Texas Industries, Inc. F2Q09 (Qrtr End 11/30/08) Earnings Call Transcript

Jan. 8.09 | About: Texas Industries (TXI)

Texas Industries, Inc. (NYSE:TXI)

F2Q09 Earnings Call

January 8, 2008 2:00 pm ET

Executives

Linda English - Manager of Investor Communications

Melvin G. Brekhus - President, Chief Executive Officer, Director

Kenneth R. Allen - Chief Financial Officer, Vice President - Finance

Analysts

John Kasprzak – BB&T Capital Markets

Derrick [Schmoist] – Longbow Research

Analyst for Christopher Manuel - Keybanc Capital Markets

Trey Grooms - Stephens, Inc.

Katherine Thompson - Avondale Partners

[Glenn Wartman] - Sidoti & Company

Brett Levy – Jefferies & Company

[Mike Detz] - J.P. Morgan

[Kevin Bennett – Davenport & Company]

Elizabeth Barney – Eagle Capital

[Andrew Root – Alicone Capital]

Seth Yeager – Jeffries & Company

Operator

Welcome to the TXI second quarter results conference call. During today’s presentation all parties will be in a listen only mode. Following the presentation the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Thursday, January 8, 2009. I would now like to turn the call conference over to Linda English.

Linda English

Thank you all for joining us today for TXI’s second quarter results conference call and webcast. We appreciate your time and interest in TXI. I’m Linda English, Manager of Investor Communications. Joining me today are President and CEO Mel Brekhus and CFO Ken Allen. We will follow a similar format as in previous presentations. Mel and Ken will first provide comments for the quarter and follow with Q&A.

Before I turn the call over to our speakers, I’d like to remind you that certain statements contained in this conference call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements speak only as of the date hereof and we assume no obligation to publicly update such statements.

Such statements are subject to risk, uncertainties and other factors which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements.

Potential risk and uncertainties include but are not limited to the impact of competitor pressures and changing economic and financial conditions on our business, the cyclical and seasonal nature of our business, the level of construction activity in our markets at normal periods of inclement weather and expected periods of equipment downtime, unexpected operational difficulties, changes in the cost of raw materials, fuel and energy, changes in interest rates, the timing and amount of federal, state and local funding for infrastructure, delays in announced capacity expansions, ongoing volatility and uncertainty in the capital or credit markets, the impact of environment laws, regulations and claims and changes in governmental and public policy and the risk and uncertainties described in our reports on Forms 10K, 10Q and 8K.

Now, for opening comments Mel, please go ahead.

Melvin G. Brekhus

Welcome to our second quarter teleconference call. I hope everyone enjoyed the holiday season and I know you join me in hoping that 2009 will return us to more stable conditions and set the stage for the economic recovery that will inevitably occur. On our call last September I reported that construction activity in Texas had begun to slowdown.

The pace of the slowdown accelerated during the fall as we began to feel the impact of frozen credit markets, declining oil and gas exploration due to the dramatically lower oil prices and the general economic downturn and uncertainty that seems to be the trademark of these times. Cement consumption in Texas this fall was off approximately 20% from a year ago. Cement prices in Texas continue to be stable with realized prices up 3% in the November quarter compared to a year ago and up 1% compared to the recent August quarter.

California continues to be a difficult market. While we are hopeful that the bottom of the market is near, we are not yet able to call the bottom or forecast the future with a significant degree of certainty. Given the uncertain conditions, the announced cement price increase effective January 1st in California will likely not be successful but we do expect pricing to be relatively stable in the near term.

We have done and will be doing a number of things to respond to the recession while at the same time keeping our overall strategy intact. During the second quarter we suspended the operation of our smaller kilns at our Midlothian cement plant in order to maximize the efficiencies inherent in our large modern kiln and manage our clinker inventory levels. In December, we suspended the operation of our cement and grinding operation at our Crestmore facility in California.

We were able to meet demand with grinding capacity at our new Oro Grande facility. We have limited the run time at our aggregate facilities in order to avoid building inventories and to reduce costs. We have adjusted shifts and reduced overtime. Likewise, our ready mix operations have trimmed their headcount in response to lower demand in the markets we serve. Compared to the end of December in 2007, total headcount at TXI as of December 31, 2008 has declined 15%.

Finally, we have recently decided to delay the expansion of our Central Texas cement plant beginning in our fourth quarter. We do not believe the market will require additional cement during the near term or afford us incremental earnings from that additional production. It is therefore prudent to conserve cash and delay construction until conditions improve. We also paired back our regular cap ex spending significantly to only spend on those projects which are absolutely necessary. Our regular cap ex spending for the year has been trimmed by approximately $20 million.

In addition to the items above, we have cost saving initiatives underway in every aspect of our business. Given the declines in construction activity in all of our markets, I am generally pleased with the price of our major products. I discussed cement pricing earlier and we expect aggregate pricing to remain stable to positive as well. We’re also pleased to have delivery fuel surcharges in place and ready to take effect in the event fuel prices start to increase.

