Texas Industries Management Discusses Q4 2013 Results - Earnings Call Transcript

Jul.11.13 | About: Texas Industries (TXI)

Texas Industries (NYSE:TXI)

Q4 2013 Earnings Call

July 11, 2013 11:00 am ET

Executives

Thomas Lesley Vines - Chief Accounting Officer, Vice President, Treasurer and Corporate Controller

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

James B. Rogers - Chief Operating Officer and Vice President

Kenneth R. Allen - Chief Financial Officer and Vice President of Finance

Analysts

Garik S. Shmois - Longbow Research LLC

Kathryn I. Thompson - Thompson Research Group, LLC

John F. Kasprzak - BB&T Capital Markets, Research Division

L. Todd Vencil - Sterne Agee & Leach Inc., Research Division

Christopher David Olin - Cleveland Research Company

Brent Thielman - D.A. Davidson & Co., Research Division

Steve Miller

Michael Betts - Jefferies & Company, Inc., Research Division

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the TXI Fourth Quarter and Year End Results Conference Call. [Operator Instructions] This conference is being recorded today, July 11, 2013. I would now like to turn the conference over to Les Vines, Treasurer. Please go ahead, sir.

Thomas Lesley Vines

Thank you, Tirsa. Good morning, everyone, and thank you for joining us for our Fourth Quarter and Year End Conference Call and Webcast. As always, we appreciate your time and interest in TXI. On the call with me today are President and CEO, Mel Brekhus; CFO, Ken Allen; and Chief Operating Officer, Jamie Rogers. We will follow the same format as in previous calls, with management providing comments for the quarter and year and then followed with your Q&A. [Operator Instructions]

Before turning things over to Mel, I need 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 risks, uncertainties and other factors which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Potential risks and uncertainties include, but are not limited to, the impact of competitive 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; abnormal periods of inclement weather; unexpected 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 environmental laws, regulations and claims and changes in governmental and public policy; and the risks and uncertainties described in our reports on forms 10-K, 10-Q and 8-K.

With that, I'll turn it over to you, Mel.

Melvin G. Brekhus

Thanks, Les, and good morning, everyone. My message on our last call remains valid today. I'll remind you that, that message was that all of our markets are improving, all of our markets still have a lot of upside before getting back to historic averages and peaks, and we are positioned better than ever to take advantage of the potential in all of our markets.

Construction activity continues to improve in our major markets. Shipments during the fourth quarter were at levels we haven't seen for quite some time. The cement shipments in the fourth quarter were up 32% compared to a year ago. Texas shipments were the highest May quarter shipments since 2008 and California shipments for the quarter were the highest May quarter shipments since 2007.

I expect demand for building materials to improve further during the upcoming year and I believe we are uniquely positioned to meet this growing demand. The completion of the commissioning of our new cement kiln in central Texas gives us the immediate ability to supply an additional 500,000 tons annually. Also, the addition of 42 ready-mix plant sites during the quarter in attractive East Texas markets improves our ability to capitalize on the future expansion of the Texas economy.

As our markets continue to proceed to the return of midcycle levels and beyond, our focus is threefold. Number one, enhancing our ability to serve our customers; number two, leveraging and improving upon the cost structure enhancements we have made during the downturn; and number three, accelerating the realization of our earnings potential.

In conclusion, I am very excited about the future for TXI. Over the past 5 years, we have been transforming the way we conduct virtually every aspect of our business, and this transformation continues today. I look forward to all of our stakeholders reaping the benefits as we move into a more normal economic environment.

And with that, I'll turn it over to Jamie.

James B. Rogers

Thank you, Mel. Mel referred to our cement shipment levels for the quarter and I'd like to add a little bit more to detail that further illustrates the strengthening of our markets. Cement shipments for the month of May, not for the quarter, but for the month of May, in Texas were the largest in 10 years for the month of May. And in California, cement shipments, again for May, were the largest since 2006. And it's not just cement that's realizing improved demand. Major markets for aggregates and ready-mix realized 20% or better increases in shipments in the fourth quarter compared to a year ago. And I share Mel's view that this positive trend in demand should continue in the near term.

One indicator that supports this view is housing starts, and in May, housing starts in the 4 major metropolitan markets in Texas reflected or continued to reflect double-digit improvement year-over-year. California's major market showed 40% or better improvement.

