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Executives

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

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

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

Analysts

Wenjun Xu - Thompson Research Group, LLC

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

Garik S. Shmois - Longbow Research LLC

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

Glenn Wortman - Sidoti & Company, LLC

Christopher David Olin - Cleveland Research Company

James Barrett - CL King & Associates, Inc., Research Division

Tim Robinson - Susquehanna Financial Group, LLLP, Research Division

Wayne Pinsent

Michael Betts - Jefferies LLC, Research Division

Matthew Dodson

Texas Industries (TXI) Q1 2014 Earnings Call October 3, 2013 11:00 AM ET

Operator

Good morning, ladies and gentlemen, and thank you for standing by, and welcome to the Texas Industries First Quarter Results Conference Call. [Operator Instructions] And as a reminder, this call is being recorded today, October 3, 2013. I would now like to turn the call over to Les Vines, Treasurer. Please go ahead, sir.

Thomas Lesley Vines

Thank you, Craig. Good morning, everyone, and thank you for joining us for our first quarter conference call and webcast. We certainly appreciate your time and interest in TXI. On the call with me today are President and CEO, Mel Brekhus; and CFO, Ken Allen. Our Chief Operating Officer, Jamie Rogers, is traveling today and is unable to participate in the call. We will follow the same format as in previous calls, with management providing comments for the quarter, and then followed with your Q&A. [Operator Instructions]

Before I turn 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 a broad range of risks, uncertainties and other factors, which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. I refer you to our reports on Forms 10-K, 10-Q and 8-K for a more thorough discussion of some of the risks and uncertainties.

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

Melvin G. Brekhus

All right, thank you, Les. Good morning, everyone. On track. I think those 2 words reflect my assessment of where we are currently. All of our markets are continuing to improve, and we continue to make progress as we expected because of this growing demand that is continuing.

The results for the quarter are certainly consistent with this view. EBITDA increased $23.3 million on $58.6 million higher net sales, reflecting a doubling of our EBITDA as a percentage of net sales compared to a year ago. Gross margins improved for each segment, with a 7% improvement at ready-mix margins being the clear leader. Demand in all of our markets continues to improve for all of our products. Texas is clearly our strongest market, as we posted strong double-digit improvement in Texas shipments of all of our products compared to a year ago. In August, Texas posted its 17th consecutive month of cement volume growth, and TXI was the largest producer of cement in Texas for the fifth straight month.

The fact that, in Texas, our monthly shipments in 2 out of the last 4 months have been the highest shipments for that month in the last 10 years further illustrates the strength of our primary market and our improving position within that market. As we indicated in July, we are accelerating the work required to resume production from our original 900,000-ton kiln in Central Texas to help with this improving demand. We intend to complete the work and resume production in early 2014. The South and Central Texas markets need these additional tons,, and the additional tons will be a good complement to the new kiln, which, by the way, continues to exceed my expectations, given we are only 5 months removed from the completion of its commissioning.

Earlier, I referred to significantly improved margins in ready-mix. While we have realized improvements in all of our ready-mix operations, the operations we acquired in the prior year are a significant reason for the dramatic increase. Results from these operations have exceeded our expectation thus far.

Turning to pricing. While there has been improvement, pricing still remains well below levels seen prior to the recession and thus, I believe there is significant room for improvement. I think this is particularly true given the changing cost environment, especially in California. I also believe that, while modest, the price improvement we are realizing is somewhat masked by the fact that we are shipping at pricing levels we committed to prior to and in anticipation of the new cement capacity we brought online. Once all of our capacity is online for a while, I expect we'll experience a more positive trend in cement pricing.

Finally, I'm encouraged by the improvement we see in all of our markets, including California. Our focus continues to be on operating our assets as efficiently as possible and doing everything we can to accelerate our full earnings potential.

