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Texas Industries (NYSE:TXI)

Q2 2014 Earnings Call

January 09, 2014 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

Christopher David Olin - Cleveland Research Company

Christopher E. White - Thompson Research Group, LLC

Garik S. Shmois - Longbow Research LLC

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

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

Seth B. Yeager - Jefferies LLC, Fixed Income Research

Ted Grace - Susquehanna Financial Group, LLLP, Research Division

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

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

Wayne Pinsent

Operator

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the TXI Second Quarter Results Conference Call. [Operator Instructions] This conference is being recorded today, January 9, 2014.

I would now like to turn the conference over to Les Vines, the company's Treasurer. Please go ahead, sir.

Thomas Lesley Vines

Thank you, Douglas. Good morning, and Happy New Year, everyone. Thank you for joining us for our second quarter 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; Chief Financial Officer, Ken Allen; and Chief Operating Officer, Jamie Rogers. We'll 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 would refer you to our reports on forms 10K, 10-Q and 8-K for a more thorough discussion of some of the risks and uncertainties.

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

Melvin G. Brekhus

Thanks, Les. Good morning, everyone. And as Les said, Happy New Year. I am entering this new year more excited and optimistic than I have been in over 5 years. Demand and pricing trends are positive across all of our markets, and we have significantly increased our ability to produce and supply our products to these markets.

There were a number of things that occurred during the second quarter that impacted our results. Some of them were anticipated and others were beyond our control. They were all nonstructural events, and my opinion regarding the quality and value of our assets remains as strong as ever, as does my opinion of our earnings potential.

Jamie and Ken will provide you more color around these items, but I want to remind you that we are in a cyclical business with long-term assets. Therefore, I believe the correct way to evaluate us and others in our industry is over the long term, and no individual period should be given too much weight.

Looking forward, growth in construction activity is expected to continue for the foreseeable future in our markets. We are in a position to benefit from our increased production capabilities and will help meet the growing demand for our products.

Last spring, we completed the commissioning of our new cement kiln in Central Texas, which initially added 500,000 tons of annual cement capacity. Also, we successfully accelerated the refurbishment of our original cement kiln in Central Texas by 2 months, and we now have that 900,000 tons of annual cement capacity back online.

Naturally, improved demand should mean better pricing, and that is what we have experienced and what we expect to experience through the rest of the fiscal year and beyond.

Our reported average sales price is not the best reflection of what is currently happening regarding pricing, but the bottom line is prices are up. And we have near-term price increases announced that we fully expect to realize, and we expect additional increases later this calendar year.

In conclusion, I believe we are in transition on a number of fronts, that recovery is well underway, but we're not yet back to mid-cycle. Much less peak level demand, and market pricing is in the process of adjusting to reflect current and projected demand.

On the production side, we are experiencing the typical ups and downs associated with operating a new kiln. It takes 18 to 24 months to reach maximum production levels and operating cost efficiencies. Similarly, we are in the process of supplying additional cement to the market. While the market needs this cement, it takes some time to fully assimilate new capacity and adjust market shares.

All of these things will sort themselves out and improve incrementally as we move forward. I have faced all of these conditions many times in the past, and I am neither surprised nor discouraged by them. We are doing everything we can to optimize our results each period, and I am confident that our results will continue to demonstrate regular and continuous improvement as we work to ultimately realize our potential.

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

James B. Rogers

Okay. Thank you, Mel. I'd like to start by taking a little time to talk about why I'm enthusiastic about the progress we've made and our prospects for the future.

I believe we have world-class production assets in the best long-term markets in the country. And the current trends and outlook for the next 5 years in our 2 major markets indicate both markets will grow significantly throughout the entire period.

Texas, which accounts for approximately 80% of our revenue, grew its population more than any other state in 2013. The most current job data indicates that Texas added approximately 357,000 jobs from January to October, which reflects the 2.2% increase compared to the same period a year ago.

Single-family permits from January to November are up 15% compared to a year ago, and based on housing supply figures, this growth should continue. As of November, the supply of housing inventory for Dallas/Fort Worth, Houston and Austin was less than 3 months, and the supply for San Antonio was little over 4 months. All of this helps explain why the PCA is forecasting Texas cement consumption will grow at an average annual rate of 6% for the next 5 years.

California still has a ways to go to get back to pre-recession levels, but it is growing significantly year-over-year. The population growth is ahead of the national trend. They added approximately 303,000 jobs from January to October, which reflects a 2.1% increase compared to the same period a year ago.

Employment levels are still below pre-recession levels, and they need almost 2 years of growth at this rate to fully recover.

From January to November, single-family and multi-family permits are up 32.2% and 35.8%, respectively. And the PCA is forecasting California cement consumption will grow at an average annual rate of 9% over the next 5 years. Most of the growth is forecast to occur in 2015 and 2016.

Now turning to our results for the quarter and our near-term outlook. The most significant operational development during this quarter is centered on our cement production capability. In addition to the continued operations of our new kiln in Central Texas that immediately added 500,000 tons of annual cement capacity, as Mel alluded to, we accelerated the refurbishment of the original kiln in Central Texas due to the strength of demand in cement for the market served by the plant.

We originally intended to restart the kiln later this winter, and instead put fire back in the kiln in early December. The 900,000 tons this kiln can produce on an annual basis is needed by the market. Additionally, restarting this kiln gives us the operational flexibility to do the things that we need to do to get the new kiln to maximum efficiency.