Given the improvement in demand, pricing in Texas for all products improved during FY '13, and I believe that, that momentum will continue during the current year as well. Also, increased operating costs in California associated with complying with AB 32 requirements for carbon emissions that impact the entire industry should support additional price increases for that market.

Looking forward, our focus is to continue to build on the foundation we've been establishing the last few years. We're very pleased so far with the new ready-mix operations that we acquired in March, and that integration is going well and continues. We are also striving to ensure that we're effectively coordinated among our product lines in each of our markets to optimize our ability to serve our customers. As Mel mentioned, we completed the commissioning of our new kiln in Central Texas. The plant is running at capacity, and I am very pleased with how it is performing. The team down there did an incredible and outstanding job.

Also, given the improved outlook for demand, we have announced that we are accelerating the work required to bring the original kiln, what we call Hunter 1, back online, and we expect to resume production for the -- from this kiln in the early part of the next calendar year. That will allow us to produce approximately 900,000 additional tons of cement.

Finally, we are looking at all of our operations to make sure that we're in the best position we can be to deliver the product required by our customers where and when they need it. Making sure we have the distribution capabilities to efficiently meet growing demand is a key focus for us.

I'm proud of our team's accomplishments. Over the last few years, we significantly redeployed capital and realigned our market positions. We did so in order to put ourselves in a position to better maximize our ability to benefit from the inevitable recovery. I look forward to us realizing the fruits of this effort.

And with that, I'll turn it over to Ken for his comments.

Kenneth R. Allen

Jamie, thanks, and good morning, everyone. As Mel and Jamie have already indicated, TXI ended the fiscal year on a very good note. However, with the asset swap we completed in March where TXI obtained significant ready-mix assets in the East Texas region, and we gave up our expanded shale and clay operations, that transaction and the startup of the new cement kiln in Central Texas we've already mentioned, and also the impact of the tax provision on earnings for continuing operations, it's a little difficult to tell just how good a result we had for the third quarter. And Mel and Jamie have talked about the operational actions and improvements we've made. You can also see from the top line, okay, that the year ended in a very good place. Total sales were up 35% for the quarter. Average realized cement prices in Texas were up 5%. Aggregate prices increased 9% and ready-mix prices were up 8%.

In Texas, cement shipments increased 34% to 908,000 tons, and that compares to 680,000 tons last June. California cement shipments were up 29% to 391,000 tons versus 304,000 tons a year ago. Aggregate shipments were up 15% and ready-mix shipments increased 72%. Now, half of that increase really came from market improvement in our metro areas and the other half came from the volumes related to the concrete assets we acquired through the swap I mentioned earlier on.

Pretax income from continuing operations was $4 million for the quarter. And this compares to a pretax loss a year ago of $2 million after you exclude last year's $60 million of major onetime gains. Now, the recent May quarter's pretax income of $4 million was negatively impacted by approximately $3 million due to unexpected outages at all 3 cement plants late in the quarter. Also, recall that depreciation increased by about $1.8 million in the quarter as the new kiln is declared fully-commissioned by May 1.

Now even though the new kiln has come up to speed very well, there's still improvement to be gained on the cost side. As an example, during startup, we've used coal as a fuel source in order to generate a stable operating environment on the new kiln as possible. A year ago, on the original kiln at the plant, we were using a much more cost-effective mix of fuels.

When we look at the entire year, I think we get a little better picture on some of the trends we're on as well. Our net sales increased to 17% or by approximately $100 million, while gross profit increased $34 million. As we gain more experience with the new kiln and the new ready-mix operations are more fully-integrated, we believe we'll see improvement on the cost side.

We also expect margin improvement in ready-mix operations as the new plants add approximately 1 million yards of shipments at the margins we typically experienced -- at the higher margins we typically experienced in the more rural East Texas region.

Now finally, recall that almost 2 years ago, TXI embarked on a program to reduce costs and increase efficiency. Our goals for enter of fiscal year 2014, which we just started here in June, with the expectation of generating at least a 15% gross margin for the year and also keep SG&A expenses below 8% of sales.

