Ward Nye - Chairman and CEO Anne Lloyd - Executive Vice President and CFO.
Arnie Ursaner - CJS Securities Kathryn Thompson - Thompson Research Group Jack Kasprzak - BB&T Garik Shmois - Longbow Research Matt Ryback - Goldman Sachs Timna Tanners - Bank of America Merrill Lynch Ted Grace - Susquehanna Keith Hughes - SunTrust Mike Betts - Jefferies Stanley Elliott - Stifel.
Good day, ladies and gentlemen. And welcome to the Martin Marietta Materials Inc. Third Quarter 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions).
As a reminder, today’s program is being recorded. I would now like to introduce your host for today’s program, Mr. Ward Nye, Chairman and CEO. Please go ahead sir..
Good afternoon. And thank you for joining Martin Marietta’s quarterly earnings call. With me today is Anne Lloyd, our Executive Vice President and Chief Financial Officer. The results we reported for the third quarter 2014 reflect the successful TXI acquisition and frankly underscores the value and timing of the transaction.
Bringing TXI into Martin Marietta not only continues to enhance our overall presence in the Western United States, but importantly augments our significant heritage position in Texas, which as you know, leads the nation in job growth, a clear stimulus for construction activity.
Texas is also operating with the robust department of transportation budget having embraced alternative financing with the vision and vigor unlike any other. Allowing the state to commit to numerous major multi-year projects that should benefit our business in 2015 and beyond.
To give you some examples of the value of TXI, the acquired operations contributed $274 million of net sales, an increase of 53% and $44.5 million of adjusted gross profit to our third quarter results.
And for the nine months ended September 30, 2014, we generated $202 million of operating cash flow compared with $166 million for the prior year period. But what are the initial and clinical takeaways, we view them largely as four-fold.
First, the acquired operations provide a powerful complement to our strong heritage business and has Martin Marietta ready to supply the increasing demand for building materials. Second, by our refinancing of TXI’s public debt, we’re now positioned to reduce legacy TXI’s annual interest expense by $34 million.
Third, our original estimates of synergies of $70 million every three years now seeing too low and too slow. We anticipate doing considerably better. Finally, the $400 million of NOL carryforwards we originally estimated have increased by nearly $100 million.
We’ll discuss the specifics of all of these value enhancing factors and more during this teleconference. Additionally, we’re also pleased to see increased demand in our heritage business during the third quarter resulting in 130 basis point expansion of our consolidated gross margin.
This improvement was driven by volume and pricing growth in our aggregates product line, despite costs in various inefficiency headwinds from rail transportation. Further, the specialty products business contributed record third quarter net sales and earnings from operation.
Before discussing the quarterly results further, as a reminder, today’s teleconference may include forward-looking statements, as defined by securities laws in connection with future events or future operating or financial performance like other businesses, which subject to risks and uncertainties, which could cause actual results to differ materially.
Except as legally required, we undertake no obligation to publicly update or revise any forward-looking statements, whether resulting from new information, future developments, or otherwise.
We refer you to the legal disclaimers contained in our third quarter earnings release and our other filings with the Securities and Exchange Commission, which are available on both our own and the SEC websites. Also, any margin references in our discussion are based on net sales and exclude freight and delivery revenues.
These and other non-GAAP measures are also explained in our SEC filings and on our website. As a preface, let me offer that it’s not easy to fully understand, calibrate and compare this quarter’s results with other periods due to the TXI acquisition as well as TXI related non-recurring items.
Simple comparisons to prior periods for either Martin Marietta or legacy TXI will not provide an adequate understanding of a business that’s been transformed with a 53% increase in net sales. That said, we classified legacy TXI reporting to conform to Martin Marietta.
As a result of the reclassification and the impact of business combination accounting, direct comparison to legacy TXI’s publicly available data from prior years does not reflect same-on-same performance results. In addition, because TXI’s fiscal year ended May 31 whereas ours in December 31, the reporting periods are not the same.
Still we have provided reference to prior year legacy TXI data where relevant to the understanding of the underlying business. So on today’s call and in future presentations we’ll be making, we will endeavor to be as transparent as possible so you can more easily track and evaluate our progress.
In our earnings release and in the charts made available, both during this webcast and on our website, we supplied supplemental financial information through the lens we used to analyze the business in light of the TXI acquisition.
First, as detailed on slide two, our heritage Martin Marietta business which includes specialty products provides same on same comparison to the prior year third quarter; second, as detailed on slide four, our acquired operation including a view of performance in the acquired business’s product lines and finally, we provide an overview of TXI related and non-recurring items.
We believe this approach provides meaningful data and makes the performance in our business more transparent for the quarter. Let’s begin with the look at our EPS. Consensus estimates vary considerably, as analysts attempted to predict the impact of the TXI acquisition on quarterly results.
Based on Wall Street’s estimates as reported by first call, we believe two key differences totaling $0.17 reconcile these estimates to reported EPS. First, analysts assumed weighted average outstanding shares of 62.6 million versus a reported 67.5 million. This alone reduced EPS by $0.07.
The 67.5 million shares include shares issued in the acquisition as well as the impact of conversion of TXI stock-based awards.
Second, business combination accounting rules dictated a fair value markup of acquired aggregates and cement inventory effectively eliminating nearly $11 million of profit in inventory sold during the third quarter, a $0.10 per share negative impact on EPS. Next, let’s review our heritage Martin Marietta business.
Slide 3 provides you key metrics for our heritage operation. Our aggregates business continues to improve led by robust activity in our West Group primarily in Texas and Colorado. Aggregates product line shipments in the West Group increased more than 5%.
Notably aggregates volumes in the West Group would have increased 9% over the prior year quarter if the required TXI-related divestiture had been included for the full three month period. The Midwest and Eastern part of the country was negatively affected by unseasonably wet weather during the quarter.
Notwithstanding this short-term impact, we are seeing signs of increased South Eastern construction activity led by job growth in Atlanta, Georgia and Florida, as well as TIFIA-supported infrastructure projects. Heritage aggregates product line shipments reflect growth in our three largest end use markets.
The infrastructure market represented 47% of quarterly volumes and shipments to the sector increased 3%. Public-sector work in Texas includes the benefits of nearly $20 billion of construction investment from 2013 through 2015.
