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Texas Industries, Inc. (NYSE:TXI)

F1Q10 Earnings Call

September 24, 2009 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

Garick Shmois – Longbow Research

Katherine Thompson – Thompson Research

Analyst for Trey Grooms - Stephens, Inc.

Glenn Wortman - Sidoti & Company

Fritz Von Carp – Sage Asset Management

Todd Vencil – Davenport & Co.

Chris Olin – Cleveland Research

Robert [Rosington] – No Company Listed

Jay Van Sciver – Bishop & Carroll Capital Partners

Operator

Welcome to the TXI first 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, September 24, 2009. I would now like to turn the conference over to Kenneth Allen, Chief Financial Officer of Texas Industries. Please go ahead.

Kenneth Allen

Thanks. Before we begin, Linda English would like to make some introductions. Linda please go ahead.

Linda English

Thank you Ken. Good afternoon and thank you for joining us today for TXI’s first quarter results conference call and webcast. We appreciate your time and interest in TXI. I am Linda English, Manager of Investor Communications. Joining me today are President and CEO, Mel Brekhus and CFO, Ken Allen. Gentlemen, thank you.

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 would like to remind you that certain statements contained in this press release are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 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 at normal periods of inclement weather, unexpected periods of equipment downtime, unexpected operational difficulties, changes in the cost of raw materials, fuel and energy, changes in the cost or availability of transportation, 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 and 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.

Forward-looking statements speak only as of the date hereof and we assume no obligation to publicly update these statements. Now, for opening comments, Mel please go ahead.

Melvin Brekhus

Thank you Linda. Good afternoon from Dallas, Texas. I am very pleased to be here today discussing the positive earnings we reported this morning. While meager from a historical perspective, our results are impressive in light of the current market conditions and directly attributable to the actions we began to take a year ago.

Recall that a year ago Lehman had collapsed, the depth of the credit crisis was not yet known and we were recognizing the reality of a recession in California and had not had seen much impact in Texas. In light of this uncertainty, we had already begun an aggressive process of thoroughly reviewing our businesses to ensure that we operated as cost effectively as possible.

At the same time, we were focused on our liquidity and took a number of steps to generate cash and to preserve and strengthen our financial position. Through the past 12 months we have reported our actions to you. We idled our less efficient small kilns at our Midlothian cement plant in order to maximize the efficiencies inherent in our large, modern kiln and to manage our clinker inventory levels.

We idled our cement grinding operations at our Crestmore plant because we were able to meet demand with the grinding capacity at our Oro Grand cement plant. We decided to operate our Oro Grand plant in California at high production rates in order to maximize our cost efficiencies by building inventory and then taking the kiln down for extended times while selling out of inventory. We suspended operations at two central Texas aggregate plants. We adjusted shifts and reduced overtime hours to match production to demand. We improved our maintenance practices on mobile equipment in order to expand major component rebuilds.

During the summer we shifted our zone production to off-peak hours in order to avoid force production interruptions during peak power consumption. Our Ready Mix operations which are particularly susceptible to inefficiencies related to volume declines, have idled trucks, reduced headcount and made a number of other operational changes to preserve margins and remain profitable. All of our operations have made dramatic changes and significantly reduced their headcount over the past year.

Our headcount is down 28% compared to the beginning of calendar year 2008. These and other actions are the reason our consolidated cash gross margins actually improved compared to a year ago despite shipments being off 25-35% for our major products. Ken will provide additional details with his comments.

On the fiscal front, we have also taken a number of actions to proactively manage our financial condition. In August 2008 we issued senior notes to add over $100 million of cash. In November 2008 we modified our debt terms to give us more room on our covenants. In June 2009 we converted our credit facility to an asset backed loan to secure by the value of our accounts receivable, our inventory and our mobile equipment; all of this in order to give us further flexibility.

We delayed the expansion of our central Texas cement plant which conserved $40-60 million of capital spending. We pared back our regular CapEx spending by approximately $20 million. We declared a companywide salary freeze for non-union employees and the board of directors, executive officers and I voluntarily chose to reduce our compensation in fiscal year 2010.

Looking forward, predicting the future continues to be a difficult task. We are preparing for a challenging winter but we are also encouraged by the fact that the Portland Cement Association forecast for our markets indicate that cement consumption will hit bottom in 2009 and that recovery will start to occur in 2010. The PCAs conclusions are in line with our current outlook and I am pleased that the recovery prospects appear to bet getting clearer for calendar 2010 and beyond.

