too well either.
So, they are trying to reconcile cash flows. The nice part is that there is a lot of toll work.
And we think we are going to be very, very busy, particularly in Dallas, Fort Worth. And there is big toll project in San Antonio also.
So, we feel about infrastructure in Texas, but some of the work is going to get pushed out, and the legislature is going to have to decide between, toll, no toll, public-private partnerships, just how they want to play the funding game for their infrastructure needs, which are immense. And they've got over 300,000 miles of roadway in Texas.
John Kasprzak - BB&T Capital Markets
I was going to ask too about share repurchase program. Could you update us on how much you have left on the current authorization?
In the press release, you guys mentioned you're at 2.3 times coverage, still very comfortable with some acquisitions behind, particularly the anticipated ones with Vulcan. Would you be back in the market buying shares?
Stephen P. Zelnak Jr. - Chairman and Chief Executive Officer
Well, we've got about 5.2 million shares left on our authorization, so certainly no issue there. What we had said last year was we were going to wait and see whether or not we had any success with these assets that Vulcan was spinning off.
And in fact, the piece that we were interested in, we did have success on. We are at 2.3.
We'll just play that out through the year and try to see how everything is going. If it goes the way we think it's going to go, then we will be generating a lot of free cash.
What we've said is we're not going to pile that up for any period of time on the balance sheet. So, we're either going to use it and some other acquisition opportunity, if there is a good one or the logical thing to do would be look at share buyback again.
So one or the other or a combination.
John Kasprzak - BB&T Capital Markets
Okay, great. Thanks a lot.
Stephen P. Zelnak Jr. - Chairman and Chief Executive Officer
Sure.
Operator
And ladies and gentlemen, that will conclude our question-and-answer session. I'd like to turn the conference back over management for any additional or closing remarks.
Stephen P. Zelnak Jr. - Chairman and Chief Executive Officer
Okay. Thanks for joining us.
Pretty brutal cold quarter in a lot of ways, but certainly I feel like our operating people just did a fantastic job, and I want to publicly acknowledge that. We are going to answer the rest of the year.
We've got a lot to get done. But based on what we know at this point in time, we think it's there and we're going to work hard to put it on the bottomline.
Look forward to talking to you in the month of July.
Operator
Thank you, ladies and gentlemen. That will conclude today's conference.
We do thank you for your participation. And you may now disconnect.