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

Kenneth R. Allen

Thank you, Mel, and good morning. The quarter's financial results clearly show both the impact of improved construction activity in our markets and also our success in becoming a more focused and leaner company. Total revenue from continuing operations was up 34% for the quarter. When revenues from the ready-mix operations that were acquired last spring are excluded, consolidated sales were up 17%. The improved sales occurred despite wetter-than-normal weather during the June and July periods in Texas. At least as significant, the consolidated EBITDA margin on reported net sales doubled from 8% last year to 16% this year. This reflects the positive impact of increasing volumes on cement unit cash costs, and also reflects our successful efforts in prior years to become leaner and more efficient.

A piece that's most apparent in the quarter, as Mel has already alluded to, is the increased profitability in our ready-mix operations. These operations, again,, acquired last spring, accounted for most of the margin improvement and also the total dollar EBITDA improvement. But also, existing operations showed significant improvements in both shipments, pricing and EBITDA generation as well.

So total EBITDA for the quarter was up dramatically from a year ago, and this is true whether the comparison is solely on continuing operations or against EBITDA that includes last year's expanded shale and clay results, and note that we've provided a reconciliation of EBITDA in the earnings release, by the way.

Even with the good margin improvement, there are still additional efficiencies to be gained from the new Hunter kiln. As Mel has mentioned already, the startup of the kiln has gone very well, however, it typically takes an extended period of time to realize the full operation potential of a new kiln. And we expect that to be our experience.

Now for some details from the quarter. Our Texas cement shipments of 891,000 tons were up 23% compared to a year ago, and California cement shipments of 423,000 tons increased 8%. Average realized cement prices in Texas were up 2%, and they were up 1% in California. In aggregates, our shipments were up 14%, with average prices up 12%. Ready-mix concrete shipments increased 75%, and about 2/3 of the increase in shipments was due to the 42 plants we acquired last spring. Average prices increased 8.5%, so again, the new operations have come out of the starting gate in terrific form, and we think they're a great addition to our portfolio of businesses.

Turning to costs. There are 3 items really worth noting. Remember that cement depreciation expense increased by $4.5 million in the quarter compared to last year's quarter as a result of the new kiln in Central Texas. In addition, depreciation expense associated with the new ready-mix plants and trucks acquired last spring added $1.5 million to book costs. Cement production costs were also negatively impacted by approximately $2 million due to unscheduled brick jobs at both the North Texas and California plants. Last year's August quarter included $3.5 million in major maintenance expense.

Now, while we're on the cement maintenance topic, last year's November quarter, the quarter that we're currently in, included $5 million for scheduled major maintenance at the North Texas plant. In this year's quarter, we expect the Central Texas cement plant major maintenance to come in around $2 million to $2.5 million.

Turning to the cash flow segment, expansion capital spending during the quarter of $7.1 million reflects the payment of capitalized interest associated with our semi-annual cash interest payment in August. As we look at the entire fiscal year, we continue to expect sustaining CapEx to be in the range of $35 million to $40 million.

So to conclude, we have completed our multi-year program to upgrade the efficiency and increase the production capacity of all of our cement plants. We have also refocused our combined portfolio of businesses around our core cement, aggregate and ready-mix concrete businesses. Our efforts are now focused on levering this improved foundation, in combination with the positive trends in our markets, to generate increasing sales, improved margins and growth in free cash flow as we move towards our goal of generating $400 million in EBITDA in a steady-state market. Not a peak market, but a steady-state market or average market.

With that, I'll turn things back to Les. Les, please go ahead.

Thomas Lesley Vines

All right. Greg, I think we're ready for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question does come from the line of Kathryn Thompson with Thompson Research Group.

Wenjun Xu - Thompson Research Group, LLC

This is Wenjun sitting in for Kathryn. First question is on the fall price increases. We're hearing the full price increase in Texas likely won't go through. What do you think is driving this given that relatively strong market?

Melvin G. Brekhus

I'm sorry. Did you say that you think you are hearing, anecdotally, that it's going to go through?

Wenjun Xu - Thompson Research Group, LLC

The price increase in Texas likely won't go through. What do you think is driving this, given the relatively strong market?

Melvin G. Brekhus

Oh. Well, I think it's driven by the fact that we not only have that strong market, which always bodes well for price increases, but we have costs that have been growing over this difficult economy that we've experienced over the past 4 years that we need to recover. And the modest price increases that you're talking about that will happen this fall do not recover all the cost increases that we've had, but at least it's a positive movement.