Let me now turn my attention to the elephant in the room, the Shamrock’s proxy play. Needless to say, I am disappointed by their actions and I strongly disagree with the conclusions they have reached about the performance of our board of directors and management team. Ken and I have been on the road visiting with a number of shareholders and these conversations will continue over the coming months. As I have already discussed, we have taken a number of aggressive and proactive measures in response to an economic event that surprised virtually everyone. We have expanded our earnings capacity in the two most attractive long-term markets in the United States and this board has demonstrated its commitment to shareholder value by initiating and completing an extraordinarily successful spin off of Chaparral Steel Company.

We are very proud of these accomplishments and we strive to exceed them for the benefit of our shareholders every day. In spite of this distraction, we are focused on running our business as effectively as possible. The good work of our employees is delivering results to our shareholders and I am grateful for their efforts.

With that I will turn it over to Ken.

Kenneth Allen

Thanks Mel and good afternoon. As Mel mentioned earlier, results from TXI’s first quarter though down from a year ago reflect the continued successful efforts of employees to control costs in an environment of significantly reduced demand for construction materials.

Consolidated net sales declined 28% compared to last year’s first quarter primarily due to lower product shipments. Wet weather in the last half of July in our Texas markets also had a negative impact on shipments but the recession driven decline in overall construction activity was clearly the primary reason for the decrease in sales.

Despite the decline in shipments gross margins increased compared to last year moving from 12.7% to 18.5%. After removing $11 million of expenses for major cement plant maintenance that were incurred a year ago in order to get more of an apples-to-apples comparison, gross margin still improved from 17% last year to this quarter’s 18.5%.

Now let’s take the comparison one more step and look at cash gross margins. When you add back depreciation and amortization expenses, cash gross margins actually increased from 23.5% a year ago to 27.4% for the current quarter. I will go into more detail on the segment discussions but these results in the face of a 28% decline in sales just underscore Mel’s earlier comments about the good job TXI’s employees are doing to control and manage costs.

Looking at SG&A expenses they were up $2.9 million compared to last year and this was due to a $6.7 million increase in stock based compensation. Taking out the stock based component which is primarily a function of changes in the company stock price, SG&A expenses were actually down $3.8 million or 18% again reflecting additional success in focusing on costs throughout the company.

Interest expense in the quarter increased by $6 million compared to a year ago. This increase reflects a higher level of debt and the fact that $1.8 million of interest related to the Hunter Cement Plant expansion was capitalized and therefore reduced interest expense in last year’s quarter. Other income declined by $5.6 million as last year’s quarter benefited from emission credit sales and oil and gas lease transactions.

As a result of all of the above, net income declined $8.9 million compared to last year but our focus on cash conservation paid large dividends in the quarter. We started the quarter with $20 million in cash. During the quarter we made a semi-annual interest payment of $20 million and still ended the quarter with a cash balance of $32 million. Again, we have our eye on the ball and continue to block and tackle.

Turning to the cement segment, operating profit for the quarter of $12.4 million was 26% below that of a year ago. Both the Texas and California operations registered 25% declines in cement shipments compared to last year. Average realized prices were down 6% as Texas pricing declined 3% and California prices were down 13%. Cement unit costs declined 13% compared to last year. As I mentioned earlier though, last year’s first quarter had approximately $11 million of scheduled maintenance expense for our Hunter, Texas and California plants and we have no major scheduled maintenance in the recent quarter.

Adjusting for the scheduled maintenance, unit costs were down 2% and unit cash costs were down 7% and this is a remarkable result given that shipments declined 25% and also that the cost per ton of coal increased 29% as we encountered our new coal contracts since last winter. The increased coal cost was offset by the positive results we have experienced in substituting other fuels for coal and by lower power costs.

Electricity prices declined 38% on a per kilowatt hour basis and natural gas prices were down 66% from last year’s very high levels. In other areas such as labor, material costs and maintenance as well as SG&A expenses, the operations did a remarkable job in controlling costs. Other income for the cement segment declined by $3.5 million. Last year’s quarter included income from the sale of emissions credits as I mentioned earlier and also the oil and gas lease bonus payments. The emission sales credit number was $1.7 million and the bonus payments were $2.8 million.

Turning to TXI’s aggregate operations, quarterly operating profit for the segment of $8.6 million was only 3% below that of a year ago even though stone, sand and gravel shipments declined 34%. Average realized prices for stone, sand and gravel products were up 4%. Average unit costs were stable and cash unit costs actually declined by 8%.

Lower [inaudible] diesel costs also helped to reduce cash costs but the clear takeaway from these results is that the aggregate employees are doing a great job of managing through this challenging time. As an added example, segment SG&A expenses declined by $1.1 million, again as the result of the continued focus on cost reductions.