The results of our price increase for ready mix concrete are mixed. We are realizing a significant portion of the increase in most of our markets but with the volatility in demand we are currently experiencing, we won’t know exactly how much we will obtain until early spring of 2009. Clearly, the current economic conditions are some of the most challenging that any of us have seen.

We believe the emphasis on infrastructure and current stimulus package proposals is appropriate and will be an important part in helping our industry stabilize and start growing again. We’re anxious to see the final results and to play a vital role in getting our economy back on track. While our current focus is certainly on cutting cost and otherwise conserving or generating cash, we are doing so with an eye towards keeping our long term growth strategy in place.

I believe that we are poised to take advantage of the growth initiatives we have laid out in the past when market conditions become favorable again. We remain focused on completing our cement capacity expansion initiatives in Texas. Once market conditions recover, we will complete the Central Texas project and finish incrementally increasing production at our North Texas cement plant.

We then should have almost eight million tons of very efficient capacity in Texas and California, the two largest cement markets in the United States. I also believe that TXI will be made stronger by the present difficulties and will emerge well positioned to take advantage of the opportunities that inevitably lay before us. As I have said, these are challenging time and I am supremely confident that the men and women of TXI are rising to the challenge.

With that, I’ll turn it over to Ken.

Kenneth R. Allen

I will first review consolidated results for the quarter ended November 30, 2008 and then provide more details on each of TXI’s business segments. Consolidated net income for the quarter was $3.9 million and this was $25.5 million lower than net income for the same quarter last June. Shipments for all major products declined as the general economic downturn began to significantly impact our Texas markets and California construction activity continued to trend down.

Scheduled maintenance expense in cement, increased depreciation related to the new California plant and increased interest expense combined with the decline in shipments to reduce net income. The impact of these items was partially offset by lower SG&A expense. Now, turning to our cement segment, total shipments declined by 18% and within that shipments in our Texas markets of 778,000 tons were down 19% compared to last year’s quarter.

This percentage decline is consistent with the decline in the overall market. Shipments in California declined 14% to 305,000 tons. Cement prices in Texas increased 3% compared to a year ago and about 1% compared to the August quarter and again, those are increases. California cement prices were 14% lower than in last year’s quarter and 5% lower than for the August quarter from last summer.

On the cost side, scheduled maintenance of the North Texas cement plant added approximately $8 million to expenses. Recall that last November, a year ago there was no major scheduled maintenance occurred at any of TXI’s cement plants. Depreciation expense related to the new plant in California added $3.3 million to expense. Energy costs were up slightly primarily as a result of higher coal costs, however, less energy was used to produce a ton of cement partially offsetting the increase cost of coal.

Electricity prices weren’t all that different compared to last year but they were down significantly from the August quarter. They were down about 40%. Turning to the aggregate segment, total stone, sand and gravel shipments declined 22% for the quarter compared to a year ago. Recall that last spring though we sold our South Louisiana sand and gravel operations and so after removing the shipments associated with South Louisiana operations from last year’s November quarter shipments were down about 9%.

Again, comparing this previous quarter with a year ago, average prices for stone, sand and gravel increased 5% while unit cost increased 11%. Primarily the unit cost increase is primarily the result of lower production. Labor costs per ton were down about 7% despite the decline in volumes. The price of electricity was fairly even with a year ago but down from the summer. Diesel costs were up 17% from a year ago but they have come down by about the same percentage since the summer time.

The contribution of all these factors resulted in an operating profit for the recent November quarter of $6.7 million which was down $4.2 million from a year ago. Now, let’s move on to the consumer products segment which is composed primarily of TXI’s ready mix concrete operations. Ready mix concrete shipments declined 27% compared to a year ago. Hurricane Ike had some negative impact on shipments but the decline in general economic activity that has recently hit the Texas region, had the largest impact.

Average prices increased 5% compared to a year ago and average unit costs increased by 9% as material and transportation costs moved up. Diesel prices were up about $1 per gallon from a year ago but down about the same amount compared to the summer. Labor efficiencies for the delivery of concrete remained high indicating that operations are doing a good job of controlling costs. Operating profit for this segment as a result of all I’ve described here declined by $3.9 million. Again, primarily on lower shipments.

Corporate SG&A expense declined by $6.3 million compared to a year ago primarily due to lower incentive and stock-based compensation expense. Other income on the corporate line declined by $1.5 million and then interest expense increased by $9.3 million. Recall that interest expense in last year’s quarter was fully offset by capitalized interest related to the California cement expansion project.

Now, as Mel mentioned earlier, we’ve decided to delay the completion of our Central Texas cement plant expansion. Our objective here is to bring construction on the project which is extremely heavy right now to an orderly halt. This will place us in good position to resume construction in an efficient manner once the economy and markets recover. As a result, we expect construction to be completely halted sometime during the spring and this would coincide with TXI’s fourth fiscal quarter.