Now, like we've already talked about, a lot has changed in TXI in the last 2 years. But even so, I believe we're in position to achieve both those goals, with the gross margin standard being a little more of a stretch than the SG&A goal. But that has to be just the start. Over time, we'll work to do better in both. We've got to in order to stay competitive. And as Mel mentioned a little earlier, given our goal of generating approximately $400 million in annual EBITDA, we have got to continue to see margin improvement in all sides of the business. So a good phase [ph], can lead to a good seller and as we look into fiscal year 2014, we think the trends are with us.

For some details though for you who are modeling the company, please recall that our annual depreciation expense will increase to $79 million to $80 million a year, and interest on the income statement will also move to a total of approximately $69 million as a result of completing the commissioning of the new kiln.

TXI's tax rate for the first 3 quarters of fiscal year '13 was very low. And then the gain in the fourth quarter caused the rate to improve significantly or to move significantly. If I were modeling TXI in fiscal year '14, I would use a very low rate again, very similar to those that we used in the first 3 quarters of fiscal year '13.

With regards to capital spending, we expect that spending for sustaining capital will fall in the range of $30 million to $40 million in fiscal year 2014. The most important project in the coming year will be to add a new baghouse in the original Central Texas cement kiln in order to allow that plant to start up early in calendar year 2014 which will effectively increase our current ability to produce and ship cement by 900,000 tons a year. Again, as we've already alluded to, given our current construction trends, we believe the production -- the new production will be well-timed.

With our major cement projects of the last decade behind us, we'll continue to carefully watch how we deploy free cash flow. Any capital expenditures above the sustaining range I mentioned earlier will be focused on projects that advance and/or accelerate our progress towards the attainment of the $400 million EBITDA goal I mentioned earlier.

And finally, speaking of being good stewards of capital, the Central Texas cement project was completed at a cost of $374 million. Now, this is on-target with the budget we set prior to the restart of construction. Meeting this budget and then obtaining such a good commissioning is a remarkable result given that the project was completely stopped and then restarted after more than a year of delay.

So a good start. And with that, I'll turn things back to Les. Les, please go ahead.

Thomas Lesley Vines

Yes. Tirsa, I think we're ready for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Garik Shmois with Longbow Research.

Garik S. Shmois - Longbow Research LLC

First question is just on energy costs. You mentioned that you're relying on greater coal use to furnace the Hunter 2 kiln. I'm just wondering if you could quantify how much that added to unit costs during the quarter and provide a timeline of when you think you'll get to a more of a blended or lower-cost energy use.

Kenneth R. Allen

Yes. Garik, that's with all the different changes and adjustments we made during the quarter, with the commissioning versus looking at the older kiln, it's really difficult to do, and after that is comparison. But for unit cost, we're up, as we've shown in the press release. That's going to move the needle of probably around $1 a ton. It's something like that for all the tons we have at TXI.

Garik S. Shmois - Longbow Research LLC

Okay. So the majority of the cost inflation that you saw this quarter would be attributable to the higher DD&A, as well as the unplanned maintenance. Is that kind of a fair way to think about it?

Kenneth R. Allen

I really do. Again, $3 million spread among all 3 plants for the unexpected downtime, and then almost $2 million for the depreciation covers most of it. That's a good point.

Garik S. Shmois - Longbow Research LLC

And are you expecting any maintenance to lead into the second quarter -- or sorry, into the first quarter?

Kenneth R. Allen

Yes. Good question. We don't have any major maintenance scheduled in the first quarter. Remember, a year ago, in the August quarter, we had about $3.5 million worth of major maintenance expense.

Garik S. Shmois - Longbow Research LLC

Okay. And then, I guess just lastly, on volumes in Southern California highlighted the housing market as being strong. Is that the real significant driver of the really strong volume growth in Southern California? Are you starting to see a pickup, whether it's on the infrastructure side or on the non-res side as well?

James B. Rogers

Garik, it's Jamie. I think that as you know, the housing starts are, really, a good proxy and correlator to the other segments as well that you alluded to. And, I guess, what I would also say, when you see big numbers like 40% or double digit, we are in no -- we are not in a boom time in any of our markets, and we still feel like we've got a runway ahead of us. We're just coming off the really low lows, especially in California.

Operator

And our next question comes from the line of Kathryn Thompson with Thompson Research Group.

Kathryn I. Thompson - Thompson Research Group, LLC

I just wanted to follow up from last quarter's discussion on cement pricing, in California in particular. You took a 2-tier approach, $2 increase in January, another $3 in April. When will the benefit of these combined increases reasonably flow through numbers?