Wenjun Xu - Thompson Research Group, LLC

Okay, that's helpful. Could you also give more color on the trends in Southern California and how is visibility today versus a year ago? Are the trends better or unchanged?

Melvin G. Brekhus

The trends in pricing?

Wenjun Xu - Thompson Research Group, LLC

Yes, and volume.

Melvin G. Brekhus

And volume? Yes, the trends in pricing and volume are both up. The trend in volume being up significantly, around -- double digits, low double-digit percentages. But remember, they're coming off that low demand that we experienced in California because of the precipitous drop, where demand went from 17 million tons down to less than 7 million tons of demand. But it's still encouraging that the volume trend is up, and it's up relatively strong. On the pricing side, it's been a slog in California. It's been very difficult to try to get prices up during this difficult time. But there are costs associated with doing business in California that are extraordinary, and we need to recover those costs. And I think that we'll see some recovery, especially as we enter into next year, when we face these additional costs that are primarily driven by environmental initiatives in California.

Wenjun Xu - Thompson Research Group, LLC

Okay, thanks. I guess, just lastly, on volume in Texas, what type of projects right now are driving volume demands in Texas? If you can distinguish between Northern Texas and Central and South Texas would be helpful.

Kenneth R. Allen

I think there's -- we're seeing improvement across all of our end markets. So certainly infrastructure projects have been strong of late, and that continues. We're seeing positive news on the housing starts front and on the commercial side. And we've talked in the past about the fact that South and Central Texas were a little bit ahead of North Texas in terms of the recovery, but we certainly see North Texas catching up.

Operator

And our next question does come from the line of Jack Kasprzak with BB&T Capital Markets.

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

So now, what do you think is the -- approximately the right level of absolute pricing to restore margins to where you think they should be in terms of recovering the costs you mentioned, the upcoming NESHAP costs? Is it higher than where it was previous peak? What do you think the level might be?

Melvin G. Brekhus

Yes, it has to be higher than where it was previously, Jack, because of the additional costs associated with not just NESHAP, but AB 32. And so we're off from peak pricing somewhere in the neighborhood of 50% in -- I'm talking in California. I think that's pretty accurate to we're off 50% from the peak. So we have to recover that 50%, but we also have additional costs associated with NESHAP and AB 32, yet -- arguably $4 to $8 a ton, depending upon what we do. So that's additive to get back to normal.

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

So the previous peak in California was around $100, $90 in Texas.

Melvin G. Brekhus

A little bit higher than...

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

$110 or plus, right?

Melvin G. Brekhus

Yes, there you go. There you go.

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

Yes, okay. How much of your cement now goes -- sort of on a run-rate basis, if you will, how much of your cement goes to your own ready-mix operations now?

Kenneth R. Allen

Jack, this is Ken. Hi, good morning. Just remember in California, we have no ready-mix operations, so we're just going to talk aggregates[ph] here, okay? And it's in the neighborhood of 25%.

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

And it's interesting. I mean, you mentioned the cement prices are being dragged down a little or maybe there's a lag, however you want to think about it, from some volume commitments. But ready-mix prices have really been very good in terms of the rate of increase. Usually, ready-mix prices follow cement prices. What do you think the change in the dynamic is?

Melvin G. Brekhus

The main change in the dynamic, Jack, is that the reason that cement has a bit of an anchor on the pricing going up is that we consciously sold cement further away from our facilities and to third parties to be sure that we have the volume presold to start up the Hunter plant. And those prices have a long enough term on them that they're an anchor to the cement prices. We don't have such an anchor in ready-mix concrete. It's not tied to the startup of the Hunter plant. It's independent of that. And that's one of the reasons why you see that disconnect.

Thomas Lesley Vines

Yes, Jack, this is Les. And I think it also -- it just indicates what we say about that masking effect in cement, that it's reflective of what may really be going on from more of a spot price perspective on cement.

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

So Les, obvious question is when do the -- when will the mask -- when will you take off the mask? When does the commitment -- when do the commitments go away?