We are still in the process of planning all the myriad of details that are associated with halting construction on such a complex project. But, our best estimate today is that this schedule will allow TXI to defer $40 to $60 million in spending and all of this deferred cash would have been expanded in fiscal year 2010 which begins June 1 of this year. As a detail, note that once construction is fully halted we will not capitalize interest on the project until construction is resumed.

Looking at total capital spending for the year, and this includes the Central Texas cement project, we expect total capital expenditures in fiscal year 2009 to be in the range of $275 million to $305 million. This is about $20 million less than we originally planned on investing and reflects a reduction in non-expansion capital spending as we focus on conserving cash. Now, while we haven’t yet developed a budget for capital spending in fiscal year 2010, we do know that capital spending for the coming year will drop off dramatically from fiscal year 2009.

With depreciation running about $70 million annual, replacement capital spending for next year will likely be around half that level. That should be about the level for total capital spending for next year as well. Looking to where we are today, just as a reminder, our new higher coal costs will come in to effect January 1 for our Texas cement plants and this will likely increase Texas cement production costs by about $3 to $4 a ton.

Also, just to clarify, we have no further downtime scheduled for maintenance shutdowns for the rest of the calendar year. The cost associated with these shutdowns at our three cement plants are behind us in the first half of the fiscal year. Now, as Mel said previously, these are challenging times and we do believe we are taking the appropriate steps to conserve and generate cash. Reductions in personnel, changes in production levels at plants to conserve cash costs and delaying and reducing capital spending are all towards our efforts.

With that, I’ll turn things back over to the operator for the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from John Kasprzak – BB&T Capital Markets.

John Kasprzak – BB&T Capital Markets

My first question is with regard to interest, Ken you mentioned once the Hunter plant project is stopped you won’t be capitalizing interest but can you give us some guidance on what interest expense might be for the February quarter will look like, for this current quarter you just reported and then what it might be like for Q4?

Kenneth R. Allen

Interest expense in the current quarter was $9.3 million and interest expense incurred was about $12 million. The difference was the amount capitalized. So, if interest expense incurred doesn’t change too much, maybe it steps up just a tad, in the third quarter capitalized interest will move up a little bit as well so you’ll see interest expense maybe be equal to or a little lower in the third quarter.

Then, it’s just a matter of when the exact timing occurs in the fourth quarter as to when we begin to cease capitalizing interest. It’s a little difficult to time that. But, we’re running interest expense before capitalized interest of $12 to $13 million right now.

John Kasprzak – BB&T Capital Markets

Mel, you mentioned in your comments that you were happy with the pricing of your products, in particular aggregates pricing is stable but, can you tell us in Texas are there price increase announcements for aggregates for calendar ’09?

Melvin G. Brekhus

No, there aren’t price increases for calendar ’09 at this time.

John Kasprzak – BB&T Capital Markets

Had there been any that you thought would be out by this time and they have been deferred to the spring or had we always thought it might not be until the spring?

Melvin G. Brekhus

There were some price increases that took effect and some of that work is still to be done and so you might see some incremental increase in prices but, generally speaking those price increase in Texas in aggregates are in the spring.

John Kasprzak – BB&T Capital Markets

The California plant during the second quarter, can you tell us what the utilization rate of the plant was during the quarter?

Kenneth R. Allen

Jack, it was around 50% to 60%.

John Kasprzak – BB&T Capital Markets

Going back a few months a sort of national cement price increased $15 a ton, that was announced by a lot of the major players. I take it that’s off the table, I guess that’s generally assumed at this point. With what you guys experienced in California in the quarter with prices down so obviously there’s no price increase out but what sort of – do you think this is the sort of level of pricing that we’ll see or is the situation still too difficult to predict with regard to California pricing? Could there be further pressure?

Melvin G. Brekhus

Well Jack, as I mentioned in my prepared comments, I don’t believe that the $15 price increase that was announced nationally by some of the players will take effect to any degree in California. It is possible that there might be some price initiatives in the spring or early summer in that market but there’s a lot of pressure on that market because of the demand declining so precipitously that I feel like the modest declines in pricing that we’ve had in California when measured against historical price declines in other down cycles is encouraging.

Operator

Our next question comes from Derrick [Schmoist] – Longbow Research.

Derrick [Schmoist] – Longbow Research

Just first off, Ken I think you mentioned higher coal costs in Texas. I think your contracts were set to expire at the end of the fiscal year in California, can you give us an update at what you’re looking at with respect to pricing there?

Kenneth R. Allen

We have completed our contract out there and it’s a little different than the other one. It is based on several different indices but our best estimate is we will pay more for coal in California once we have the new contract in place. Remember we said in July we expected coal costs to go up roughly 40% in Texas but in California we don’t expect to see anywhere near that sort of increase.

Derrick [Schmoist] – Longbow Research

I didn’t hear it in your prepared remarks but there were some reports over the course of the quarter that you’d be taken Oro Grande offline temporary in January. I’m just wondering if you can confirm that or dispute that?