James B. Rogers

Kathryn, it's a little bit hard to model that with the specificity that I think you're looking for. Given the mix of business, given the mix of the geography, what I can say with some confidence is that we were successful with both of those. And as Ken alluded to, it's a start. And we've got -- we expect a lot more progress. But it's a start.

Kathryn I. Thompson - Thompson Research Group, LLC

But just been able to see some pricing realized already in other markets, not just in Texas, but we do checks in the other markets in the U.S. where they have price increases. And I just want to make sure that there isn't any other thing that we should take into consideration like mix or any other factor that could skew how we think about year-over-year comps or even sequential comps with pricing.

Kenneth R. Allen

Yes. Kathryn, this is Ken. That's a good point. We have seen some price movement up. But as the market's expanding, we're also shipping to a little further destinations, and that geographic mix tends to offset pricing improvement a little bit, too. It's all real good. We'll take those extra times. We sure will. But that is a factor when you've got relatively small increases playing against the mix shift that we're looking at in California as well.

Kathryn I. Thompson - Thompson Research Group, LLC

Okay. That's helpful. Could you give a little bit more color on how the Hunter plant is running since commissioning? And how we should think about cost over the next several months because, typically, there will be just an overall cost of -- there's inevitably hiccups that happen over a several month period after commissioning of the new plant.

Kenneth R. Allen

Kathryn, you took the words right out of our mouths. A lot of times, it takes 1 year or 2 years to feel like you've really hit the sweet spot on some of these things. I think you'll see good improvement in costs in our some -- all of our cement operations being primarily driven by the new Hunter kiln if you take the depreciation out now, okay, over the next year. It gets very difficult to give you some idea what that number is going to be in the first quarter versus the second quarter right now. But the plant continues to run very well. We've got June behind us, and we're in mid-July and the run time on the new kiln has just been exceptional.

Kathryn I. Thompson - Thompson Research Group, LLC

So in your prepared comments, you talked a little bit about how May was doing. And we know on our checks that some -- there could be some pretty big swings in particularly in some areas that have higher levels of precipitation. Were you seeing -- what were you seeing in terms of June, once you get from May to June? And also, if you can maybe comment on just much farther looking-out bid activity. So in other words, bid activity that could have impact your numbers, 12, 18 months from now.

James B. Rogers

Yes, Kathryn, I think we had a little bit wetter weather in June in Texas than we expected, and we saw that in our daily shipments. But I think your second point or question is more on target in terms of how we think about it. Because looking forward on looking at our backlogs, that mix of potential business that's available to us, looking forward, all those indicators are very positive.

Operator

Our next question comes from the line of Jack Kasprzak with BB&T Capital Markets.

John F. Kasprzak - BB&T Capital Markets, Research Division

Can you tell us the trailing 12-month ready-mix production effective for the acquisition you've done, sort of a pro forma trailing 12-month ready-mix production number?

James B. Rogers

Yes, Jack, it's Jamie. It's -- the trailing volume for those assets 12 months before we got it is in the 1 million yard range.

John F. Kasprzak - BB&T Capital Markets, Research Division

So that's what you acquired?

James B. Rogers

Yes.

Kenneth R. Allen

Jack, just as a general indication so people could kind of get a sense of that, remember, I said that we expect in fiscal year '14 that we've added about 1 million yards. And we'd expect to do a little better than that with growth. I just wanted to be sure people added that acquisitions volume in as they model the company.

John F. Kasprzak - BB&T Capital Markets, Research Division

Right. Okay. Was there anything else -- I mean, you talked -- some questions on the cost side already. You mentioned on the unscheduled maintenance and start up and coal. So that's all appreciated. Was there any -- it seemed like well on the cost side, there's some inflation in all the businesses and all the segments. Was there anything else that's noteworthy, that affected the quarter in terms of the cost performance?

Kenneth R. Allen

That's a good question. I think you see some transaction-related -- not really transaction-related, but integration-related expenses early on with ready-mix. And also, we not only have our markets improve dramatically, but we've come out of the winter into the spring, and so the ship -- seasonal shipment cycle has been pretty dramatic as well. And I think we struggled a little bit to keep up with all that. That's caused a little higher cost. But as we go through this summer and have a little more time to adjust, I think you'll see things settle down. And Jamie can add some color as well.