Thomas Lesley Vines

I'm not sure of the exact timing of the commitment, but I just would remind you that we are in the process, as Mel referred to, of bringing back Hunter 1. And so we're still bringing cement capacity back to the market. And so it's going to be a little bit cloudy until we get that completed and it kind of settles in.

Melvin G. Brekhus

And also, Jack, as the demand in Texas becomes more clear, and we know what demand is likely to be, if it tracks where it's tracking now, the mask comes off sooner rather than later.

Operator

And our next question does come from the line of Garik Shmois with Longbow Research.

Garik S. Shmois - Longbow Research LLC

Just a couple of follow-up questions from what was asked previously. I just wasn't clear on the earlier question on the fall price increases. I think there's some confusion in the marketplace, whether or not those are sticking in Texas, and I wasn't clear from, Mel, your answer earlier. Are you getting traction on the September price increases that you're planning on announcing, or have those been effectively deferred until early calendar '14?

Melvin G. Brekhus

No, we're getting traction on those and we're getting traction on the September and October price increases in the -- and the impact is $2 to $3 a ton. But we also have, as I was explaining to Jack on the previous question, we have some firm commitments that will result in us not getting the full price increases that you're hearing about anecdotally, because we're going to get it over -- somewhere between 25% and 35% of our sales rather than 100%.

Garik S. Shmois - Longbow Research LLC

Okay, that's helpful. And then, I guess, with respect to when you bring Hunter 1 back online, do you have similar commitments to secure the volume from the Hunter 1 capacity addition early next year, similar to Hunter 2?

Melvin G. Brekhus

Yes, we might. That's something though that we haven't made a firm decision on yet. It will be an alternative and it will be on our menu, but the most important thing is that we will have additional cement available to us when Hunter 1 comes back up that, quite frankly, we could use then.

Garik S. Shmois - Longbow Research LLC

Okay, so you anticipate the market to remain tight even as you add capacity?

Melvin G. Brekhus

Yes.

Garik S. Shmois - Longbow Research LLC

Okay. And then, just lastly, switching to aggregates, very strong volume and pricing performance again. Can you speak to what end markets are driving the volume growth on the aggregate side? And then on the pricing side, the double-digit pricing growth, was that mix related at all, or were these organic price increases that you implemented that's giving you pretty much the full benefit there?

Kenneth R. Allen

It's come about. I think from a market perspective again, and it's across all of our segments. Pricing, we are pushing price and having favorable trends there. But there also was favorable mix, both product and geographic mix.

Garik S. Shmois - Longbow Research LLC

Okay. And then now, the volume growth, what end markets? Is that mostly infrastructure work that's driving the aggregates volume growth?

Kenneth R. Allen

It's certainly a strong player, but again, I think we're seeing positive things in all of our end markets.

Melvin G. Brekhus

Yes, and another thing you need to consider when you're thinking about Texas, we not only have the infrastructure demand that is relatively significant and more than you might typically find in some other states and some other local markets, we also have a huge highway system that requires a lot of maintenance. And so you can't leave -- you can't just send concrete, you can't leave asphalt and repair work and the aggregates that, that consumes out of your thinking process.

Operator

And our next question does come from the line of Todd Vencil with Sterne Agee.

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

Mel, thanks for the clarity on the Texas October price increase. Can you talk about other price increases that are out there or that you may be thinking about in cement and also in any of the other products?

Melvin G. Brekhus

Well, in cement, let me switch to California to give you some color on that. I explained how important it is that we focus on recovering some of the costs out there. We're -- we have intentions of getting $3.5-a-ton price increase January 1 in California, followed by an April price increase of $5. Now, those are our intentions and our announced objectives. The logic, of course, is certainly there because of the costs that have gone up, but it is difficult market. Now, we will also assess and we'll be transparent about our desire for price increase in April of 2014 in Texas also, but we haven't crystallized exactly what that will be at this time, but it will certainly be a continuation of trying to get the price back to some reasonable level.

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

Got it. Anything out there in the market on aggregates or concrete?