We recently began serving the interstate 35 East project in Dallas and are positioned to serve upcoming sections of the TIFIA funded Grand Parkway project in Houston. The East and other major projects have contributed to a multi-year backlog in Texas.
Colorado is also experiencing growth driven by the responsible acceleration of maintenance and partnerships or RAMP program, as well as reconstruction work resulting from last year’s flooding. For the quarter, infrastructure shipments in Colorado were up more than 20% over the prior year period.
During the quarter, Congress passed an extension of MAP-21 through May 31, 2015 and also authorized $11 billion of transfers to maintain the High Way Trust Fund solvency. We believe these are the first steps toward reauthorization of a multi-year federal highway bill.
The non-residential end-use market represented 30% of quarterly heritage volume since shipments increased 3% over the prior year quarter. Growth was driven by shipments to support shale energy expansion projects notably in South Texas.
Recently, there have been market concerns about the sustainability of these projects primarily due to the decline in the global price of oil.
However, there are over $100 billion of anticipated energy projects along the Gulf Coast and over $1 billion of needed infrastructure repairs on roads damaged by heavy construction vehicles used in energy projects over the past several years. Early portion of this repair work are now underway.
Given this level of ongoing activity, we expect the ramping up in construction materials demand for these projects. Consistent with that expectation, on the November 2014 ballet, the Texas legislature has advanced Proposition 1. Our proposed constitutional amendment who directs needed road repairs.
If approved by the voters, Proposition 1 would authorize annual disbursements from the state’s existing oil and gas production tax collections to the state highway fund, an estimated $1.7 billion will be transferred in the first year alone. Current polling data indicates Proposition 1 is expected to pass in next week’s elections.
The residential end-use market represented 14% of quarterly heritage aggregates product line volumes and shipments increased 9% over the prior year quarter. We experienced significant residential construction growth in our western markets in direct contrast to national trends.
By way of example, for the trailing 12 months ending September 30, 2014, residential starts were up 31% in San Antonio, 11% in both Houston and Austin and 27% in Fort Collins, Colorado along the front range north of Denver.
This reaffirms our view for the value of the company’s strategic growth initiatives made over the past several years which should continue to benefit our future demand. Finally, to conclude the discussion of end-use markets.
The ChemRock and Rail market representing the remaining 9% of our heritage aggregate product line volume and shipments declined 9% versus the prior year quarter.
The performance of Class 1 railroads both in terms of capital maintenance and operational efficiency has led to continued weakness in balanced sales and is the primary driver for the decrease in shipments. Heritage aggregates product line pricing remained strong and we were pleased to achieve increases in each geographic group.
Prices increased 5% over the prior year quarter led by an 8% increase in the West Group. Product mix did not have a material impact on the quarterly pricing comparison. Aggregates’ product line production increased 4% response to higher demand.
However, direct production cost per ton increased slightly as greater leverage was offset by higher repair and supply costs and the productivity impact of certain weather constraints. Cost of sales was also negatively affected by higher transportation costs related to our long-haul distribution network, principally rail inefficiencies.
We estimate that these increased third quarter costs to be over $12.7 million, a cost headwind likely to continue in the fourth quarter. However, energy costs, which were essentially flat during the quarter should mitigate ongoing production costs as the effect of declining diesel fuel prices work through the business.
The heritage aggregates-related downstream product lines provided an enhanced quarterly contribution. The ready mixed concrete product line experienced volume and pricing increases of 17% and 14% respectively which led to an 840 basis-point increase in the product line gross margin.
Additionally, the asphalt business reported 13% increase in net sales. Gross profit for the heritage aggregates business increased 16% to over $142 million, yielding a gross margin percentage to net sales of 24.3%, an improvement of 170 basis points from the prior year quarter.
The incremental contribution from each dollar of net sales would have been in line with stated expectations excluding the impact of higher rail transportation costs. Our Specialty Products business again posted strong quarterly results, delivering record net sales of $58.7 million and the gross margin of 34%.
The business contributed earnings from operations of $17.7 million also a third quarter record. The first 90 days post TXI acquisition have been both busy and invigorating. Our aggregates and ready mixed concrete operations teams have worked diligently on integration into the existing West Group structure.
Specifically, we completed the back office integration of the aggregates business, including closing our former district conference in Lewisville, Texas as well as moving to Southwest division’s leadership team from San Antonio. Both groups have relocated to TXI’s former Dallas headquarters.
Simultaneously, our cement group team also based in our Dallas office has been refining the sales and operational strategies of that business. We plan to complete systems integration for the cement and ready mixed concrete businesses no later than June 2015.
Accordingly and as planned, certain deflective corporate overhead costs will continue through that time. We’re pleased with the progress to-date and are especially proud of the response from the combined workforce as we forward to new unified accountability and performance culture on every front.
Leading the safety through operational and profitability expectations. Our team is energized and enthusiastic about solidifying the foundation for future growth and shareholder return. A key area of focus is increasing and accelerating the synergistic value of the acquisition.
When we announced our planned acquisition of TXI, we said that we expected annual synergies of $70 million by 2017. We were conservative in our estimates. As our integration efforts progressed, we now expect synergies will be higher and the benefits will occur sooner than originally expected.
Over the next few years, we also fully anticipate utilizing the income tax benefits from legacy TXI’s, net operating loss carry-forwards as well as incremental value from the expected divestiture of identifying non-operating real estate asset.
After completing initial estimates of legacy TXI’s fiscal year 2014 tax provision, the NOLs now exceed $500 million, also the completed refinancing of legacy TXI’s outstanding debt is expected to reduce annual interest expense by $34 million based on current interest rates. This amount is incremental to the previously stated synergy target.
Slides four and five provides you financial information and key metrics for our required operations. The acquired aggregates business reported net sales of nearly $37 million on shipments of 3.2 million tons. Average selling price was $11.83 per ton driven by increased rail distribution yard and sand and gravel shipments.
After adjustment for the non-recurring impact of the mark-up of inventory to fair value during the quarter, the acquired aggregates business generated $8 million of gross profit, a 21% adjusted gross margin.
Performance in the aggregates business should improved at an accelerated pace given the strength of the underlying market demand coupled with synergy expectations. The acquired ready mix concrete business shipped 1.5 million cubic yards during the quarter at an average selling price of $86.10.