James B. Rogers

Well, we'll see how colorful it is. But the thing I want to mention, Jack, is which I think we alluded to in our prepared comments that AB 32, on a going forward basis, the cost of that program will be a significant impact to us in California. And it's not only us, it's other industries, but that is something that we are learning about and will certainly get us on the cost side going forward that it didn't use to.

Kenneth R. Allen

Jamie is absolutely right about that. But in May we really didn't have much of an impact.

John F. Kasprzak - BB&T Capital Markets, Research Division

Look forward, okay. And so to the seasonal issue you raised, Ken, some of your business spend ahead of time, and you know it's coming and you prepare for it. But maybe on the private side and smaller jobs, it's -- there's less of a lead time. Are you, in part, suggesting that you guys have been a little bit surprised at how well volumes have trended so far this season?

Kenneth R. Allen

I don't think as that so much as -- and I'll tell you, as the CFO, I'll take some of the responsibility here. You've heard us talk about focusing on cost reduction and efficiency improvement with almost a laser-like focus for the last 2 years. And that really continued on through the end of the winter and things like that as well. And then it's impossible to time some of these things. But I think that was a part of the impact as well. And that was -- that I'm probably responsible for some of that.

John F. Kasprzak - BB&T Capital Markets, Research Division

Well, I appreciate those comments. Given the depth of the downturn, I'm not sure that anybody is not as focused on cost also.

Operator

.

And our next question comes from Todd Vencil with Sterne Agee.

L. Todd Vencil - Sterne Agee & Leach Inc., Research Division

Can you talk about how your capacity utilization stands right now? And -- well, I guess, Texas and California overall, you frequently give us those numbers, and I appreciate that for the industry. But also, as your plants in North Texas and in California?

James B. Rogers

Todd, this is Jamie. We're getting closer to capacity at our North Texas plant. Central Texas, as I think we alluded to, we're running there now with potential hiccups as we talked about going forward that we don't know about. But we're running there now. And in California, I think we're close to 65%, something like that. So we're improving there as well.

L. Todd Vencil - Sterne Agee & Leach Inc., Research Division

Okay. And you said you're closer in North Texas, is that kind pretty kind of an 85, 90 range?

James B. Rogers

I think it's getting close to that, yes.

L. Todd Vencil - Sterne Agee & Leach Inc., Research Division

Okay. Switching over -- well, actually, sales there for a second, and this is curiosity and arithmetic for me. But what was the official commissioning date for Hunter 2 from an accounting standpoint?

James B. Rogers

Yes. I think we talked about it being the end of the quarter, and really, it's about May 1.

L. Todd Vencil - Sterne Agee & Leach Inc., Research Division

May 1, okay. Okay, that's great, that's helpful. And then switching to aggregates, nice price performance there. I get that it's pretty small for you guys now. But anything we ought to think about there in terms of the price trends?

James B. Rogers

Yes, Todd, let me broaden the answer. I mean, you see the price improvements there, and I think there's support or an interest in support for moving that up in aggregates. But in cement, we will be announcing a $5 price increase effective September 1 for Texas. And in ready-mix, we -- I mean, that's a little bit more fluid and kind of more job-to-job and bid-to-bid. But we've got a formal announcement in North Texas, our DFW for $5, KPR [ph] effective August 1. And then our other regions, we expect -- okay, in most of the other regions, we expect similar pricing announcements for September through October from us.

L. Todd Vencil - Sterne Agee & Leach Inc., Research Division

Got it. Have you seen those announcements from its similar magnitude, similar timing from other players yet?

Melvin G. Brekhus

This is Mel. We have seen similar announcements in cement. And as Jamie said, ready-mix is fluid, but we've also seen some announced ready-mix prices, which -- especially in Texas and especially in North Texas, the DFW is somewhat unusual, but we consider very positive.

L. Todd Vencil - Sterne Agee & Leach Inc., Research Division

Sure. And then on the aggregates side, on the [indiscernible] you guys had in the quarter, was there a mix effect in there? I mean, I'm guessing there was, but can you sort of unpack mix versus sort of same product, same location?

Kenneth R. Allen

Todd, I'm sorry, were you talking about the aggregate price?