For the consumer products segment, operating profit moved from a loss of $500,000 a year ago to a profit of $4.8 million in this year’s quarter. A 6% price improvement combined with a 2% unit cost decline offset the 35% drop in shipments. Raw material costs including the transportation costs of getting raw materials to the plants, declined by 8%. Diesel prices were off by approximately 50% compared to a year ago as well. Maintenance and SG&A expenses also declined while solid delivery efficiencies were achieved even with the significant drop in shipments. Again, the results reflect the good blocking and tackling the consumer product segment has done to show improved results in spite of the steep decline in construction activity.

In the corporate section, other income declined by $1.8 million. In last year’s quarter we had $1.6 million in oil and gas bonus payment income and that accounts for the decline. Corporate SG&A expense increased $5.9 million and this was driven by the $6.7 million increase in stock based compensation that I mentioned earlier. Taking the stock based compensation out, corporate SG&A actually declined by 9% compared to a year ago.

As we look forward you can see from the results in our press release that depreciation expense is running at an annual rate of about $66 million a year. With regard to capital spending in July we mentioned that capital spending for fiscal year 2010 should be between $30-40 million. Today though we expect capital spending for fiscal year 2010 to be somewhat lower, between $20-30 million and this is just another action we are taking to conserve cash.

Now that we are not capitalizing interest for projects, the interest expense run rate is approximately $13.2 million per quarter or about $52 million per year. The tax rate for the quarter of 47% was high by historical standards but as we mentioned in July at these low levels of pre-tax income the tax rates can become highly variable. I would use that rate in modeling for the rest of the year.

Now for a couple of notes for the November quarter. First, our Texas markets have been subject to extended and continuous rainfall during September and this has negatively impacted shipments for the month. Secondly, remembering last year’s November quarter our Midlothian, Texas cement plant was down for scheduled maintenance and we estimated that the maintenance added about $8 million to expense for the quarter. Now we expect to bring the Midlothian plant down for maintenance late in the current quarter and the downtime will extend into December.

Estimating the cost impact to the November quarter related to the downtime is difficult because of the timing but we do expect the cost of the maintenance in the November quarter itself will be less than the $8 million incurred last year.

Finally, with regard to TXI’s financial standing, we ended the quarter with $30 million in cash and the ability to borrow approximately $100 million under the asset base line before we encounter any maintenance [projects]. With the good discipline that is being applied to capital spending we believe the company is well positioned to get through the recession and are looking forward to the beginning of a recovery in the coming year.

Now with that, operator, I will turn things back over to you as we move into the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of John Kasprzak – BB&T Capital Markets.

Jack Kasprzak – BB&T Capital Markets

My first question, with regard to cement prices which we continue to see come in a bit versus the last quarter and the quarter before that, I know you said in the press release the price of cement in Texas is now down a bit. Could you give us some indication of how much weaker you think they might be? What is Texas due to look a little more like California where we are already seeing double digit price declines? Maybe some commentary there.

Melvin Brekhus

In Texas there has been a price reduction recently and when you look at the sequential decline, quarter-over-quarter there has been about a 3% decline in price. That is because of the pressure that is being put on the suppliers because of the decline in demand. Even so, that is somewhat encouraging because it hasn’t been as dramatic as we have experienced historically in declining markets like this. The good news is that as I stated in my opening comments the Portland Cement Association, and I happen to agree with them, see an increase in demand coming in calendar year 2010. That is going to bode well not only for sustaining prices but also the opportunity to increase them.

Let me state at this time in North Texas, for example, we have a price increase letter out that calls for a $10 per ton cement price increase in November; a $10 per cubic yard price increase November 1 and a $1 per ton increase in aggregates. While that may be very difficult to obtain we are trying to make sure that we preserve as much of the margins that we have worked so hard for over this past year as we can. In California the market price declined but I would say at this juncture it seems to be at a similar position where it is not likely it will decline substantially more. The big declines occurred there quicker. The declines in Texas took longer to come to fruition but they haven’t been significant in nature, especially recently.

Jack Kasprzak – BB&T Capital Markets

You anticipated my next question with your comments about price increases. Thanks for that. Ken you mentioned in your comments electricity costs in cement were down 38%. The math escapes me in how I can translate that into a per ton basis. Is it possible to do that?

Kenneth Allen

Just in rough numbers it is about $1.25 per ton in cement for every $0.01 you have in KWH. We gave you percentages. Another way to think about it is if electricity is about 20% of the cost of making a ton of cement and that cost was down year-over-year about 40% you are going to have a fairly significant decline there, aren’t you?