When compared to the legacy TXI quarter ended August 31, 2013, shipments increased 20% and pricing when adjusted for comparable legacy TXI presentation increased 4.5%. The business contributed nearly $10 million of gross profit. A $6 per cubic yard price increase was announced in the North Texas market on August 1st.
The full realization of this increase will likely take six months as we work through the current backlog. As a reminder, we acquired a leading position in the Texas cement markets and a state-of-the-art rail-located cement plant in Southern California.
These plants produced Portland and Specialty Cements with a combined annual capacity of 6.6 million tons, as well as the current permit that provides an 800,000 ton expansion opportunity at Midlothian plant near DSW.
As discussed earlier, the economic climate in Texas has moved beyond recovery into an expansion phase in infrastructure, non-residential and residential construction. As such, Texas cement demand currently exceeds available local supply, a trend that’s expected to continue for the near future.
In the third quarter, we shipped 1.525 million tons of cement. Volumes were 16% higher than 2013 when compared with legacy TXI’s publicly disclosed data for the three months ended August 31, 2013 a period higher to our ownership of these assets and reflecting a quarter based on TXI’s fiscal year ended May 31 versus our fiscal year ended December 31.
Cement pricing of $85.95 per ton is $6.52 or 8.2% higher than legacy TXI prices reported for the three months ended August 31, 2013. For the third quarter, the cement business contributed $110 million of net sales and generated nearly $28 million in adjusted gross profit, yielding an adjusted margin of 25%.
The adjusted gross profit excludes the non-recurring impact of a required markup of inventory to fair value. The Texas plants are operating between 75% and 85% utilization and the California plant is operating in the low 70% utilization reflective of a slower recovery in the Southern California construction economy.
We anticipate California markets should reach the demand supply equilibrium during 2016.
Our cement group leadership in collaboration with the aggregates and ready-mixed concrete teams developed strategic plans regarding interplant efficiency, as well as tactical plans addressing plant utilization and efficiency providing incremental supply for a sold out Texas cement market and a roadmap with significantly improve profitability for 2015 and beyond.
Further, on October 1, 2014, we announced the $10 per ton price increase for both the Texas and California market. Our results for the quarter also underscore the continuing discipline we bring to managing our business. Consolidated SG&A was 5.3% of net sales and 90 basis point reduction compared to the prior year quarter.
The improvement reflects transaction synergies, lower pension expense and the absence of information systems upgrade costs incurred in 2013, but does not reflect non-recurring transaction costs. We incurred net acquisition expenses of $26.1 million which includes transaction and integration costs and a gain on the required divestiture of assets.
As detailed on slide 6, our adjusted consolidated earnings from operations, which excludes the cost related to the markup of acquired inventory, as well as net acquisition-related expenses was $153 million. This compares to $109 million in the prior year quarter and represents improvement of more than 40%.
On a year-to-date basis we generated $202 million of operating cash flow compared with $166 million for the prior year period. This increase is primarily due to earnings before depreciation, depletion and amortization expense coupled with cash flow generated from working capital, all in relation to the prior year.
Further, the ratio of consolidated debt to consolidated EBITDA for the trailing 12 months ended September 30, 2014 was 2.91 times, in compliance with our leverage covenant.
As to full year 2014 guidance, we expect continued growth in our markets particularly in areas with strong employment gains and reaffirm our guidance for heritage aggregates product line shipments to increase 6% to 8% and product line pricing to be up 3% to 5%.
Heritage aggregates product line direct production cost per ton is expected to remain relatively flat compared with 2013. And lastly we expect the TXI acquisition to essentially breakeven to earnings per diluted share excluding non-recurring cost and corporate overhead allocations.
We have now completed our initial planning for 2015 and are in the process of formulating our definitive guidance which we’ll provide to you in our year-end earnings release. Broadly speaking, we continue to see our end-use markets growing albeit at varying degrees depending on geography.
Importantly, the Eastern United States continues to recover year-over-year.
Meanwhile economic expansion in the Western United States will continue to outpace recovery in the east and force the acquire TXI business will contribute significant incremental growth in 2015 driven impart by the realization of a full year of operations coupled with continued synergy realization and operational improvement.
In Martin Marietta geographies, the infrastructure market is expected to increase mid single-digits. Non-residential construction should increase in high single-digits. The residential markets should experience a double-digit increase. And ChemRock and Rail should remain relatively flat.
Our company’s outlook for the cement industry is largely consistent with PCA’s forecast and should increase in the high single-digits. To conclude, we’re grateful to our shareholders for their support of the TXI acquisition. We are already benefiting from this transformational transaction and the growing demand for building materials.
Job growth should continue to serve as a catalyst for construction activity, and provide opportunities for us to increase earnings and create additional shareholder value. Thanks very much for your interest in Martin Marietta. If the operator will now give the required instructions, we’ll turn our attention to addressing your questions..
Certainly. (Operator Instructions). And our first question comes from the line of Arnie Ursaner from CJS Securities. Your question please..
Good afternoon, Ward and Anne.
Could you expand, you gave us some detail about the heritage aggregates business, but could you expand a little bit more about the balance of 2014 and into 2015 by geographies of where you seeing particular strength or weakness and maybe highlight your outlook for the various end markets, because I know you do it bottoms up for various geographies?.
Sure Arnie, thank you for your question. As we look at top side Arnie, the west will continue to outperform, but we’re seeing both in Texas and Colorado is pretty exciting and we see that’s being very strong for the balance of this year, and we see that’s being very strong into next year.
I think part of what we discussed in the earnings release and in the telecom is infrastructure work as well as non-res and res in Texas is all very, very attractive right now, same story is true in Colorado. The fact is all of those are getting better in the Eastern United States, but it’s lumpier and it’s a little bit slower.
So for example in the quarter, we saw volumes nicely up in parts of North Carolina. So Charlotte was better quarter-over-quarter, but here is the lumpiness of it, Greensboro and Raleigh were actually modestly down. Now, I do think weather has something to do with that. And I think timing of some infrastructure work has something to do with that.
But as you’re aware, when we have that type of group in North Carolina, we discussed for years that we feel that rather disproportionately. So as we look at the business Arnie, it’s progressing in the recovery phase how I would have thought.