L. Todd Vencil - Sterne Agee & Leach Inc., Research Division

Yes. Yes.

Kenneth R. Allen

Yes, I think there was some mix that caused the price to be maybe a little higher than it would have been without the mix change. It's not quite clear where we're going to stand in the August quarter. But you might see that inch down a little bit just as that mix piece flows out.

L. Todd Vencil - Sterne Agee & Leach Inc., Research Division

And was that a product-type mix for you?

Kenneth R. Allen

Good question. More geographic. More geographic.

Operator

.

The next question comes from Chris Olin with Cleveland Research Company.

Christopher David Olin - Cleveland Research Company

I just wanted to go back to the aggregate segment. I apologize if you touched on it, but the margin was a little bit lighter than I would have expected concerning the 1 million tons that you did. Did you break out what the outage impact was in that? And can you just help me a little bit better understand where the costs are coming from?

Kenneth R. Allen

Yes, Chris, this is Ken. Remember, the outage impact we talked about was really on the cement side. But your intuition's pretty good. With the upturn in the aggregate piece like you mentioned and I mentioned with Jack's earlier comment, we've been running our plants a little harder and had some repair and maintenance expense that was a little higher than normal, which would certainly impact what you're talking about. And then also I think staffing and over time contributed to some of the costs. So these things, as we get some more time behind it, I think you'll see that even out.

James B. Rogers

And I think there also was an impact associated with the timing of stripping costs to get access to the reserves.

Christopher David Olin - Cleveland Research Company

Historically, the aggregates industry has talked about 50%, 60% incremental margins. Is that something that your operations can do once some of these issues get straightened out?

Kenneth R. Allen

Chris, you'll see good margin improvement in our aggregate operations as volumes improve. I got to tell you, what we really are focused on right now is that margin improvement with incremented sense on some assets. That's where the impact is really going to be.

James B. Rogers

And I think Chris, you see those types of margins on the initial incremental tons, but at some point, you start to have to add additional shifts and things like that to get the other tons. And when you do that, you lose -- you're going to get some more normal type margins.

Operator

Our next question comes from Brent Thielman with D.A. Davidson.

Brent Thielman - D.A. Davidson & Co., Research Division

Ken, I was wondering should we be thinking about a $9 million to $10 million annual level for maintenance spend this year?

Kenneth R. Allen

For the cement plants?

Brent Thielman - D.A. Davidson & Co., Research Division

That's right.

Kenneth R. Allen

Okay. Given that we have -- that's a good question. Given that we have the new plants online, and that we expect to bring the original kiln online later on in the year, I think you'll see total -- major maintenance that we'll call out during the year in the $10 million to $13 million range for the whole year, with something like 7 to 10 of that being at our North Texas plant. And in addition to that, with the new -- with the original kiln coming online, I think you'll see some additional repair and maintenance expenses there that may be in the $2 million to $3 million range that would be a little bit out of the normal.

Brent Thielman - D.A. Davidson & Co., Research Division

Okay. That's helpful. And then I'm sorry if I missed this or skipped over it, did you clarify what led to the tax gain this quarter?

Kenneth R. Allen

Yes, it's just the impact of a lot of -- we recognize the big gain in the fourth quarter. Our operating results for the fourth quarter in general were a lot better and were positive. As a result of that, the losses that we didn't benefit as much of or fully through the first 3 quarters, we got to benefit some of that in the fourth quarter.

Brent Thielman - D.A. Davidson & Co., Research Division

Got you. Okay. And then just lastly, are you starting to see some shift in terms of end market which are driving your business, namely, sort of residential versus nonresidential? Or is the mix fairly similar to what you've been seeing the last few quarters?

James B. Rogers

We're certainly seeing the pickup in residential. And it just drives, like we've said before, it drives the other segments indirectly as well. And we -- depending on where we are, our mix of business tends to be more skewed towards in the commercial and public works. But there are certainly local market that we participate in where we're seeing a direct impact to the residential as well.

Operator

[Operator Instructions] Your next question comes from Steve Miller with BlueMountain Capital Management.

Steve Miller

Just had a quick question. Wanted you to walk me through you guys' EBITDA reconciliation, specifically on the cash flow side. That has you going to, I guess, $59 million, call it $60 million for this quarter, right, in EBITDA? And I'm wondering when I try to adjust that to get just the core continuing stuff, is it right to subtract out of that the $59 million, $60 million of gain on asset sales?