Melvin G. Brekhus

We've got some -- yes, the -- well, you heard earlier that we don't -- we have found, over the past couple of years, that it's better for us to get price increases in concrete when we can, and we've been reluctant to put out letters and traditional price increase announcements, but rather focusing on getting price increases when we can in local markets based upon local conditions. And as you can see by looking at the pricing data, we've been very successful in ready-mix concrete. So we're going to continue to do that. In aggregates, the short term, we have some price increases that Ken, I think, already alluded to in Central Texas, in the Austin market, in stone and sand. I believe those are in the 5% price increase category. We don't have anything in place at this time in North Texas, but we're certainly reviewing that very closely and believe that we'll have an opportunity to move prices in North Texas also.

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

What's the timeframe on this 5% Central Texas aggregate increases?

Melvin G. Brekhus

That's this fall. It's actually an October 1 price increase.

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

Got it. And you mentioned the concrete, where you obviously have been doing a great job in getting pricing grants[ph] on that. If you stripped out the, generally speaking, the impact of the acquisitions on the volume, can you do the same thing for price and just talk about, I don't know if you can, but do you have a feeling for what the legacy price in concrete did maybe year-over-year?

Kenneth R. Allen

Todd, this is Ken. It's up mid- to high-single digit, depending on the market, year-over-year.

Melvin G. Brekhus

Legacy.

Kenneth R. Allen

Legacy.

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

Perfect, thank you. Switching to cement and maintenance, did you say -- and I think I wasn't clear on it. Did you say there were some -- there were unscheduled brick jobs at California and the North Texas cement plants?

Kenneth R. Allen

That's right. There were $2 million total, about $1 million a piece.

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

Okay, got it. And you mentioned the Central Texas downtime in the November quarter. Is there anything on the books that you're anticipating for the rest of the year? Should we just wait to see how that develops?

Kenneth R. Allen

Let's see how the timing flows. I mean, we have not had a major maintenance downtime in our North Texas plant yet. I would expect that to occur late fall or early winter. But we'll see on time.

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

Got it. So the North, it sounds like North Texas isn't the one that -- one of 2 that was just down in the August quarter?

Kenneth R. Allen

Remember, it had a little bit of an upset in the kiln. It needed to add some brick, retiling it[ph] .

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

It's not a major job.

Kenneth R. Allen

Yes, not a major job.

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

Got it, got it. And final question you mentioned California. Could you talk about where you feel like capacity utilization is for operating plants, obviously that wouldn't include Hunter 1, in Central and North Texas right now?

Thomas Lesley Vines

Sure. So in -- we've said in Central Texas that, that market is a very strong market and we're running that plant at full utilization, where it has continuing to ramp up in North Texas and getting into the 90-plus percent area, and so a continued improvement there. And then out in California, we are running at about 70%, which is an improvement from -- I think, a year ago, we we're saying 60% to 65%.

Operator

And our next question does come from line of Glenn Wortman with Sidoti & Company.

Glenn Wortman - Sidoti & Company, LLC

Just where the market is trending in Texas. Would expect to sell out most of that additional 900,000 tons of capacity of Hunter 1 when it comes back online?

Melvin G. Brekhus

That's certainly our goal. And the way the market is trending and the demand that we are seeing going forward suggests that the market certainly has demand for the 900,000 tons that we'll be bringing back online at Hunter. We, of course, will want to do that in an intelligent way, and we will.

Glenn Wortman - Sidoti & Company, LLC

Okay. And then just my second question is if you could just update us on where you think you stand with respect to your operating goals for fiscal '14, namely the 15% gross margin target?

Kenneth R. Allen

Glenn, this is Ken. You know, it's early. We've gotten off to a pretty good start this year. We'll just have to see how the winter, I think, comes out. And then also how the startup of the kiln in Central Texas goes. But I'm real pleased with the efforts everybody has made to cut costs and become leaner, and then almost do a complete 180 turnaround as the markets have begun to improve as well. But we'll see. Yes, that's our goal and we haven't changed it.

Operator

And our next question does come from the line of Chris Olin with Cleveland Research.