Operator

The next question comes from the line of Garick Shmois – Longbow Research.

Garick Shmois – Longbow Research

I am wondering if I can drill down on the California climate. It has been a few quarters since you implemented the stagger schedule of running the plants and then taking them offline. Can you just talk about the profitability of that plant? You typically don’t give hard numbers around it but the question is the plant profitable now with this new strategy that we have had some time to evaluate?

Melvin Brekhus

I am going to give you the short answer and Ken can elaborate if he wants to. When we are able to run the Oro Grand plant at or near its capacity it is profitable. The problem we have in California is the demand is such we can’t run the plan at or near its capacity continuously. When we are afforded the opportunity to run it, it performs extremely well as we hoped it would when we commissioned it and brought it on line.

Kenneth Allen

Just to follow-up, a year ago we were pretty clear the plant was not profitable. We have seen further price declines since that time but the plant is in fact running better when we run it. So while it is not profitable, it continues to hold its own in a market that has come down from a year ago. We are very pleased with how it is operating.

Melvin Brekhus

Just a little bit more color. When we were able to run the plant in the past quarter at 80% of its rated capacity, over a continuous period of time we saw fuel economies at or around 3 million BTUs per ton which we told you was a very important reason why we constructed that plant and modernized that plant, we saw our power consumption drop from 160 some KWH per ton to 125 KWH per ton. We saw our tons per man hour up near 5. Five tons per man hour and we ran at 80% of capacity. We just look forward to the day when the market demands that we run it at full capacity and when we do we are very efficient and we will be very profitable.

Garick Shmois – Longbow Research

Moving onto the headcount reductions, down 28%, is it possible to break that out by segment?

Kenneth Allen

We don’t have it broken out by segment but it is throughout the company.

Garick Shmois – Longbow Research

A follow-on to that, going forward how much of that do you anticipate would be permanent versus how much would you need to bring back?

Kenneth Allen

That is going to depend on what pieces of the business come back. As demand for ready mix concrete comes back we will have to add drivers and things like that. What we do think we have done is made adjustments that will really position us well when things do come back. You have heard Mel talk before that we are going to be stronger and lower cost when things come back. A little difficult to put a number on that because we are still in the process of becoming as efficient as we can be. That includes all areas of the company. Not just employees but all other sorts of expenses.

Garick Shmois – Longbow Research

On ready mix prices, in the last call you were anticipating what sounded like a decline in ready mix prices and it was only down very modestly. Could you talk about that? I know you mentioned you have an increase in the market for November but maybe some trends in ready mix prices you observed during the quarter.

Melvin Brekhus

I think one of the reasons when you look sequentially at the ready mix concrete price is you see that it really didn’t go down as much as we might have indicated it would at our last teleconference call. Part of the reason for that is that the volume was as low as it was and we were shipping backlog at the higher price. So the declines didn’t occur as quickly because we haven’t shipped the backlog to get into the lower price concrete that is going to come in the next several quarters.

Operator

The next question comes from the line of Katherine Thompson – Thompson Research.

Katherine Thompson – Thompson Research

My first question is for both your cement and your ready mix pricing. What was the pricing at the end of the quarter versus the quarterly average just to give us a better understanding of what trends we should expect sequentially?

Kenneth Allen

You are right; the price in cement was down sequentially from the fourth to the first quarter about 3%. We would expect to see as Mel said earlier some modest price declines unless we get this cement price increase through. I don’t have the number in front of me but it isn’t going to be a whole lot since the total percentage price decline wasn’t much as well.

Katherine Thompson – Thompson Research

It would be safe to say you would see maybe another 3-4% sequentially assuming you don’t get a price increase?

Melvin Brekhus

Yes, that would be fair to say.

Katherine Thompson – Thompson Research

On the ready mix would you expect a similar type trend?

Melvin Brekhus

Yes, we would expect a similar type trend.

Katherine Thompson – Thompson Research

Still keeping to the pricing, something we have run across in the past few months is you are seeing some pricing stability in California which is obviously a big change. While year-over-year numbers are down, what was pricing sequentially in California, in other words from Q4 to Q1 for California pricing?

Kenneth Allen

In California from the fourth quarter to the first quarter it was down about 3%.

Melvin Brekhus

You are right about it stabilizing.

Katherine Thompson – Thompson Research

That was my follow-up. I just wanted to make sure that we are on the same page with that. In many discussions you talked about pricing pressure and in the previous quarter I think a trend a lot of companies are seeing is you are seeing the greatest pricing pressure from public works. Is that still the case or are you seeing other pressures from non-residential construction too?