Kenneth R. Allen

I don't think so, because what you're looking at in that EBITDA number is our continuing operations EBITDA. And this does not reflect anything with respect to our discontinued operations. So we operated our standard selling play operations really for 3 plus quarters and then we have the gain on the sale and none of that is reflected in those numbers.

Steve Miller

But I don't understand. You have on your cash flow statement kind of negative $60 million for that gain on sale, indicating it was a noncash item, right? Shouldn't I look -- if I wanted to look at cash EBITDA, subtract that out?

Kenneth R. Allen

I'm sorry, that was a noncash item, certainly because that was -- the gain was attributable to an asset swap that we exchanged the expense on play operations for the ready-mix operations in East Texas.

Steve Miller

But it's fair to say that you're not going to continue these asset swaps as an item, right? Or sort of a onetime item? So if I wanted to pro forma that out, especially considering its noncash, I'd want to take the $60 million of EBITDA that you present then subtract out the $60 million noncash gain on the asset swap. So it's definitely not going to be a continuing item, and I get to 0 EBITDA.

Kenneth R. Allen

Yes. I'd tell you, there are so many different things moving around on tax and everything. If you really take the pretax income number, $4 million, okay, and add back the interest expense of $10 million, you're at $14 million. And then you add back the depreciation in the quarter, you get to $31 million or $32 million.

Unknown Analyst

Okay. Okay. And then the other question is, is you have the, I guess, you have the net income from continuing operations of $15.6 million. And then you have the loss on discontinued operations, right? How much was that again? That was...

Kenneth R. Allen

Yes, I want to -- you've thrown us for a loop when you say we had a loss on discontinued operations...

Steve Miller

Sorry, gain on discontinuing operations, right. That number was $28 million, right? And so I'm wondering, you guys have the $60 million onetime gain on the asset swap, but you only have the $28 million gain in discontinued operations. So I'm sort of wondering, where does the other $31 million go?

Kenneth R. Allen

One of the nuances of the way you're required to report discontinued operations, and that $28 million number is a net of tax number. And so you have the gains that we reported, it's kind of a gross pretax gain, and then tax effective to get into a discontinued option.

Steve Miller

Got it. So you're saying that the tax rate is -- what's the tax rate then that you use to get from the $60 million gain to the $28 million net of tax? That sounds like a pretty high tax rate.

Kenneth R. Allen

Well, I think we're also talking about the wrong gain number. Because the gain in the fourth quarter of the current year was $44 million. In the prior year period, we had a $60 million gain. But so a 36% to 37% tax rate in discontinued operations is I think where we were at.

Melvin G. Brekhus

Steve, [indiscernible] you're dealing with some of the things we actually dealt with internally here as well. I suggest, if you don't mind, maybe you and Les just deal with that off-line because that's a -- it may take a couple of iterations there to pick up all the pieces.

Steve Miller

Yes, sure thing. It makes a lot of sense, because I mean, the you've got the $60 million adjustment and I'm just sort of wondering if all of that isn't going into that discontinued operations line. It looks like some of that benefit is kind of flowing through into continuing operations, which would make it look like the continuing EPS is a little bit larger than it should be. But maybe there's a tax issue I'm missing there and maybe on the EBITDA reconciliation, I'm a little bit wrong in calculating 0 and taking out that $60 million onetime gain.

Kenneth R. Allen

Yes, all your questions do make a lot of sense. They're very reasonable. But I think on the teleconference, we're probably better off seeing if we could help you off-line on that one.

Operator

.

And our next question comes from the line of Mike Betts with Jefferies.

Michael Betts - Jefferies & Company, Inc., Research Division

Just 2 few questions for me if I could. One, certainly, on cement, and apologies if I missed it earlier. But the 29% growth in California volumes, I mean, I'm surprised it's that high given having seen the kind of industry data. I mean, is that just because the specific areas you're selling into? Or was it the comment earlier about selling into surrounding regions as well? And then just on the ready-mix, half of the growth in shipments, I think, as in the press release is due to the East Texas operations. I thought they had a very significantly higher selling price for ready-mix. Maybe you need to sort this off-line as well, but do you have kind of an adjusted ready-mix price for what it would look like without the East Texas operations? Because I would've thought with East Texas in there, we'd have seen a bigger increase in the ready-mix price.