Melvin G. Brekhus

I’ll add to that Gary. As part of our plan to operate our facilities to meet market demand from our customers we have anticipated that we will have the ability to produce more clinker and therefore cement in Oro Grande than our customers will need so we have warned our employees that if that is the case then we will have a shutdown and a lay off. We have at this time expectations that that will happen this winter sometime in late January/February, maybe early March.

Derrick [Schmoist] – Longbow Research

Are you prepared to talk about potential costs associated with that right now?

Melvin G. Brekhus

Well, the cost associated with that are not running the facility but there are no special costs associated with that shutdown and lay off.

Kenneth R. Allen

Gary, we think running this way may be a little better than running the way we have run the plant in the past.

Melvin G. Brekhus

Yes, I should have mentioned Gary that in the past we tried to run the plant at lower than rated capacity thinking that might be a way to keep our costs as low as possible and we’ve come to the conclusion that that isn’t the case. We need to run the plant at or near it’s rated capacity and run it hard and then when we have inventory levels that are in excess of what the market place call for shut it down and lay off the employees until we burn those inventories off.

Derrick [Schmoist] – Longbow Research

Have you seen recently any capacity coming offline in Southern California from your competitors perhaps?

Melvin G. Brekhus

There have been some shutdowns like we’re talking about doing announced. For example, Mitsubishi did something like that over the Christmas and New Year holidays. There may have been others that have done that. There were plans to do that in Northern California, the Heidelberg plant in Redding. I’m sure there are others that are considering.

Derrick [Schmoist] – Longbow Research

Lastly, in more higher level, with freight rates where they are now pulling back significantly over the course of the year, I’m just wondering if we could get your thoughts on a situation which potentially lower cost to imports reenter the US market and become competitive against domestically produced cement?

Melvin G. Brekhus

Well, the shipping cost Gary have gone down rather substantially over the last quarter and yet there has not been imports that have come in to displace domestic production. I believe the reason for that is what we have articulated for a number of years now, that the importers are international cement suppliers and not likely to want to import product in to the United States and dump on their domestic production because it’s extremely difficult to cost justify brining in lower imports and then having to absorb that with the loss production in sales from your domestic operations.

Operator

Our next question comes from Analyst for Christopher Manuel - Keybanc Capital Markets.

Analyst for Christopher Manuel - Keybanc Capital Markets

Just a question on Texas, as I remember demand still vastly exceeded supply within the state but you were seeing some cement being shipped from Florida and some surrounding regions. I was just wondering if going forward you expect those to be scaled back or if there’s simply no other place for that cement to go at this time or if demand fell too fast for those to be scaled back in the second quarter?

Melvin G. Brekhus

Jason you’re talking about cement coming in from outside the state?

Analyst for Christopher Manuel - Keybanc Capital Markets

Right. It does look like, particularly the Florida cement has been pulled back just to get directly to your comment there. But, you’re right demand did take a step down in the fall fairly significantly.

Analyst for Christopher Manuel - Keybanc Capital Markets

Then just to clarify on the maintenance, was there any maintenance in the last two quarters of fiscal year ’08?

Melvin G. Brekhus

No, there was no scheduled maintenance that was of any significance. We did have, and we talked about this last time, last year’s third quarter we had a fan motor go down at our Morse Texas plant and that cost some outage and that was about a $3 million hit.

Analyst for Christopher Manuel - Keybanc Capital Markets

Then just last question on California, with the fiscal situation there I know you had said you had seen some project lettings increase in the past quarter and since the fiscal situation has gotten a little worse, I was wondering what you were seeing there in terms of lettings?

Melvin G. Brekhus

The only thing we’ve seen Jason is that Schwarzenegger got his emergency budget passed. Other than that there has been literally nothing going on. No change other than that. Quite frankly, I’m not answering your question I’m answering a more global one, but quite frankly I think that in California and other places, maybe even Texas, there’s a lot of anticipation that President Elect Obama’s stimulus package is going to have a substantial amount of infrastructure work embedded in it. I think some of the states are waiting for that quite frankly to see what that is.

Analyst for Christopher Manuel - Keybanc Capital Markets

So are the states actually delaying projects in anticipation of getting federal funding?

Melvin G. Brekhus

I would say in the case of California they’re not delaying it for that reason. California has such a negative deficit that they’re just trying to work their way out of it. But, I would suggest that there are probably some states that don’t have that sort of situation that are anxiously waiting to see what President Elect Obama means when he says, “I’m going to supply a stimulus package and you use it or lose it.” So, they’re probably keeping their powder dry.

Operator

Our next question comes from Trey Grooms - Stephens, Inc.

Trey Grooms - Stephens, Inc.

A couple of questions, Mel if you could give us just a little bit more clarity on the cost associated with shutting down Oro Grande later this month if you guys do end up doing that. You said the cost is just not running the plant there’s no special costs really so can you try to quantify for us just a little bit more what that cost of just not running the plant is?

Melvin G. Brekhus

I think Ken would be better to answer that question.