Christopher David Olin - Cleveland Research Company

I just wanted to talk a little bit about California. It seems like the demand environment is slowly starting to improve and one of the things we've been seeing is the northern part of the state, and you can count San Francisco in that, is seeing some nice investments in technology and other infrastructure. I'm just wondering, one, if you're feeling better about the visibility that you have in California; and two, can your plant in the south ship up and capture some of that growth that could potentially be out there?

Melvin G. Brekhus

The answer is we share your view that there's some positive things happening in California, and specifically in the northern part of the state, not to discount the good things that are happening in the Los Angeles area and the San Diego area. And yes, we can capture some of that, Chris, but we are limited, for 2 reasons, in how much we can capture in the north. And one of the reasons is the physical distribution network that we have and its ability to handle tons. And then the other is we want to be sure that since we come from quite a distance away into a market where there is existing capacity, we don't want to be disruptive in that marketplace.

Christopher David Olin - Cleveland Research Company

Is there supply coming from the north into the south that could be redirected that would help your pricing power?

Melvin G. Brekhus

If there is, and sometimes there has been, we have done, on occasion, swaps to try to reduce the logistics costs, the transportation costs.

Operator

And our next question does come from the line of Jim Barrett with CL King.

James Barrett - CL King & Associates, Inc., Research Division

Mel, can you talk about the current state of imports into the state of Texas? Are they weighing down price at all? How concerned are you about the imports currently versus historically?

Melvin G. Brekhus

I'm not as concerned about them currently as I am about them historically. They currently do have an impact on pricing, particularly in Houston, of course, because that's where they, of course, are coming in that impact us, TXI. But because we have this strong demand and because most of the cement producers in the state that are importers also have their domestic capacity sold out, they're reluctant to foul their own nest by bringing in low-cost imports and dumping it into a market and hurting their domestic production. Long term though, I really do think that the State of Texas will probably need imports, especially if these trends continue that we're seeing. And when I say imports, I mean, imports from outside of Texas, whether it be South Korea, Greece or Indiana, Alabama, Oklahoma, we're going to need those imports. And I do think it will have an impact on pricing, in especially the Houston market, where we just have to look at import parity and see where it is.

James Barrett - CL King & Associates, Inc., Research Division

Okay. And then a question on aggregates. Ken, this might be one for you. Certainly the cost per ton was up 5.9% in the quarter due to geographic mix. Is that a permanent change in your geographic sales mix, or is that likely to change from quarter-to-quarter? And, I guess, my ultimate question is when would you expect, in a rising volume environment, your cost per ton in aggregates to be trending downward?

Kenneth R. Allen

So good question. Part of the answer is with the -- our acquisition we made in the spring, we acquired a couple of terminals, one of them in Southeast Texas. And a nice piece of that business mix down there is resale of product. And so whether the manufacturing costs flowing through the cost of sales for those -- for a big piece of the product that we sell down there, it's product that we buy at obviously a higher price and then resell them at a nice margin. But that impacts our overall average cost as well. And so that's going to be a little bit of a permanent change, but it does[ph] impact both of the price line and the cost of sale line.

Operator

And our next question does come from line of Tim Robinson with Susquehanna.

Tim Robinson - Susquehanna Financial Group, LLLP, Research Division

Most of my questions have been answered, but just a couple of quick ones here. I know in the past you've talked about how volume growth in California has come from outside of your core market, which has helped drive volume growth at the expense of pricing. I was just wondering if that has started to normalize in the quarter, given the volume growth that decelerated down from, call it, the 20s to the high-single digits, low double-digit level right now, and just how should we think about that and its impact on pricing going forward?

Kenneth R. Allen

I think it obviously will help, but it is still going to be a bit of a drag until you get the market completely recovered and selling all the cement in the local market that you can make.

Tim Robinson - Susquehanna Financial Group, LLLP, Research Division

Got you. And so, I guess, have the growth rates started to normalize, or is it still predominantly coming from outside of the core market?

Kenneth R. Allen

I don't think you're -- if I think -- if I understand your question right, I would think the growth rate is still high due to small denominators. I mean, that will start pulling back obviously, but it's still impacting the overall growth rate.