Part of what I was pleased with as I looked at quarter is really that the component of the quarter that I think was clearly unplanned is the cost that we incurred relative to rail freight. So, as we pause and step back from that and look at it, rail freight all by itself was somewhere probably $8.5 million to $9 million worth of cost for the quarter.
And the reason that I call that out in particular, maintenance repairs is a cost that’s going to ebb and flow depending on what’s happening with volume. But what happened with rail is extraordinary.
And for the quarter coming back to your question, if we pull that extraordinary cost out, what I like about the quarter is we were seeing incrementals in our heritage business very much in line with what we’ve been anticipating. So I hope that’s responsive to your question..
That’s great. And there’s an obvious second question for me if you don’t mind. On the synergies, you mentioned 70 million over three years and in your prepared remarks you said greater and sooner and used a term considerably better.
So, I guess it’s fair to ask can you try to quantify what the savings you hope to get are and the timing?.
Let’s think of it then in this term Arnie. So, we talked originally about basically $70 million of operational synergies and let’s call it $34 million of interest rate synergies that gives you $100 million all by itself.
Coming back and just speaking to the targeted synergies that we spoke of $70 million that we thought we would have at the end of 2017, based on what I’m seeing right now, I think we’ll likely have $70 million probably by midyear ‘16. So we’re going to capture if at least 18 months in advance.
And as I look at what’s going on what I like about that is that’s really going on primarily within what we’re pulling out in the operations.
And keep in mind we’ve got quarrying that are littering next door to each other, the fewer operational efficiencies that we’re seeing in the transaction are going nicely ahead of where they thought -- where we thought they would be. And I think what we said is right.
Our original estimates for too low and too slow, they’re going to be higher, they’re going to be faster, I think we’ll hit that 70, 18 months of it..
Thank you very much..
Thank you, Arnie..
Thank you. Our next question comes from the line of Kathryn Thompson from Thompson Research Group.
Your question please?.
Hi, thanks for taking my questions today. In the 8-K you filed in the quarter was helpful and gave us some sense of the magnitude of contribution of divested asset related to the TXI transaction.
For the quarter end what was the revenue and gross profit contribution impact of those divested assets and also tagging that you a little bit earlier with the freight impact in quarter, have you taken a stab at what contribution margins would have been with the clean year-over-year cost taking to account those divested asset? Thank you..
Let me look at this right, Kathryn. If we look at the divested assets, if I look at the tonnage that came out for the quarter, it’s probably around 570 some thousand tons for the quarter. So that’s probably a good way for you to go back and really sort out what that means.
I think the second part of your question I think it really goes back to what we were talking about before, if we’re simply looking at the change in cost quarter-over-quarter, the rail freight and the adjustment there is the primary driver on where we’re seeing the difference.
And again, if that’s $9 million, if you take that $9 million bring it back into the adjusted gross margin of 162 and then go back and at least work with call it 575,000 tons that work historically coming out of North Troy. I think that gives you your bridge..
Okay, great. Thank you. Looking at some of the certain regions in the Southeast, particularly more call it a passionate certain markets, Alabama which received feedback not only from our base and material contracts, but also our building product distributor. So, completely different construction end market.
What has been the feedback or the driver of just tapping at the pedal and then in certain markets. In other words is it a more end market focus, weather driven or is there something else we should take in consideration.
And what do you see on [Touchstone]?.
As far as what you’re seeing in Alabama and the entities in South, is that your question, Kathryn?.
Yes, it is..
Okay. I think the primary issue that we are seeing there and principally more in part of a quarter, remember we are not all things to all people in Florida. We’re really infrastructure play in Florida and our positions in Alabama are really more headed toward Birmingham and heading South as well.
I think what we’re seeing particularly in Florida is we have a timing issue and the timing issue is relative to larger projects. So, we know for example the I-4 Ultimate work is going to began in 2015. That’s going to be significant work for multi-years inside of a record Florida DOT program. So, we’re looking at that portion of the Southeast.
We think it’s more of a timing issue. Part of what I was particularly hard to see though is we do continue to see a nice recovery in North Georgia.
And as you recall, we’ve changed our footprint in that Atlanta market pretty considerably over the last five or six years and have a very attractive number two position in Atlanta today, which is very different from number four and number five position we would have there 6 or 7 years ago.
So, what I would say direct response is we think Florida is a timing issue for us on infrastructure and we think North Georgia continues to recover..
Great.
You described that a little bit in your prepared comments, but have you seen any change in pace of orders or change in conversations and energy beverage regions and response to the decline in lower pricing?.
We have not. And the simple fact is if we go and take a look at what’s going on in shale with our business, I can say our shale-related tonnage. And again this is in frac material, this is what’s going to road it’s going to [pads] et cetera was up 424,000 tons for third quarter last year to third quarter last year.
My guess is at the end of this year, we’re going to see tonnage going to those different shale plays of an access of $7 million tons. Now but I would remind you, obviously I think most people last year thought it probably peaked up and if we’re right this year is going to be higher than last year was.
Here is what we’re seeing and the different place Niobrara is better, Marcellus is better, Eagle Ford is better, Haynesville is better and Barnett is off. Now that’s really the way that stacks up right now, Kathryn..
Okay. thank you. Then my final question today, just to clarify what you had certain specific comments regarding interest expense.
Is interest expense reported in Q3 a good run rate going forward or there will be additional decline on quarterly run rate going forward?.
Kathryn I think the interest rate in the third quarter is a pretty solid run rate..
Great. Thank you so much..
Thank you, Kathryn..
Thank you. Our next question comes from the line of Jack Kasprzak from BB&T. Your question please..
Thanks. Good afternoon, everyone..
Hey Jack..
With regard to the rail congestion and the increased cost there, isn’t it likely to persist at least for a little while longer?.
I think it is and I said it much in our prepared remarks. I think several things are affecting Class 1 railroads. I think a lot of them came out of a very difficult winter behind April. I think they have had a lot of traffic this year in March driven by what’s going on their rails. I think some of their infrastructure needs some work right now.
I mean we’re certainly seeing evidence of that. So I do think that continues to go on. I think part of the evidence of it is, Class 1 railroads this year by my data will use about 20% less ballast in 2014 than they did in 2013 and our ballast shipments are down a little bit less than that year-over-year.