Kenneth R. Allen

It’s really not just the shutdown. It’s as Mel said, recall we’re going to run and run at a higher level of capacity before we shutdown. So, think all the way through of a three month period, when you think all the way through a three month period we think the costs could very well be better running this way, running at a higher level of capacity and then shutting down compared to the way we’ve been attempting to run which is run every day at a reduced level of capacity. So, I’m not sure we’ll see – well, we don’t think we’ll see a spike in costs in the quarter as a result of running in this fashion.

Trey Grooms - Stephens, Inc.

Then you said that you were going to run it at a higher capacity and then shut it down until the inventory gets back to more normalized levels and then pick it back up and run it. I guess when you pick it back up you’ll be running it at the higher utilization levels again and just kind of monitoring inventory at that point? So, I guess could we see another shutdown sometime in future quarters if demand continues to fall off in California?

Melvin G. Brekhus

Yes, that’s exactly correct.

Trey Grooms - Stephens, Inc.

Mel, you mentioned that you thought that the price in California was going to begin to kind of stabilize now. I know you touched on it again on an earlier question but can you give us a little bit more clarity on what’s giving you that optimism on the price there?

Melvin G. Brekhus

What’s causing me to be optimistic by that and encouraged by that is while demand dropped so quickly in California, the price went down some, there’s no question about that, it did go down but, it has stayed there for months now in spite of the fact that we’ve had this significant decline.

Trey Grooms - Stephens, Inc.

So since November I guess you haven’t seen any additional declines in California?

Kenneth R. Allen

Trey it hasn’t been September – I mean the last two or three months prices have been stable in California.

Trey Grooms - Stephens, Inc.

Then just one question about Hunter, do you guys think you’ll be seeing any penalties or anything like that from the contractors there as a result of postponing the construction process there?

Melvin G. Brekhus

Yes, there will be some costs associated with this delay because we will have certain things that have to be done as we demobilize and delay this project. I don’t think it’s going to be significant in nature and that’s why we are shutting the project down temporarily the way we are. We’re doing it in a way that we think is smart so that when we resume construction the overall costs of the delay will be more than compensated for by the profitability of the decision not to finish a plan that when it was scheduled to finished that would provide us product that we wouldn’t be able to sell in to the marketplace.

Trey Grooms - Stephens, Inc.

Then just one last question, you guys recently I think it was back in November, you bumped up the covenants on your revolver which as far as I know has zero drawn on it. Can you go over some of your thoughts and kind of what your thinking process was behind that?

Kenneth R. Allen

With the overall economy doing what it was doing and liquidity and things like that being so important, we decided it was important just to be sure we had plenty of flexibility under our credit line. As a result we bumped up the debt to EBITDA covenant to give us some more room over the next year or so. That’s simply it.

Operator

Our next question comes from Katherine Thompson - Avondale Partners.

Katherine Thompson - Avondale Partners

With the construction expansion cancellation or curtailment at Hunter, what are the construction cancellation costs and the demobilization costs that will be associated with this curtailed expansion?

Melvin G. Brekhus

That is being worked on as we speak. Representatives of TXI and the general contractors as well as other subcontractors are working on that and I can assure you that all parties are trying to keep it at a minimum. But, it’s really too early for me to predict. I’m encouraged by what I’m hearing back from TXI’s engineering group that all of the contractors know that our objective is to finish this construction, we just don’t need to finish it now.

They all want to be a part of finishing it so they’re working with us to make sure we have a smart shutdown so that when we do start up, the overall cost including the cost of this delay are minimal.

Kenneth R. Allen

And, we expect them to be.

Katherine Thompson - Avondale Partners

So I assume that there would be some cancellation fee associated with your construction company? Is that a correct assumption?

Melvin G. Brekhus

Not necessarily, no. That is not necessarily correct.

Kenneth R. Allen

Katherine if you’re getting at are we likely to see a P&L impact for cancellation fees or something like that?

Katherine Thompson - Avondale Partners

Yes.

Kenneth R. Allen

We don’t think we will see anything of significance from that side.

Katherine Thompson - Avondale Partners

Do you have any color regarding CEMEX was looking to expand its plant in Texas also adding about one million tonnage of capacity. Do you have any color regarding whether they’re continuing that project also?

Melvin G. Brekhus

I think that what you should do is talk to them about that Katherine. I would hate to talk about a competitor’s activity because I really don’t know the answer to it.

Katherine Thompson - Avondale Partners

One thing, a clarification, you had indicated early on the call that past utilization at Oro Grande is 50% to 60%. But then at the same time later on in the Q&A you had indicated you’re trying to run at full capacity in order to build inventory. Can you help me understand the disparity between those two comments? It appears that you’re running at half capacity but saying you’re trying to run at full capacity in order to build inventory.

Melvin G. Brekhus

I think I can answer this question with this answer, we are going to run the Oro Grande plant at 100% of capacity 50% of the time to meet the demand which is 50% of the rated capacity. Did that make sense? Now, it isn’t exactly that number but that’s the way we are planning on running, 100% of capacity to meet whatever market demand is which right now is about 50% of rated capacity.

Kenneth R. Allen

So, we’ll run full out for a while and then stop.

