Texas Industries Earnings Call Nuggets: EBITDA and Hunter Plant & Pricing
Texas Industries (NYSE:TXI) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.
Ted Grace – Susquehanna: Maybe starting with that last comment that you made on $400 million of EBITDA could you give us some of the key building blocks or assumptions that underlie that number?
Kenneth R. Allen – VP, Finance, Treasurer and CFO: I’d be happy to, you know prior to the downturn in construction the average cement market in the United States was in a sold out position and required imported cement. We think that’s going to be the average condition of the cement market going forward once the recovery is fully realized in our markets and our experience has been that if you have good cement assets in a sold out cement market. You generate 30% or 35% EBIT margins. Given those margins and given the 7 million to 7.5 million tons of cement capacity that will eventually be able to shift and the associated aggregate ready mix results and margins that would go along with that. It’s all pretty consistent with around $400 million of EBITDA.
Ted Grace – Susquehanna: I realize this is probably the toughest question you are ever going to answer but, realistically when would you expect to get to the type of market conditions that might produce that kind of demand, for the industry and for TXI?
Mel G. Brekhus – President and CEO: Obviously we would expect that to occur quicker in the Texas market. As a matter of fact as you look at things affecting this market, we are probably pretty close to being there over the next year or so we think of total supply into the market today. The California region market balances a little different than it is in Texas with demand being still quite a ways below capacity and that’s why it will take a little longer for that region to catch up. But I will tell you in the meantime with our concentration of assets being in the Texas region and the opportunities to improve EBITDA in that region, in the near term there is a lot of value being created just in Texas. Then value will be created in California as things begin to pick up but it will take a little longer in California.
Ted Grace – Susquehanna: So just maybe on the pricing front if we go back to kind of the prior high where pricing on some of that in any way was in the mid-90s and now we are looking at something that’s in the 70s. How would you encourage us to think about the path between here in getting back to – the time table of the path to getting back to something in the high-80s to low-90s?
Mel G. Brekhus – President and CEO: Some of that will depend on input price movements as well and that’s why we talk about margins rather than prices. But given what we have seen in this past downturn and really in the past 20 years in the Texas, in the U.S. in that market in terms of improved market structure where we’ve seen imports being fairly rationale, where we’ve seen pricing in a terrible downturn drop and drop significantly, but not to where you think it would be in a high fixed cost, variable cost industry. There is no reason why we shouldn’t see pricing exceed the previous peak. Right now though that $400 million number is really based on EBIT margins that we’ve seen in the past with the (equipment)…
Ted Grace – Susquehanna: The last thing I wanted to ask because I know you want to get on to others too. If we just think about TXI’s competitive positioning following the Hunter Commissioning, in terms of where you think you will be on the cost curve vis-a-vis your competitors. Could you just help us understand do you think you are going to be in line with the market, better positioned from call it unit economics basis or something else.
James B. (Jamie) Rogers – VP and COO: I would expect to be on the better end or upper end from a competitive standpoint, we’ve got great footprint. We have the newest fleet in the industry with our Hunter plant coming on line and the (indiscernible) being among the newer plants in Texas, as well as California. So, we’ve had – we’ve built three new cement plants in roughly 10 years, so I feel extremely good about our position.
Hunter Plant & Pricing
Kathryn Thompson – Thompson Research Group: First question is on the Hunter plant commissioning. Just a little walk around how it’s running, as you’re getting to the process of fully commissioning and you are also will be shutting down about 900,000 from plant as Hunter becomes fully commissioned. Maybe discuss just more the mechanics of the timing will there be additional costs as you ramp up and ramp down capacity and if there is anything that we should take into account in this quarter and the next quarter when taken into account of the Hunter dynamics.
James B. (Jamie) Rogers – VP and COO: This is Jamie, I might (indiscernible) this with Ken a little bit and I am too propitious, but I am going to say this anyway. Our commissioning process so far has gone as well as we could have possibly expected. As we mentioned earlier in the comments, we expect to formally commission Hunter 2 this quarter. We expect the cost as we get into more normal run rates or commission run rates to be very good with Hunter 2 of course. And our expectation you didn’t ask this, but I will answer it anyway our expectation is that we would after making the appropriate modification for our Hunter 1 plant the 900,000 that you mentioned to bring that back online maybe a little sooner than we thought but I’d say within 12 to 14 months plus or minus. Kathryn, the only other cost and I am sure you pick this up that it would be depreciation and the interest that would start to flow through as well once we declare commission…
Kathryn Thompson – Thompson Research Group: Moving to pricing. We are hearing very positive commentary out of Texas with the cement price increase. In California, it is our understanding that you’ve taken a little bit more of a two tier approach. So, overall number is about in line with the market, but the timing is a little bit different spreading out the increases through the spring. Could you maybe expand more on the thoughts behind the strategy and also talk a little bit about market acceptance of cement price increases in California?
James B. (Jamie) Rogers – VP and COO: It’s Jamie again. We saw I mean to your two tier comments a modest $2 price improvement or price increase in January. The next tier of $3 we feel very confident about that occurring April 1 and we’re optimistic as well of the potential increases in the spring in the summer months.
Kathryn Thompson – Thompson Research Group: What was the general magnitude of that being would it be in California and Texas?
James B. (Jamie) Rogers – VP and COO: I’ll start with the California, yeah let me go back to Texas in Texas depending on what local market you are in it will range but I would say both are going to occur in April, as you get both through the North Texas in the $3 price increase range for cement in Central Texas and Houston closer to a $5 range. I think that covers your question.