Tim Robinson - Susquehanna Financial Group, LLLP, Research Division

Okay, and then could you just give a little additional color on the increase in bad debts expense that you highlighted in the aggregates business? Was it just a particular customer or just a one-off situation?

Kenneth R. Allen

Good question and good eye. It's more of a one-off situation. As we come through the downturn here and come back out of receivables, we really look very good. We just had a couple of hiccups with a couple of customers here. If you look at the bad debt reserve at the end of August versus a year ago, it's really at about the same level, but we've got higher sales.

Operator

And our next question does come from the line of Wayne Pinsent, Gamco Investors.

Wayne Pinsent

Most of my questions have been answered, but I just wanted to check if you could elaborate a little bit on the costs that you see associated with bringing on the 900,000 tons in Central Texas, and then sort of the timing and looking further out, when you expect to expand North Texas and what the costs will be associated with that.

Kenneth R. Allen

So you're talking -- are you talking the capital cost, primarily?

Wayne Pinsent

Yes.

Kenneth R. Allen

Yes, okay. Our cost for the Hunter kiln, original kiln, will be in the $7 million to $10 million range. And that includes around $6 million for capital, and then a little bit for repair and maintenance. In the North Texas plant, where we're looking at expanding operations there, we're really not -- we really don't have very precise numbers. But if we're going to add somewhere in the neighborhood of 800,000 tons a year of capacity, that incremental capital cost might be in the neighborhood of $30 million to $50 million, depending on what we do. That's going to be some of the cheapest capacity we could ever add.

Thomas Lesley Vines

And we haven't really settled in on the timing of that at this point.

Wayne Pinsent

Okay, and are you looking to -- because wasn't it closer to 1.3 million that you've talked about in the past, adding to the North Central -- to the North Texas plant?

Thomas Lesley Vines

Could you ask the question again please, Wayne?

Wayne Pinsent

In the past, haven't you talked about adding more than 800,000 tons in North Texas, closer to 1.3 million?

Thomas Lesley Vines

I don't think so.

Kenneth R. Allen

Not at all.

Thomas Lesley Vines

That's closer to the number that we added with the new kiln down in Central Texas.

Operator

.

And our next question is from the line of Mike Betts with Jefferies & Company.

Michael Betts - Jefferies LLC, Research Division

Yes, please. Two questions for me. Firstly, some of your competitors are now also starting to announce potential capacity additions in Texas. I know some sort of debottlenecking, which comes on quickly, but, I mean, realistically, what sort of additional supply could we potentially see come onstream in Texas over the next 2 to 3 years? That would be my first question. And my second question would be obviously, a very good start for the new ready-mix businesses in the quarter. Is the seasonality between the quarters any different from your existing ready-mix businesses? I mean, I'm not sure that it would -- I can't see why it would be, but I just wanted you to clarify. Is this seasonally a particularly good quarter, or what we're seeing in the quarter is a good measure of the underlying profitability of these businesses?

Melvin G. Brekhus

Mike, to answer your second question first, there's nothing unusual about the seasonality comparisons between what we acquired and our same-store sales that we had. But -- so that answers it, but of course, it is seasonal even in this part of the United States, and winter quarter is usually not as good as others. But back to your additional capacity, cement capacity coming online in Texas, that -- a major modification that's going on is Ash Grove added the Midlothian facility, and that will not increase capacity. That will -- they will be more efficient, and as they've stated publicly, they'll be able to resolve environmental emission compliance requirements by doing the modifications that they're doing, but it won't add production. There will be production added by the CEMEX expansion of their Odessa cement plant in West Texas. That capacity historically has been reserved for the West Texas demand, which has been driven largely by oil and gas. So it can always get to Dallas-Fort Worth by rail, but historically, they have created production for demand that they anticipate in West Texas.

Michael Betts - Jefferies LLC, Research Division

And I also heard from public announcements from one of your other competitors that they were looking to add some brownfield capacity. I mean -- and they haven't started yet. But once they do start, how long would it take to add brownfield capacity? I mean, we're talking a couple of years, I guess, at least, are we?