Katherine Thompson - Avondale Partners

So as you said earlier, for instance you could run three months at a time and then off three months at a time?

Melvin G. Brekhus

Yes, it probably won’t work exactly that way because that’s hard to cover a shipping cycle by doing it that way. It’s more likely that in this environment today that we would run less than three months so that we’re not down three months. More like run for six weeks and then be down for six weeks, or run for two months and be down for two months. Three months is probably a lot, I hope it’s a lot.

Katherine Thompson - Avondale Partners

Then just to clarify, I misunderstood earlier, you originally talked about slowing down in late January. Is that still the case or is that being pushed out a little bit?

Melvin G. Brekhus

It’s pushed out a little bit I think. It depends on how we run in January but, it’s the same concept in place.

Katherine Thompson - Avondale Partners

Your tax rate was a little bit lower for this quarter, why was that the case? Also, how should we think about tax for the remainder of fiscal ’09?

Kenneth R. Allen

Our tax rate stand Katherine, as our income drops the depletion allowance doesn’t stay completely fixed but stays fairly fixed so as income drops it maintains a larger share of the deduction and so you see a reduction in our overall average tax rate. I’d used a quarterly tax rate that we showed for the second quarter and use that for the rest of the year. That’s as good as we know at this point.

Katherine Thompson - Avondale Partners

It’s really more related to your income?

Kenneth R. Allen

Yes.

Katherine Thompson - Avondale Partners

Also, there was a ready mix price in October, our checks for the industry, not necessarily just for you but kind of for the industry in general, indicate that’s been pretty challenging to see any kind of price increase going through granted they were a little early. Can you give any color about what you’re seeing with that price increase and if it’s actually going through.

Melvin G. Brekhus

Yes, I can. It has been challenging but I’m encouraged that we are seeing some, if not most of that price increase in some of our markets. We’re seeing some of it in North Texas, we’re seeing some of it in East Texas, some of it in Louisiana. It has been much more challenging and we have not seen the price increase in the greater Huston market. But, I’m very encouraged by the price increases that we have seen in the other parts of the state that I mentioned and in spite of this difficult market with ready mix concrete demand down significantly we’ve seen the increases in our average ready mix concrete prices that are part of the information that we sent out to you.

Kenneth R. Allen

Right, about 5%.

Melvin G. Brekhus

So, we’re getting some traction.

Katherine Thompson - Avondale Partners

Also, we’ve been doing some of our own checks just in terms of volumes and pricing trends in California and Texas in particular and it’s our sense that there’s been a fairly substantial slowdown between [inaudible] and November. I am just wanting to get your perspective on that subject and what type of trends have you seen since the end of the quarter?

Melvin G. Brekhus

The trend we’ve seen are the ones that Ken mentioned where we’ve seen the 20% decline in Texas. If we were looking forward under this scenario we believe that sort of trend is likely to continue based upon what we’ve seen and what the Portland Cement Association is projecting. So, whereas demand may have been 17 million tons last year, it’s going to be more likely in the 13 to 14 million tons this year in Texas.

Katherine Thompson - Avondale Partners

Could you remind me what capacity is in Texas right now?

Melvin G. Brekhus

About 12 million.

Kenneth R. Allen

13 million.

Melvin G. Brekhus

I’m sorry, 13 million because of the CEMEX expansion if it’s running.

Operator

Our next question comes from [Glenn Wartman] - Sidoti & Company.

[Glenn Wartman] - Sidoti & Company

Just with respect to the lower natural gas prices, are those fully reflected in your electricity costs or do you foresee some benefit that has not been realized?

Kenneth R. Allen

Glenn, I think what you saw in our cost structure in the second quarter is about the full realization. We might get a little bit but in the winter time you can see things bump up too so I think we’ve gotten most of it.

[Glenn Wartman] - Sidoti & Company

Then just if you can kind of give us some color on the market in Central Texas versus North Texas, is there a difference or is it pretty much 20% down across the board?

Melvin G. Brekhus

There’s some slight differences but it is definitely down across the board. Right now we’re seeing a decline in demand in Huston that is probably a little bit greater than the decline and demand in North Texas and Central Texas is stronger than the other two but a much smaller market. I don’t think it’s important to really differentiate between the three, it’s not that great.

[Glenn Wartman] - Sidoti & Company

Then finally, I would imagine that the inventory draw downs that you were hoping for at North Texas are kind of off the table?

Melvin G. Brekhus

No, that’s still a part of our plan, is to continue to draw those inventories down.

Operator

Our next question comes from Brett Levy – Jefferies & Company.

Brett Levy – Jefferies & Company

With respect to all these initiatives, is there a working capital sort of consequence? It looks like you’re going to need a little less.

Kenneth R. Allen

You may be right. When you say working capital you’re talking about working capital funding out of the line?

Brett Levy – Jefferies & Company

I guess what I’m saying is you guys by sort of producing less and needing less raw materials and running half time that maybe you’re going to need less inventories. You’ll be able to generate some cash from your working capital account?