It’s not the lack of need that they are taking that ballast. They’ve got that much activity on the ballast. Now, here is the quick response to it as well, Jack. And I think the way that we’ll likely respond to that is twofold.
One we have the ability to run distributed power and bring more cars into our yards and make up for inefficiency by share volume coming through. And candidly the other component of it is transportation is going to be tight for everyone by both rail and by truck and that’s likely to end up being a price point.
And I think if we continue to see that type of headwind, I think we’re going to come back and we’re going to adjust prices accordingly..
Got you. Thanks for the color. Let me ask about corporate overhead in the quarter which I think you are even take out the acquisition cost that you reported is up substantially in the high 50 million versus a little less than 6 million in the same period last year.
Obviously you have TXI later in there and you told us not to compare legacy TXI numbers but to my point of reference, we have and it seems like an outsized increase even after adjusting for the acquisition cost taking them out, is there something else in there or how should we think about the corporate line going forward?.
We look at corporate overhead and Jack, I want to make sure I am following you where you are. I mean we look at total SG&A cost to $48 million versus $37 million last year. The corporate pieces principally have all the acquisition related cost in them.
And then if you look at TXI as a whole, so if you look at the acquired operations, we picked up about, rounding about $16 million of SG&A from the acquired businesses.
Included in that $16 million is about $4.5 million of basically overhead we allocated here from the corporate office, there was some unallocated overhead that remained that we allocated to that business, there is about $6 million of what I’ll call duplicative overhead and that is the remaining SG&A really left as we continue to integrate the ready mixed concrete and the cement businesses which is most commonly indicated, we are expecting to be done by June of next year, so that cost to begin to work its way out of the system.
So as we look at the pure SG&A that we picked up from TXI, I think we picked up around $5 million of SG&A on a go forward basis against their corporate run rate in the third quarter or quarter ended August 31st of about $18.5 million. So that’s where we’re looking at. If you’ve got some other specific questions, maybe we can uncap that offline..
That’s helpful to go directionally, thank you.
And the diesel fuel, can you tell us the price change in the maybe for the heritage operations if you have that versus last year?.
I’ll tell you what I’ve got. I’ve got 309 in Q3 versus 322 last year in the same quarter. So, we’re seeing a nice decline. And obviously what we’ve got is about two weeks worth of storage at facilities.
So, if that helps, I’m going to stay a little bit for Q3; if it continues like that, it really is going to be much more of a player in Q4 than it was in three..
Yes, very good. Okay. Thank you..
All right. Thank you Jack..
Thank you. Our next question comes from the line of Garik Shmois from Longbow Research.
Your question please?.
So, a follow-up question to the last one with respect to diesel costs and your expectation that it should offset the higher anticipated rail congestion expenses. Just wondering if you could maybe provide some clarification.
Are you expecting that the lower diesel is going to fully offset or just be a partial offset moving forward?.
Hi Garik. I think it will be a partial offset; I don’t -- I think the word I used was mitigate, not offset. So, I think it will make it easier going forward, but I don’t think it makes up a whole..
Okay.
And with respect to cement price increases that you have mentioned for October in both of your states, can you provide maybe a little bit more color on how those are sticking at this point?.
Yes, I can Garik. I mean we don’t see any retraction on those at all. I mean we went into both Texas and California resolute that we needed to have those, I don’t think we like we particularly needed to have that in California.
Our intention is to make that plant profitable and that’s exactly what we intend to do and the other thing that we intend to do is come back with a very similar looking increase in 2015 as well..
Okay. Thanks. And then just a question for Anne. Just under tax guidance of 39% for the full year, quite a big step-up obviously in the fourth quarter.
How should we be thinking about the tax rate looking forward?.
The tax rate is paid down and track down all of the really TXI-related costs that were non-deductible including the goodwill that we wrote-off for the divested assets sort of the change in control costs that were not allowed tax deductibility and some of the transaction costs that were tax deductible.
If you strip all of that out, the ongoing tax rate for the core business including TXI is 29%, which is really where our guidance thought it would be. If you recall back in the second quarter, we indicated we probably have a 29% tax rate excluding this figure there. All of these TXI issues are what drove the tax rate to that from the 29% to 39%.
So, I expect it to continue to be 39% for the fourth quarter because it’s just (inaudible) the run rate is 29%..
Okay. That makes sense. And I guess just my last question on the TXI accretion guidance for this year is expected to be flat. Correct me if I’m wrong, it’s not previously when you had announced the deal you had anticipated accretion to earnings for this year and for year one closing somewhere along lies in mid-to-high-teens accretion.
Just wondering, if you could speak to the change, is it just a timing issue around the closing and if you are still contemplating the year one accretion levels that you previously outlined?.
Thanks for the question. I think we’re sticking with what we thought full year one would look like. I’m going to quote one of my colleagues who looked at this and said, this is all subject to the tyranny of purchase price accounting. And candidly, that’s exactly what we’re dealing with.
When you look at the inventories and the other odd things that go through purchase price accounting, they are in [advisory] delta. I think we could end this year with this deal being accretive. I think it depends on what fourth quarter looks like. And I’m hopeful that that’s where it will be.
But if we come back and really look at what the delta is, I would point you to purchase price accounting and what’s tied up in that..
Okay. Thanks so much. Best of luck..
Okay. Thank you, Garik..
Thank you. Our next question comes from the line of Jerry Revich of Goldman Sachs. Your question please..
Good afternoon. It’s Matt Ryback on behalf of Jerry. It sounds like you had some pockets of soft demand overall.
Just wondering if you could talk about whether volumes improved in October and maybe say more about your confidence in the mid single-digit infrastructure growth next year?.
I guess a couple of things on that. We’ll tell you more about Q4 when we’re together in February, but here is what I’ve always said about October. It should be the busiest month that the aggregates industry in this country sees. And if you’ve got good weather, you would have to work reasonably well.
And what I’ll tell you is I’m not sure what it’s doing for you, but it’s sunny and clear in Raleigh today. So, but I’ll talk more about October when we get together in February. As we come back and address your question relative to infrastructure next year, here is what I would say on that as well.