Melvin Brekhus

Most of the pressure we are seeing is directly correlated to the public works projects. So it is the same as we stated in our last teleconference call. The bid work where the buyers come in and bid on the project, get it or don’t get it and then that project is complete, and then they reload for the next bid. There has been a lot of pressure because there are a lot of suppliers looking for that volume so it is still in the public works or large projects and there are very few large projects other than public works.

Katherine Thompson – Thompson Research

Could you remind us what the current market volume rate is for Texas?

Melvin Brekhus

That rolling 12 months is somewhere around 13-13.5 million tons. What is important to recognize is that is a rolling 12 months. If you look at where we think this is going we still think that Texas will end up at about 12 million short tons for calendar year 2009.

Katherine Thompson – Thompson Research

You talked obviously how lower fuel contributed to improve profitability in aggregate. Would you say at least half of the gains were from overall lower fuel price? Is there something else beyond headcount we should take into consideration? I know you have done a lot in the quarter but I’m just trying to think what was the biggest lever in overall contribution to profitability in the quarter.

Kenneth Allen

The fuel and electricity was a piece but it doesn’t account for a very large piece of the cost. The other piece would have been on maintenance. Maintenance expenses, even though production is down, on a per ton basis the aggregate operations have done a great job of controlling their maintenance expense. That is the lion’s share of the expense that goes into making a ton of aggregates.

Katherine Thompson – Thompson Research

Would you say are there any irrational competitors in the California or the Texas market you care to comment on? Have you seen any meaningful shifts either positive or negative among your competitors in those respective markets?

Melvin Brekhus

You have given me an opportunity and so I would say they are all irrational except for TXI. That was a joke. We are all managing our businesses during a very difficult time and we don’t worry about what they are doing and I’m pretty certain they don’t worry about what we are doing.

Operator

The next question comes from the line of Analyst for Trey Grooms - Stephens, Inc.

Analyst for Trey Grooms - Stephens, Inc.

I wanted to touch back on the Oro Grand plant. I know you have been kind of idling it and then running it. I’m sorry if I missed it but did it run at all this quarter or was it basically shut down?

Kenneth Allen

Good question. The plant did run. The kiln came back on line late July and ran through August and it is still running as we speak.

Analyst for Trey Grooms - Stephens, Inc.

How can we think about the cost? Really what I’m trying to get to is I know costs were down significantly and you have done a lot all over the board, I know, but I’m trying to get a sense as to how much that played a role in those costs coming down and kind of what to look for in the coming quarters with that plant running, if that makes sense.

Kenneth Allen

We are going to continue to cycle the plant just like we have. Until we see the market begin to really improve we will continue on that. As time passes and we get more experience with the plant I think it will run better. In terms of modeling major changes in our bottom line in the near term that is a difficult one to assume given that demand continues to stay down.

Melvin Brekhus

Yes, and we are going to run, for example, our plan is to run the Oro Grand plant and put up inventory until we get to a point where we think that we have ample inventory for market demand and then shut it down and then sell out of inventory. Our plan right now is probably to run through pretty close to the end of October and then we will go down and we will sell out of inventory but we won’t know exactly how long we are going to be down until we get to that point and we start shipping out of inventory and depending upon the demand that is out there in the marketplace it is the determining factor for the amount of time we are down. We just don’t know what that is going to be because of the volatility in the marketplace. We hope we are down for a shorter period of time because if we are then of course we are running and we are more profitable than when we are down.

Analyst for Trey Grooms - Stephens, Inc.

I wonder if you could talk about how August was compared to maybe June and July just in a general sense. Knowing seasonality is about to play a role, how has September fared compared to the prior quarter?

Kenneth Allen

I mentioned in July in our Texas markets we had unusual amounts of rain. Usually in Texas it just doesn’t rain all summer. The rain stopped August probably because of some of the demand that was held up by the rain in July and August relatively it was a pretty good month. Now if you will recall I said we have gotten a lot of rain in September in the Texas markets. That will have an impact. You are right about thinking seasonally but I will tell you that just unusual rain here is having more of an impact than normal seasonality is right now.

Analyst for Trey Grooms - Stephens, Inc.

On the commercial construction front I know it kind of came to a screeching halt it seems late last year and that continued in the early part of this year. Are you seeing any signs of that letting up at this point? What are you seeing on that front both in Texas and in California?

Melvin Brekhus

We are not seeing that let up in either Texas or California.

Operator

The next question comes from the line of Glenn Wortman - Sidoti & Company.