Kenneth R. Allen

That’s going to be part of our objective going forward.

Brett Levy – Jefferies & Company

There’s no way to quantifying it or you guys really haven’t set a target for that?

Kenneth R. Allen

No, I think it’s difficult to quantify because the markets are still difficult to judge but we’re focused on generating some cash out of our working capital.

Operator

Our next question comes from [Mike Detz] - J.P. Morgan.

[Mike Detz] - J.P. Morgan

Two question from me if I could please, the first one is probably to you Ken, you no longer are going to be able to capitalize interest on the Hunter plant, do you have to do any kind of depreciation of those assets or because they’re not operating do you just leave them in the books at their construction costs?

Kenneth R. Allen

Just to be sure we understand, we’ll stop capitalizing interest once construction is fully halted. Then, we will not depreciate those assets until the plant comes online.

[Mike Detz] - J.P. Morgan

Then maybe Mel I missed it but, did you comment on Texas cement prices and what you saw as the outlook there or whether there’d be any January increase? And, what you saw the outlook for the rest of the year in Texas for cement prices?

Melvin G. Brekhus

I talked about what has happened year-over-year and what happened sequentially so you may have missed that. But, we have had year-over-year price increase and we have had a modest increase sequentially from the summer quarter.

[Mike Detz] - J.P. Morgan

I was thinking more in terms of January?

Melvin G. Brekhus

There was a $15 per ton price increase announced in January. Unlike California, I think that we’re going to see some price increases in the Texas region. I don’t know when that will occur but the trend and the traction is in place to get some of that. I think that what is likely to happen is that historically January price increases have been deferred until the spring and it’s too early to tell but I think we will see that happen. I don’t know what part of that $15 we’re likely to get but I think we’re going to get some of it.

[Mike Detz] - J.P. Morgan

Then just one other one, a final one, the 20% decline that you’ve seen in cement demand in Texas, is that across all the sectors or is it basically just housing driven?

Melvin G. Brekhus

It’s across all the sectors but it’s weighted more in housing and commercial than it is in public works. But, that’s the answer. Part of the reason that’s the answer is we had a lot of public works in progress.

[Mike Detz] - J.P. Morgan

So when you were talking about earlier the public sector may be sitting waiting to see if Obama funds come in that was more in terms of contract lettings?

Melvin G. Brekhus

Yes.

Operator

Our next question comes from [Kevin Bennett – Davenport & Company].

[Kevin Bennett – Davenport & Company]

One quick one is, is it safe to assume that the delay at Hunter is not going to impact the current capacity that you have there?

Melvin G. Brekhus

That is absolutely safe to say.

[Kevin Bennett – Davenport & Company]

Then I guess lastly, I’d just like your comments on a potential stimulus plan. There’s a lot of talk going around, what kind of impact do you think that can take on you, what kind of numbers you’ve heard and anything else you’d like to say about that would be great.

Melvin G. Brekhus

I think the most important thing that I have to say about that Kevin is that when President Elect Obama first talked about the stimulus package, the first three words out of his mouth were roads and bridges. That’s very encouraging to me because that means that he recognizes that a stimulus package that builds up our infrastructure is good for several reasons. One reason is that for every billion that you spend in infrastructure you put 49,000 people to work. You might recall he wants to put 2.5 million people back to work in the first year of his administration.

The second reason why that’s important is that when you build infrastructure you’re building something that is good for the future of our country and impacts our country in a positive way and improves our economy in a positive way in the years to come. That’s what I feel about the stimulus package. The numbers, who knows? You’ve heard the same rumors we’ve heard, anything from $300 billion to a trillion. We’ll just have to wait and see. I think it will be very meaningful. I really think that President Elect Obama will have a stimulus package that is very meaningful.

Operator

Our next question comes from Elizabeth Barney – Eagle Capital.

Elizabeth Barney – Eagle Capital

Ken, in the $275 to $305 of cap ex, does that include any capitalized interest?

Kenneth R. Allen

It does.

Elizabeth Barney – Eagle Capital

How much does it include?

Kenneth R. Allen

I want to say somewhere in the $10 million range.

Elizabeth Barney – Eagle Capital

Then there would be $25 out for the quarry that you bought, $30 of other cap ex because it was $50 and you’re saying it’s going to be $20 less now?

Kenneth R. Allen

Roughly.

Elizabeth Barney – Eagle Capital

Then the difference would what you’re going to spend on Oro Grande and that’s going to be [inaudible].

Kenneth R. Allen

I’m sorry you meant to say Central Texas?

Elizabeth Barney – Eagle Capital

I’m sorry, Central Texas, that’s $210 to $240.

Kenneth R. Allen

Exactly.

Elizabeth Barney – Eagle Capital

So that’s $210 to $240 and then you spent $70 million last year on Hunter, is that correct? So you spent $380 to $310 and it sounds like you’re not going to have to spend much at least now to get out of finishing the plant but, how much do you think you have to spend to finish the plant ultimately? Assuming that the world does return to normal at some point and there is demand for cement in Texas – you initially said you’d spend around $350.