We’re showing infrastructure up, it’s all about where you are. And here is why we see infrastructure up. It’s going to be another good year in Colorado. It’s going to be another steady year in [Iowa]. It’s going to be another great year in Texas. I think we’ve got probably four years of great infrastructure work ahead of us in Texas.
We’ve got Florida clearly getting better year-over-year with a record DOT program. And we’re seeing a good steady program right now in North Carolina. The Governor has come back, he’s laid out his 20 plus year vision of transportation here.
It’s more urban focused than it’s been historically, but he is also looking at a considerable bonding program that could come back and have more rural initiatives as well. So when we come back and say Colorado feels better, Iowa feels fine, Texas feels better, Florida feels better and North Carolina feels steady, that gives us a good start.
I think if we again more a Northeast or more Great Lakes focused I would probably have more concern, but if I look at where we are I feel good about infrastructure next year..
Great. And then just to follow-up on pricing, pricing has been well ahead of your guidance.
Can you talk about what surprise to the upside and maybe why you’re not changing the pricing guidance range for the full year?.
Well, keep in mind, we had a lot of mixed issues and timing at the beginning of the year, so we thought we would see a make-up as we came through the year. I think part of what’s giving us some tailwind on that right now is we did see more midyear price increases this year than we’ve seen last year.
As a remainder, we actually saw midyear price increase in Dallas Fort Worth market this year and that’s been a market for years that we did not see a midyear price increase.
So again, I think the pricing is doing exactly what we thought the price would do and the volume recovery we always said there was going to be a lag there, but I feel good about it, feel good about as we look into ‘15..
And also Matt, I would say that the fourth quarter pricing is very much affected by mix of agricultural line shipment and that will obviously be dependent on -- it’s very weather dependent as to whether that ag line goes down..
Perfect. Thank you very much Anne..
Thanks Matt..
Thank you. Our next question comes from the line of Trey Grooms from Stephens.
Your question please?.
Hi thanks. Good afternoon..
Good morning Trey..
Kind of back to the cost in the quarter, you pointed to the rail but also I think you said $8 million to $9 million in the quarter from congestion there, but you expect diesel should mitigate this.
So just for clarity, so the impact in 4Q from this kind of net of diesel should be less than the $8 million to $9 million that you realized in 3Q, we think about that right?.
I think you’re thinking that right Trey. I mean I think directionally you are in the right place on that. I think the maintenance and repair spike that we’re seeing is not a surprise. We talked about last quarter, it’s not going to be something that goes in a quarter or two. But I think you will see that come back into a more normal place.
But I do think if we have diesel down and we have a normal Q4, it will certainly start to mitigate some of the congestion and related issues that we’re seeing in rail..
Okay.
I’m sorry if I missed it, but the higher repaired supply cost, what was that in the quarter?.
It’s about $4 million..
Okay. And then looking at your initial guidance range for ‘15 volume, I guess kind of the directional range for ‘15 volume. I appreciate you’ve given us kind of an insight into that a little early and you have made a few comments, but didn’t really get into a whole lot of detail about pricing.
But just given the backdrop of volume, could you give us any directional sense or any color on how you think about pricing in that kind of demand environment?.
As you heard us say before Trey, I think pricing tends to follow volume up with the lag. And I think we clearly feel the benefit of increased midyear pricing this year, more next year. I think if we come back and take a look at where we particularly see strong economies and we have leadership positions in Texas and what we could do in Colorado.
Keep in mind, even as we look at the quarter, we’re looking at price increases on a percentage basis in the west that are going up higher than they are in the east. So there is your volume and your price link. So, I think we’ll continue to see that.
And obviously, we’ll give more definitive guidance on pricing when we come out in February with our full year results. And I’m sure we’ll talk about that at the Investor Day that we’re playing in February as well.
But I think the pricing story continues to be a very different and very appropriate in this industry given the reserves that are incredibly valuable and hard to permit..
Okay. Thanks for that Ward. And then you mentioned in October $10 price increase in cement. It sounds like that’s come along pretty well. But there is some announcement from some of your competition in those markets, California and Texas for price increases, substantial price increases as we look into 2015.
What are your thoughts as we kind of look into those announcements? Have you guys put anything out in those markets for that timeframe or just general thoughts on increases on cement as we look into next year especially in the Texas and California market?.
I guess, this is when I would say Texas is sold out, I mean Texas is sold out. And I think when you’re operating in a sold out market, obviously you’re going to see pricing do what pricing will do in a sold out market. I think the other thing that’s perfectly inherent is California is working its way back to equilibrium.
I think one of the things that we’re most excited about is coming back and increasing the efficiencies in all of our plants Trey, within the permit limits to make sure that we can really meet this rising demand need also in a situation in Texas where do see pricing going up very nicely.
So I guess my point would be this, in a sold out market, you’d expect pricing to go up. In a market in which frankly we need to make that plant profitable, you’re going to see as push price, we’re deciding our brand, because we need to do that.
But what I think as well is we can come back and add as much as 250,000 additional tons of cement to our business next year just through efficiencies.
And I spoke in my prepared remarks of what our teams were doing to ramp those up and simply getting a place like Hunter and Hunter [One] that’s operating in the high 70s up to something closer to deals like 85% working its way toward 90% which is the type of the theoretical world class capacity that we’re looking to.
Giving us that type of volume in that type of pricing environment is where we think we need to be..
Great. Thanks for the response, Ward. And good luck..
Thank you very much, Trey..
Thank you. Our next question comes from the line of Timna Tanners from Bank of America Merrill Lynch. Your question please..
Yes. Good afternoon, Ward and Anne..
Timna welcome back..
Thank you. I just want to take a step back and ask a little bit since this acquisition didn’t burden you too much on the balance sheet, I wanted to hear a little bit more about your thoughts of uses of cash down the road as we look into 2015.
So you touched on some optionality perhaps of expanding at Midlothian, you have clearly the acquisition environment seems to be hued a little bit for aggregates.
So just wanted to get your panorama of opportunities and how you’re thinking about it?.
That’s a fair question, Timna because I think we’re going to have a nice [sprouting] going forward because I think we’ve got what is going to be a remarkably cash generative business. I think the opportunities to continue to grow our business responsibly is one that we’re excited about. So number one, we’ll look at it from that lens.