Kenneth R. Allen

Mike, this is Ken. And I'll try to answer your second question and then Jamie can answer your question about shipments in California. We do have a little higher price in our East Texas operations, you're right on that. Remember, while we have 2 months of operations here in our ready-mix operations from East Texas, let's see how things flow and go in fiscal year 2014 on that. What we do know is, and you've heard Mel say, that we want a high single digit EBIT margin for all of our ready-mix operations. What we do know is those East Texas markets generate EBIT margins that are greater than that even.

Michael Betts - Jefferies & Company, Inc., Research Division

So if I had a figure of over $100 a cubic yard in mind for East Texas, is that wrong? Is that just too high?

Kenneth R. Allen

As a general rule for a broader region, because this region covers Beaumont to Southwest Arkansas and on up in the North, that's going to be too high of a average number for that broad of a region.

Michael Betts - Jefferies & Company, Inc., Research Division

Okay. Understood.

Kenneth R. Allen

And I -- so I do want to add that too high of a number today.

Michael Betts - Jefferies & Company, Inc., Research Division

Okay. And on the California cement shipments?

James B. Rogers

Yes. Mike, it's Jamie. I think when you're looking at California, and you alluded to it, it's a broader area than California in terms of where we ship to. But my comment is when you're coming off that low and you see these big numbers, don't read too much into that. So as you know, the California market went from 17 million tons, it paid [ph] to 7. So in all -- wait, wait, if I may repeat myself. I just wouldn't read too much into big numbers.

Kenneth R. Allen

Jamie, if I can, just relate as I've been reading some of the other analysts' reports as well that came out before the call, Mike, the PCA is talking about Texas cement consumption growth in calendar year '13 and '14 of 5% to 10% growth in that range. And over the next year, we expect to do better than that because we're in a position to improve our market share like you've seen. At California, the PCA, I think, is looking for something that's a little more reasonable, higher, maybe 10% or something like that. And out there, I think our expectations are to really probably more closely follow our market growth.

Operator

Mr. Vines, there are no further questions at this time. Please continue with any closing remarks.

Thomas Lesley Vines

All right. Well, again, thank you, everybody for joining us today and...

Operator

Pardon me, someone just queued for a question, would you like to take their question?

Thomas Lesley Vines

Yes, we'll take the question and then we'll wrap it up.

Operator

.

We have a question from Philip Volpicelli with Deutsche Bank.

Unknown Analyst

This is John sitting in for Phil today. Just taking a look very quickly. Obviously, you guys have been turning the organization. You've done a couple of asset transfers and a couple of asset swaps. I guess going forward, do you foresee yourselves doing this in the same magnitude as you've done in the past 2 years? I think in fiscal year '12, you had about $68 million, and in fiscal year '13, you have roughly $64.5 million. Do you have a lot of assets or a lot of opportunities out there to do more of these asset swaps going forward? Or do you think they're going to kind of normalize over time?

Thomas Lesley Vines

Yes. I'm excited and we will certainly continue to look for opportunities to improve our position in the markets that we're operating in. As you look at our operations, and we described in our financial statement, you can see that there are not a lot of operations that are outside of our core demand aggregates and ready-mix.

Melvin G. Brekhus

And Sean, that's the key -- this is Mel. The key is the last thing that Les said. What we are doing and have been doing as we've transitioned over the past few years during this very difficult time, we've been focusing on strengthening our core position, which is in cement, aggregates and concrete. And when and if we can do things to enhance that position, that's what we'll do. But as you can tell from our assets, we have fewer of those opportunities going forward.

Operator

There are no further questions at this time. Please proceed.

Thomas Lesley Vines

Right, thank you, Tirsa. And like I said, everybody, we appreciate your time and attention this morning, and we look forward to discussing our first quarter results next September. Everybody, have a great day.

Operator

Ladies and gentlemen, this concludes the TXI Fourth Quarter and Year End Results Conference Call. This conference will be available for replay after 12:00 p.m. Central Standard Time today through July 25 at midnight Central Standard Time. You may access the replay system at any time by dialing 1 (800) 406-7325 and entering the access code of 462-6096. Thank you for your participation. You may now disconnect.

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