Glenn Wortman - Sidoti & Company

Just to be clear on this bottom you are expecting in 2009 for cement volumes, are you expecting a year-over-year increase in the February quarter?

Kenneth Allen

The February quarter because it is our winter quarter can be all over the map just from a weather standpoint. Our general comment is we do expect the calendar year 2010 to begin to see things come back. We are not going to try to time it to a quarter at this point. We need to get closer and see where things are.

Melvin Brekhus

I will also add that traditionally or historically the increases you are going to see are going to be in the latter half of the calendar year as compared to the first half of the calendar year. We believe that will be the case with the rebound the Portland Cement Association is predicting.

Glenn Wortman - Sidoti & Company

Thinking about 2010 and this expected rebound, can you kind of break that down by your various end markets? As far as I know Texas is supposed to have an uptick in transportation spending. Housing seems like it would have bottomed earlier this year. Can you give us a little more detail on what your expectations are?

Kenneth Allen

You have already anticipated it pretty well there. The biggest increase is going to come out of the public works side particularly in Texas. We have mentioned in previous teleconferences a number of large jobs we think will have a positive impact next year. Housing, I don’t think anybody expects housing to come back with a roar in the 2010 calendar year. We would expect to see improvement in Texas in housing. The Texas housing market has just been so much better than a lot of other markets as well. As Mel indicated before, the non-residential side probably doesn’t improve much next year if at all. Where California is concerned I would echo everything I have just said except that probably the rebound in public works might not be quite as intensive as it will be in Texas.

Glenn Wortman - Sidoti & Company

On these maintenance expenses in the aggregate segment is this something you think you can manage more efficiently like you have done over the past several quarters on a permanent basis or do some of these maintenance expenses have to come back? Maybe you can give us a little bit more detail on what is going on there.

Melvin Brekhus

We think we can manage our maintenance expense in the future similar to what we have in the most recent past. That is one of the most encouraging things about what the aggregates group has done. They have changed the way they manage repair and maintenance in such a way it will be embedded in the future and we will do a better job going forward regardless of market demand.

Operator

The next question comes from the line of Fritz Von Carp – Sage Asset Management.

Fritz Von Carp – Sage Asset Management

On the electricity prices, which I guess if I understand you effectively are a natural gas price. Just tell me how, I want to understand better if I have a view for natural gas price how I transfer that to into what you may be paying for power down the road. I don’t know how you can answer. Can you tell me how much natural gas price in BTU was embedded in your electricity price and we can think about it sort of moving proportional like that or just give me some help with this?

Kenneth Allen

Let me try anyway. Just in rough numbers, you are right in our markets the price we pay for electricity does tend to be driven by movements in natural gas but in rough numbers. For every $1 in MCF gas moves you might see our costs of production move about $1.25 just in real rough numbers.

Fritz Von Carp – Sage Asset Management

Is there any lag? How do you buy the electricity? Are you hedged? Do your electricity prices lag the gas market by two months or how do I think about it?

Kenneth Allen

For modeling purposes I would assume it is pretty instantaneous.

Fritz Von Carp – Sage Asset Management

I’m sorry, is that $1 in gas is $1.50 in power?

Kenneth Allen

$1.25 just in a real round, crude estimate.

Fritz Von Carp – Sage Asset Management

The second question is on ready mix. How should I think about in the big picture think of the ready mix moving? Is this driven by residential? Is it driven by non-residential? Is it equally driven by both and can it be mixed by those two? How do I think about the ready mix business?

Melvin Brekhus

We are primarily in the ready mix business in Texas and Louisiana. In Louisiana and east Texas we are going to supply a pretty balanced ready mix market of public works, residential and non-res. In the metropolitan markets that we serve at DFW and Houston, Texas, we tend to be more into commercial than we are into residential and we are also involved in public works. So our strengths are commercial, public works and our area of least strength has in the past been the residential market. As we move forward in ready mix concrete, we are looking forward to as Ken said earlier, to public works improving and of course we are waiting on the commercial market to come back.

Fritz Von Carp – Sage Asset Management

In general should I think of ready mix and the operating profit line as being a more cyclical and more volatile image of the rest of your aggregates and cement businesses? Is it just like a leveraged play on the aggregate cement world because of its cost structure?

Kenneth Allen

For a number of reasons, just over a year that is probably not a bad assumption because weather will tend to have more of an impact on our ready mix than some of our other businesses. Then I would say maybe slightly it tends to be a little more volatile than the rest of the business just because it tends to be focused in several discrete markets.

Operator

The next question comes from the line of Todd Vencil – Davenport & Co.