And number two, we are going to come back and look very carefully the way that we put capital into the business as well because part of what we’ve seen over the last several quarters and we’ve talked about it as volume ramps up, rolling stock needs some help.
And we’re going to make sure that we’re putting appropriate and sensible capital in rolling stock. The other thing that we’re always going to be sensitive to and always look at is coming back and looking at share repurchase and where we are.
We’ve got an authorization from our Board right now that we’re mindful of, but we’ve -- look we like acquisitions we like Martin Marietta too and we’re going to be looking at that going forward.
Part of what I’m grateful for is, shareholders, as you said, we didn’t put our balance sheet in any form of -- in fact our balance sheet is in a very good place. At the same time, shareholders would like to see some of the natural dilution that occurred from that go way and we’re sensitive to that.
So, we’re going to be looking basically at what we’re going to do with acquisitions, we’re going to be looking at what we’re doing with capital and we’re going to be looking at really what we can do with extra cash. The thing that I would remind we’re 120 days end. So, it all sounds exciting and it is exciting.
And we think it’s a great story, but I’ll say we’re 120 days there..
Okay. That make sense. Just to be able to more granular real quick and I know there has been a lot of discussion about this, but on the rail side our folks are expecting that this isn’t a temporary situation this could last into next year and even two years. And I just want to understand how the mechanism would be if you were pass along price hike.
Would that be lag effect, could you do it on a case-by-case basis or how might that look?.
I think it’d be several form. I think you can look at just a pure price increase. I think you can look at surcharges, although that’s never been a mechanism that we prefer. And again, I think part of what we can do to mitigate that because of the way that we build our rail yards, if the traffic is going down we can put in longer train.
If we’re going with distributed power and by that meaning really two locomotives one at the front one in the middle, we can go in and we consider being more than 100 cars and that’s the dialogue we’ve been having with all the Class 1 railroads..
Okay. Sounds like you’re on it. Thank you for your help..
Thank you, Timna..
Thank you. Our next question comes from the line of Ted Grace from Susquehanna. Your question please..
Hey guys, how are you doing?.
Hi Ted..
Hi Ted..
Anne, I was wondering if you could go through the EBITDA bridge that we’ve historically done on the legacy side of it. I know you have made comments, I think you have outlined $8 million or $9 million of headwinds on rail and maybe four R&M on legacy side.
But could we just go through that? And I know on slide six you had kind of a $49 million bucket, but could we maybe just aggregate what that is?.
Okay. So the $49 million bucket, can we have a detail of that in the back, excuse me Ted. That’s going to include -- has it been adjusted? There has been no detail provided on that one, excuse me.
But those cost increases are going to include for the aggregate product line the $9 million on rail that we’ve been talking about; the $4 million on maintenance and supply; and then the normal cost increase that come along with the volume on the business..
And so when you go into the cost, could you just help us understand, I mean last quarter you guys were very helpful in kind of explaining inventory dynamics.
Was there a repeat of that at all in the legacy business this quarter?.
Not at all. As we indicated in the last quarter, it was -- we didn’t it was, but no there was not. We made the conscious decision and to reduce inventories for the second quarter. And now the inventories we think are in good balance. .
Okay.
So, those are kind of the key factors that you would bridge on the legacy aggregates business?.
Yes..
Okay. And then on the specialty products, I guess we’ve come to expect incremental kind of a net 30% range, it was a little low this quarter.
Were there any kind of discrete cost items that would have weighed on incrementals that will be helpful to be aware of?.
Really you’ve got two things there Ted, I mean you’ve got natural gas pricing year-over-year up but 2Q to Q3 down that’s the quick way to think about that. The other issue that we’re faced within that is we did have a kiln shutdown that affected that business to the tune comparatively about $1.2 million.
So if you look at the net gas and the kiln down for a period of time, which happens, I mean that’s just a way that this (inaudible) outage. That’s entirely the difference..
Okay. And then the last thing I was hoping to ask before I jump back.
When you talk about infrastructure being up potentially mid double-digits -- I’m sorry, mid single-digits next year, could you walk through how much of that is public versus private and how you’re thinking about the public piece of infrastructure?.
That’s all public in our domain. Although, there may be pieces of it that have a P3 component to it, because as you know on all major infrastructure projects now in the United States under map 21, they have to go and look if whether a P3 element would makes sense to go with it.
But as we’re looking at that just to be clear, it’s all public infrastructure..
And then so, are you making any assumptions on the federal highway bill, the highway bill or is that all kind of driven by other programs mostly state and local?.
I guess the primary -- it’s primarily driven on the upside about what’s going on in the state right. Because they’re clearly taking more and more charge of what they’re doing. On the federal side Ted, the primary thing we’re assuming is just going to keep on, keeping on, it’s relatively flat in our view and that’s the assumption that we’re making..
So that was the last thing I wanted to ask, because just kind of what’s the latest you’re hearing on the highway bill, optimism you have or like thereof and then I’ll get back in queue?.
Sure. I guess here is to take I’ve got Ted and nobody’s that’s been right on it. So you can probably add me to that queue as well. I think legislative fatigue is going to take this over. If we look back to the last of $11 billion that when it showed up, every time they go to the well looking for whatever the next $11 billion is, it gets harder to get.
And I think one of the things that I was most moved by as I was reading this week is this notion that if the Republicans for example took the House from Senate, one of the issues they’re concerned about is that they don’t demonstrate an ability to govern. They don’t feel like they’ll get a shot at a White House in 2016.
And as we’re looking at things that are simply fundamental to job creation and economic growth, the transportation bill is one of them.
And part of what we’ve seen there’s been recent study that actually did put out early in the month or last month things that are sustainable feel like this would add 2 million jobs of construction jobs in the United States.
So, I think as we sit here and consider the fact that they’ve kicked the can down the road but there is just not a lot of road left to kick the can down. I think our sense is we do end up getting a fixed; they do have to deal with the rough side of it.
Nobody necessarily needs to do that but simply gasoline going down as much as it has over the last several weeks and months and the fact that it’s likely to continue going down may give people opportunities to do that. That’s probably a long answer Ted. I’m not sure that it’s precise but it’s probably as good as anybody can offer right now..
That’s very helpful guys. Best of luck this quarter..
Thanks Ted..