Kenneth R. Allen

We said $325 to $350 million excluding capitalized interest Liz. So, you can see that there just really isn’t a lot of cash to go from the standpoint of the total project to finish the project but again, once we start it up it’s very difficult to know exactly what those expenses will be but we think what we’re doing here in this smart shutdown puts us in a real good position to be able to efficiently restart and resume construction so that we shouldn’t have to incur a lot of additional costs to finish the project.

Elizabeth Barney – Eagle Capital

I’m not question the decision at all, you know that we’ve been talking about this for a while, I guess I’m just wondering is $325 to $350 way too low of a number and when things returned to normal it’s more like $150 or $200 that you’re going to have to spend?

Kenneth R. Allen

We don’t see any way that it could be in that range Liz. The $325 to $350, maybe it turns in to a little more than that or something to finish the project. But again, we’re being very careful to shut the project down so that we’re in good position to finish the project when we resume.

Elizabeth Barney – Eagle Capital

Then what’s going on with the imports at the Houston terminal? Can you talk about is there inventory there or are imports still coming in or have they stopped coming in? What’s the situation there?

Melvin G. Brekhus

There are some imports that are coming in. They’re limited at this time. I hesitate to tell you what I’m about to tell you but here’s what I think is happening Liz. I think that CEMEX is no longer importing anything because that’s the G2 I got back from our sales department. That Argos is bringing in a modest amount and that Huston Cement which is [inaudible].

Elizabeth Barney – Eagle Capital

[Inaudible].

Melvin G. Brekhus

And Ash Grove and Alamo are bringing in modest amounts because that’s also what we’re hearing from our sales department.

Kenneth R. Allen

But imports are down dramatically year-over-year, dramatically in Huston.

Elizabeth Barney – Eagle Capital

Is anything coming from Huston up in to Dallas or are your sales in Dallas down with demand?

Melvin G. Brekhus

There’s nothing coming from Huston to Dallas. There’s some cement that comes from Central Texas to Dallas.

Elizabeth Barney – Eagle Capital

Then what is in Houston is going in to Central Texas, is that what happens?

Kenneth R. Allen

Liz, the cement that’s coming in to Huston is pretty much staying in the Houston area.

Elizabeth Barney – Eagle Capital

And it’s Central Texas that comes up?

Melvin G. Brekhus

Yes.

Operator

Our next question is from the line of [Andrew Root – Alicone Capital].

[Andrew Root – Alicone Capital]

I just had a couple of quick items, you mentioned the surcharges for fuel costs. I was a little confused by the comment, they’re no longer in place now but they can sort of be reimplemented was that the gist of the comment?

Melvin G. Brekhus

That’s the gist of the comment because the price of fuel has come down.

[Andrew Root – Alicone Capital]

Then related to that, do you have a guess as to how much diesel you consume in a fiscal year? It’s really kind of a nitpicky questions but one of your competitors gave that data.

Kenneth R. Allen

I don’t have that information in front of me.

[Andrew Root – Alicone Capital]

Then the last question is the aggregate pricing data point was given year-over-year, you also gave the cement sequentially. I was wondering if you could give the quarter-on-quarter change in aggregate pricing?

Kenneth R. Allen

From first quarter to second quarter?

[Andrew Root – Alicone Capital]

From the August quarter to November, yes.

Melvin G. Brekhus

We might have that so hang on Andrew.

Kenneth R. Allen

Our first quarter 2008 average price was $7.82 and November was $7.75. Down a little bit on average but as I remember looking back through, that’s mixed. When you look at plant-by-plant, prices were up.

Operator

Our next question comes from Seth Yeager – Jeffries & Company.

Seth Yeager – Jeffries & Company

You previously mentioned for the California plant a breakeven of roughly 60% to 70% of utilization. Given the new coal contract coming on in June and the various present takes I guess on your inputs, can you give us an updated number for that?

Kenneth R. Allen

We wanted to give people a sense of where the California plant was in September in terms of profitability just so we could get grounded on where things were at the time. We don’t anticipate breaking out profitability between Texas and California in the cement area going forward. But, clearly prices are down since August and shipments are down since August in California so you can triangulate a little bit from that.

Seth Yeager – Jeffries & Company

I apologize if I missed this before but with the potential shutdown in one of you operations, can you give us an update maintenance cap ex on a consolidated basis for the company?

Kenneth R. Allen

It’s really what I alluded to early on. If our depreciation is running about $70 million a year, our replacement cap ex can probably be somewhere in the neighborhood of half that, maybe a little bit more. In a period we’re in today, we’ll keep that down to the minimum, about half.

Operator

At this time there are no further questions. I’d like to turn the call back over to management for any closing remarks.

Kenneth R. Allen

Thanks for joining us. We look forward to speaking with you late in March. Have a good first of the year.

Operator

Ladies and gentlemen this concludes the TXI second quarter results conference call. You may now disconnect. Thank you for using ACT Teleconferencing.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!