Melvin G. Brekhus

Yes. The couple of years of -- a couple of years probably of permitting. And then it takes 2 to 3 years of construction.

Michael Betts - Jefferies LLC, Research Division

Okay. And then a final question, if I could, just on the finances. I mean, clearly trading is picking up now. The debt ratios are improving. When -- I mean, are there any restrictions in terms of your banking facilities on what you can do in relation to dividend, or is -- and to reinstating a dividend, or is that really just determined by when you're comfortable with the trading situation? But are there any restrictions on the bonds or anything else in relation to that?

Kenneth R. Allen

Mike, this is Ken. On the bonds, we really don't face much of a restriction there in terms of the things you're talking about. On the bank revolver, we do face some restrictions there, but they just don't impact the real level that we were paying prior to the dividend cut. Right now, if you're asking is there a dividend increase coming, that will be something for the board to take up at its regular board meetings.

Michael Betts - Jefferies LLC, Research Division

Yes. I guess, I asked the question a bit badly as well because, I guess, where I was really going, the second part of that was -- and this is the final question, I promise. The second part of that was how you would balance the need to -- investments and the very low cost of expanding the North Texas plant against the dividend. I mean, would the priority be to invest the CapEx in North Texas?

Kenneth R. Allen

Mike, a lot of things go into that, but if you could add 800,000 tons of capacity for $50 million, you'd add all the capacity you could at that per-ton number, and that's pretty compelling there. And so I can't see anyway that something would jump in front of that use of capital.

Michael Betts - Jefferies LLC, Research Division

And does that start off the Hunter 1? Is that sort of the strategy?

Kenneth R. Allen

Yes, we're going to have to see how the market absorbs Hunter 1 and the direction of the market. But you've heard Mel say in the past that we want to try to accelerate things and get ahead of the market a little bit, too.

Operator

Next question does come from the line of Matthew Dodson with JWest LLC.

Matthew Dodson

Can you talk just a little bit about -- you talked about the issue that you had in Texas, why you're getting squeezed in cement a little bit. You also talked about the price increases that you're putting in, in cement in September and October. Can you help us understand how you think that's going to play through to your ready-mix? Because obviously, your ready-mix had really nice pricing. So will they be able to push the price of the cement that you're passing on, since you deliver a lot of your cement to your ready-mix? Or can you just help us understand that?

Kenneth R. Allen

You cut out a little bit earlier on, but later on, you were great to hear. I'll try to answer the last part of your question first. A $5 price increase per ton of cement turns into roughly $1-a-yard material costs increase in ready-mix, just to give you a sense that, that's the math. With that in place, we're pretty confident we'll be able to pass along increasing material costs in our ready-mix operations on to the customer. That's really what you're seeing. You -- we talk about a spread, where you talk about -- where you look at the price of ready-mix goods minus the material cost delivered to the plants, and we have seen spreads increase nicely over the last year. Does that answer your question?

Matthew Dodson

Right. And just -- could I follow-up with that because I didn't ask the question very well and I apologize. But do you think you'll be able to continue to maybe get more or increase spreads as you're getting more cement pricing through in ready-mix?

Kenneth R. Allen

That has been the case in the past in a market, frankly, that isn't anywhere near where it was at peak. So that's -- over the last year, we've been able to get improved margins in ready-mix with material cost increases. We would expect to continue to do that as we move forward.

Melvin G. Brekhus

Yes, and expect [indiscernible] increase, as you're suggesting.

Operator

And at this time, there are no further questions. I would like to turn the call back to management for any closing comments.

Thomas Lesley Vines

Thanks, Greg. As always, again, we appreciate your time and interest this morning. And I certainly look forward to talking to you after the new year to discuss our second quarter results. Hope you have a great day. Thank you.

Operator

Ladies and gentlemen, that will conclude the conference call for today. If you would like to listen to a replay of this conference, you may do so by dialing either (303) 590-3030 or 1 (800) 406-7325. You will need to enter the access code of 4639088. Again, we do thank you for your participation. You may now disconnect your lines at this time.

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