Thank you. Our next question comes from the line of Keith Hughes from SunTrust.
Your question please?.
Yes, a couple of questions. First on the NOLs, you raised your estimate to 500 million.
Can you just kind of update on timing of how the shape or form you’ll be realizing those?.
Yes, we actually think over the next several years and if you look in the press release, this year we indicated that in 2014 we’ll actually be able to use 84 million of those NOLs..
Do you have a ‘15 estimate at this point?.
We don’t have -- well, I do, but we haven’t talked about it. We’ll talk about that when we release guidance for the balance the year..
Are these NOLs in the next let’s call it 18 months or so, are they on foregoing capital gains taxes or are they on operating income?.
It’s operating income..
And I think you said 39% tax rate in the fourth quarter so that seems a little high considering you’re getting an NOL.
How does that all work out?.
Well, as I indicated early, this is the effective tax rate, the NOL only deals with your cash taxes..
Okay, I got that. Thanks..
And we’ve also indicated we estimate cash taxes for the full year is expected to be about $13 million..
Switching back to the previous question on assumption for infrastructure spending in ‘15, you’re assuming flat federal dollars that would mean at same stage what have to be double-digits less or some kind of [trickier] offsetting there, can you reconcile that for me, Ward?.
I think we don’t see it could be offsetting there because if we’re looking at 77 hot lanes in Charlotte at high four, and Charlotte -- I mean in Florida right now if we’re looking at what’s going Interstate 35E and Dallas and we’re looking at more underground Park Lane in Houston. Those are just some of the headline projects.
We also think that we’ll see more of those come through as we enter into ‘15..
Okay. And then final question, I know you don’t typically breakout revenues by state or geographies, but Texas becomes so important to you here and so many good things going on.
Can you just give us a feel of how much of the my revenues are intensive?.
We’ll give you some more of that at the end of the year. Here is a good way to think about it, look at what’s going on in non-resi in United States because that’s an area that’s we’re getting considerably better year-over-year, it’s fasting. Look we’ve seen an additional $30 billion of non-resi activity in the United States this year.
What that means effectively is that $45 billion of areas that are up about $15 billion that are down, but next year to the 30. Here is the takeaway, $15 billion of it is in Houston all by itself. So that gives you a sense of to your point how important and how dynamic Texas is but at year-end we’ll come back to give you the snapshot..
And Keith just a reminder, we obviously will have to likely be what we’ll give you is what we think 2015 looks like because obviously 2014 will only have half the year of TXI’s operations in it..
Yes, I was looking for pro forma combined..
Yes. So, we’ll give that to you as we come out with the annual guidance..
Okay. Thank you..
Thanks Keith..
Thank you. Our next question comes from the line of Mike Betts from Jefferies. Your question please..
Yes. Thank you very much. I just got two questions left, if I could. Firstly on SG&A and I heard your comment on the check side that was fill-up by another $10 million to go out which we at least give about $5 million in that, that seems extremely low on almost a billion of sales.
Maybe I’m missing something and I guess the real fundamental question Ward is with the new IT system and with cement potentially requiring less SG&A. Now we move to structurally lower level of SG&A as a percentage of sales within the business? And then my second question just on the TXI heritage aggregates price, the $11.83.
You gave an explanation, Ward and thank you for why it was higher. My question is though do you report the aggregates pricing any different from the way TXI reported that number.
I mean is there a some kind of accounting difference or actually is that all mix I mean with that number similar to what they would have looked like and you are attempting? Thank you..
I’d say, let’s do this way, let’s bifurcate that. I’m going to talk about pricing and aggregates and Anne is going to talk a little bit about SG&A. I think this is what’s going on. I do think you are seeing sand short in much of Texas to give you a sense of it.
The sand and gravel numbers that we’re seeing in much of Texas right now is actually ahead of our corporate average. So it’s somewhere between $11 and $12 a ton. We’re also -- keep in mind and this is different. We gave up those two yards at Frisco and Dallas. We picked up 8, so that’s 8 yards, so we picked up in Texas.
The average selling price of those yards is in excess of $60 a ton.
Now Mike to answer your question directly when we come back and look at what’s going on at the stone facility that we picked up in North Texas, they do tend to be considerably lower than our corporate average that’s something that we’re working on right now and that help TXI would have rolled all of that out.
And you do have some dynamism in the market right now, particularly relative to what’s going on in sand and gravel that has used that. I hope that’s responsive to your question. I’ll let Anne to talk about SG&A..
Thank you..
Change in SG&A, I do believe that we’re entering an area and arena at time we will have some structural change. As I think about 2015 and beyond, I don’t believe a 5.3% SG&A level on this side is sustainable, but neither do I think it’s going to be 7.5%.
I think if I was modeling, I’d probably put in 6% to 6.5% of total sales as a pretty decent run rate on a business at this revenue base. But obviously we like to always outperform against our target. So we’ll always work to keep that going down..
That’s great. Thanks both of you..
Thanks Mike. .
Thank you. Our next question comes from the line of Stanley Elliott from Stifel.
Your question please?.
Hey, thank you for taking my question, most of have been answered. Real quick on the specialty products. You mentioned the kiln shutdown.
What happens in Q4 to kind of get to the gross profits ramp like it’s schedule to do according to guidance?.
Look, I think we just -- the pricing is working we’re seeing a lot of demand for clays, we’re seeing a lot of demand for chemical products as we come back and look at the types of margins that we’re getting on that business on a record quarter. I don’t see anything disrupting that. And we won’t have to count them.
I think those are your differences, Stanley..
I’ve got to say we’ve got a 34% margin on that business for the quarter. It’s a darn good business..
No look, I think it’s 32 but when you look at it, the sequential ramp relative to how it’s been historically, I was just curious, plus I got out of questions..
We’ll give you that..
Thank you. .
Thank you..
Thank you. This does conclude the question-and-answer session of today’s program. I’d like to hand the program back to Ward Nye for any closing comments..
Thanks again for joining our third quarter earnings call. We remain to running this business in a world class fashion. We’re convinced we’re going to do it and we’re convinced that we’re going to have the returns as a company of world class business.
We look forward to talking you about that when we’re together in February and we look forward to seeing you in New York in February. Thanks so much..
Thank you ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day..