Todd Vencil – Davenport & Co.

What has been the cumulative price drop to this point in California? We are looking at about a year now it has come down from the peak I guess, however you look at it on a quarterly average.

Kenneth Allen

It is around 15-20%.

Todd Vencil – Davenport & Co.

I think you have done this a time or two in the past, can you tell us where the average price is for each of your two markets, California and Texas, at this point?

Kenneth Allen

You are close. About 180 degrees. We have resisted talking about California’s cement prices and Texas cement prices individually because you know our customers pay a range of prices and to give a point, so we really haven’t done that.

Todd Vencil – Davenport & Co.

What about tons? I think you have given a percent of sales per market. Can you give us tons for each market?

Kenneth Allen

In the quarter, in Texas we shipped 657,000 tons and in California about 260,000 tons.

Todd Vencil – Davenport & Co.

We had heard rumblings of an actual outright price cut in cement of about $5 a ton in the Dallas market effective September 1. Is that consistent with what you are seeing?

Melvin Brekhus

We have not heard the same thing you have heard.

Todd Vencil – Davenport & Co.

You talked about those North Texas price increases. Are you looking for price increases any place else?

Melvin Brekhus

Not at this time.

Todd Vencil – Davenport & Co.

Around maintenance, you talked about Midlothian you expect to go down in the November quarter and it was $8 million the last time, a year ago. Do you think it will be less than that? Can you maybe put some clarity around that? Are we talking about half as much this time?

Kenneth Allen

Because we are not exactly sure about timing and that sort of thing, the impact on the quarter all I am comfortable with saying right now is the impact on the quarter is going to be less than a year ago. It may even be actually be down longer than we were a year ago because you have heard us talk about how we talk about scheduled maintenance. If we stretch that out and don’t bring in new people or contractors or pay overtime as well. So, we will have to give you a better clue on that I think when we come to the January teleconference.

Todd Vencil – Davenport & Co.

You took that plant down in the May quarter did you not?

Kenneth Allen

We did.

Todd Vencil – Davenport & Co.

Could you tell me what the impact was for that quarter of the Midlothian plant?

Kenneth Allen

It was less than $5 million in the May quarter.

Todd Vencil – Davenport & Co.

Looking out a little bit, can you talk about when you think you may need to take the other two plants down for maintenance?

Kenneth Allen

We are going to wait and see but right now I think there is a good potential that the Hunter cement plant to have scheduled maintenance downtime in our February quarter.

Todd Vencil – Davenport & Co.

California, no visibility there yet?

Kenneth Allen

Because we are running that and then having it down from time to time it is a real different picture there. We don’t have anything in the real near term that I feel comfortable about setting a date for.

Operator

The next question comes from the line of Chris Olin – Cleveland Research.

Chris Olin – Cleveland Research

I wanted to go over some things that we are seeing within our channel that I’m not quite sure you are really commenting on. The first has been some positive order activity related to residential and I think there seems to be some increased buying activity related to people trying to get in to have this first time homebuyer’s credit. The second is, stimulus dollars seem to be working not only in Texas but we are starting to hear some good things from California and I guess can you comment on what it could mean for your business over the next couple of quarters?

Melvin Brekhus

Both of those things would be positive. We just haven’ seen significant movement in either one. In California as you know because of the inventory of homes even though there is this stimulus for first time buyers, it is an insignificant percentage of the sales of home.

In the stimulus package itself, Texas gets $2.25 billion and California gets $2.6 billion and that will be spent but it has been very slow coming and most of the projects where this money is being spent have been maintenance type projects that involve asphalt and our aggregate suppliers and our aggregate business itself, not so much the cement business or the concrete business. But it is going to be positive. Both of those are positive things. They are just not very significant at this time and it will take awhile before the money trickles down into projects.

Kenneth Allen

Just to drill down a little bit on the residential side, in Texas when you look at single family homes versus multi-family homes, we are beginning to see a little bit of a pick up on the single family start side but on the multi-family side it is still down. Single family home starts are really where the bread and butter is.

Melvin Brekhus

It is also encouraging we just saw a report in the past month in Houston, San Antonio, Austin and DFW the inventory of new homes were in every case less than seven months which is pretty darned encouraging going forward.

Chris Olin – Cleveland Research

No major projects regarding stimulus other than these cosmetic things that are showing up because I have actually heard about a big project being released in Northern California which may not impact it as much and a couple in Texas. Is it possible you are just not winning the business or you are not seeing anything being kind of bid on out there?

Melvin Brekhus

In Northern California it could be we didn’t even participate in the bid. In Texas we are not seeing the major projects from the stimulus money. We still have the major projects that Ken talked about earlier. We have got, for example, $7 billion worth of infrastructure projects in DFW that have nothing to do with stimulus.

Chris Olin – Cleveland Research

In terms of modeling, let’s assume I thought the ready mix concrete price today was being quoted around $60-70 per cubic yard, when would that start to show up in the numbers? How lagged does that go through your business model?

Melvin Brekhus

In our case it would never show up because we would never bid it that low.

Chris Olin – Cleveland Research

How lag does it go through the business?

Kenneth Allen

You would start and you are beginning to see some impact from lower ready mix prices I think here in the second quarter. It will take several quarters to see the full impact of anything like that beginning to happen, okay? As the new projects work into the backlog and actually get shipped we will realize those prices and it will take months for a price increase to really have an impact.

Chris Olin – Cleveland Research

I brought up those numbers because it seems like some players in your industry could be using concrete as a loss leader, for lack of a better word. It seems to be some of the numbers that are kicked around. I guess that’s why I thought that may be a possible number.

Kenneth Allen

We have heard different numbers on cement for one-off projects and we have also heard different numbers for ready mix and aggregate for one-off projects and those tend to be things that people tend to focus on and probably emphasize a little too much as well. So be a little careful about just looking at the outliers there.

Operator

The next question comes from the line of Robert [Rosington] – No Company Listed.

Robert [Rosington] – No Company Listed

This quarter was better than I expected and as I look ahead the next 3-6 months, more near term than out a year, I am just trying to figure out because there is talk of stabilization from your end markets and frankly improvement in some aspects. I am just trying to think about how that is going to counteract with the seasonality of the business because it is hard to really gauge it when we are talking about such a low base. Maybe you could provide some clarity on which side of the equation will have a larger impact as we sort of move ahead in the short-term.

Kenneth Allen

You heard Mel say in his earlier prepared comments that we do expect this winter to be a very challenging winter for us. Clearly we said back in July and we say again we just don’t think our markets are quite bottomed out yet as well. We are seeing a number of good things in the areas we can control to offset some of that. We don’t give earnings guidance but we do expect that we haven’t seen our markets bottom out and we will see the seasonal impact going through the winter.

Robert [Rosington] – No Company Listed

Do you think, you talk about a particularly hard winter? Is that just because people are waiting for more clarity in terms of the economy and their own businesses before they spend so you are really going to see a push back in when projects are being put out there to the end of next year? Is that the reason why? I am just trying to understand why this winter will be so particularly tough if you are seeing, I know you aren’t seeing a bottom, but stabilization?

Kenneth Allen

We still see reductions in employment in our markets. The unemployment rates haven’t peaked out yet. We do see a number of positive things out there and Mel has gone through a lot of those. We think and we are preparing in terms of the actions we are taking to get ready for winter time which is typically a time of low construction activity. We are just preparing for a winter where construction activity will be low. What we are also looking for is next year coming and seeing improvement at that point.

Operator

The next question comes from the line of Jay Van Sciver – Bishop & Carroll Capital Partners.

Jay Van Sciver – Bishop & Carroll Capital Partners

Just a quick question on inventories. It looks like inventory increased a tiny bit in the quarter but it increased a fair amount last quarter. Are you comfortable with that level? Do you need to ramp back utilization or anything like that as we go forward into the winter months? Where do you see that needing to be?

Kenneth Allen

One of the things that happens, you have heard us talk about how we run the Oro Grand plant to built inventory and then we turn the kiln off and draw inventory down. So where we are in that cycle relative to the end of the quarter could have a real impact on our inventory balance. Our overall approach here is to bring down some of our clinker inventory over time. I will tell you it is going to be difficult until our markets bottom out a little more but that is our overall strategy.

Jay Van Sciver – Bishop & Carroll Capital Partners

Is there a certain dollar value you are targeting or anything like that or is it just whatever you can push through efficiently?

Kenneth Allen

We are going to try and push through as much as we can efficiently. Good question.

Operator

There are no further questions in the queue.

Kenneth Allen

We appreciate you joining us today. We look forward to you joining us for our January teleconference. Thanks again. Good bye.

Operator

Ladies and gentlemen this concludes the TXI first quarter results conference call. If you would like to listen to a replay of today’s conference please dial 303-590-3030 or 800-406-7325 with the access code 4160818. AT&T would like to thank you for your participation. You may now disconnect.

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Source: Texas Industries, Inc. F1Q10 (Qtr End 08/31/09) Earnings Call Transcript
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