The new kiln continues to perform well. It's not yet running at maximum efficiency, but we would not expect it to be there at this time. Typically, it takes 18 to 24 months from the beginning of commissioning to realize the full potential of the new cement kiln. We started commissioning in November of 2012, and I believe we will get to full later this spring. Work planned for an outage in the first part of the upcoming fourth quarter will significantly improve the efficiency.

The demand that supports the additional capacity is also supporting higher prices for cement in our markets. Our backlog for cement related to civil and highway projects in Texas is up 83%, and the average backlog price is up over 8% compared to a year ago.

Additionally, we have announced an $8-per-ton increase in Texas effective April 1. And from what our customers tell us, this announcement appears to be in line with other announcements for the same time period, and I'm very confident we will realize this increase.

We are seeing similar improvements in demand for aggregates and concrete as well. Aggregates backlog in North Texas are up 42% compared to a year ago, and we have announced price increases of $1 per ton for both coarse and fine aggregates effective April 1, with the increase for some market segments even occurring sooner.

In Central Texas, we've announced an increase of $2 per ton on gravel and $1 per ton on sand, effective March 1.

Concrete backlogs in Dallas/Fort Worth are up 57% and our average backlog price is up 5% compared to a year ago.

As you know, pricing for concrete is more fluid and is driven by specific market and even sub-market factors and, thus, we don't typically announce broad price increase changes. As we've seen over the past year, though, I expect pricing and margins to continue to improve for concrete as demand in our markets continue to strengthen.

In California, we've announced a $3.50-per-ton increase, effective this month, and a $5 per ton effective April 1. Our combined increase through this spring appears to be in line with the other announced increases we've heard about.

As a result of the strategic transactions that we've made during the last couple of years that changed our footprint in Central and East Texas, we are making a shift away from a strict individual product-based approach to a market and more to an integrated approach that considers all of our capabilities in a given market. This integrated local-market approach in Austin, where we supply cement, aggregates and concrete, is starting to pay dividends. Our margins on a combined basis for all of our operations in this market have increased 18%, and we intend to expand upon this approach to add value in all of our markets.

So to go back to where I began, it's not hard to understand why I'm so excited about the future. We are in great and growing markets with great assets and people and the ability to leverage our improved strategic footprint to achieve new levels of profitability.

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

Kenneth R. Allen

Thanks, Jamie, and good morning and Happy New Year to everyone. Consolidated revenues for the November quarter were up 25%, and this increase reflects the combination of increased shipments and increased prices for cement, aggregate and concrete, and the addition of the ready-mix operations in Texas acquired last spring.

It also reflects the trends in construction activity in our markets that Mel and Jamie have already mentioned. And the underlying construction trends certainly provide a foundation for our optimism.

EBITDA from continuing operations for the quarter of $19.5 million was $9 million higher than a year ago. Adjusted EBITDA, though, was $32.5 million for the current quarter, $15 million or 85% greater than adjusted EBITDA of a year ago.

Now this apples-to-apples comparison of EBITDA, which is reconciled in our earnings release and on the company's website, illustrates that business fundamentals are strong and so is the positive financial trend for the company. And we are still early in the cyclical recovery of construction.

In our earnings release, we provided a list of nonrecurring, short-term or nonoperational items that reduced earnings in the quarter by approximately $12 million on a pretax basis. I'll run through those items now.

Let's first look at the $4 million in Hunter refurbishment costs. As we have already mentioned, Texas cement demand is growing sharply, and this caused us to accelerate the refurbishment of the original kiln at Hunter so that we could start production earlier than planned. There is no doubt that even with rain in the second quarter, having the production capacity from the original kiln would have allowed us to ship more cement into Central Texas.

As we mentioned in the earnings release, the expense we incurred to refurbish the kiln was $4 million. We had originally expected this work would be done in the third quarter, but decided to move the start-up to early December so that we could be in position to better serve the market. After several weeks of operations, the original kiln is running well.

Now let's turn to the Hunter new kiln start-up costs. The start-up of the new kiln at Hunter continues, and the kiln is running at 70% to 75% of capacity. At its current level of operations, we estimate that start-up inefficiencies, which are to be expected at this point, added about $1.5 million to costs during the quarter compared to expected long-term efficiencies when you run at full capacity. Again, it normally takes about 18 to 24 months to achieve full capacity and efficiency on an ongoing basis, and the kiln has just now been operating for a little over a year.

Regarding the environmental compliance costs we listed. In California, we just completed the first calendar year under the requirements imposed by AB 32, the law regulating greenhouse gases. During this first calendar year, direct operating expenses associated with the new requirements added $4.5 million to expense or about $3 a ton.

The way the timing for this first year worked out, $2.5 million in expense was compressed into the November quarter, and this is about $1 million more than the quarterly average for the year. Now going forward, we expect the expense in the calendar year 2014 to be in line with or be below that of this year's, calendar year '13.

Now let's look at non-operating legal costs. The $1.5 million higher legal expense resulted from the chrome-6 litigation reported in the footnotes to the company's financial statements. The deadline for the cut-off of fact discovery in those cases is approaching. So in the second quarter, there was a flurry of activity and we incurred unusually heavy discovery expenses.

Now fact discovery is expected to end in the third quarter and then expert discovery will begin. However, we don't expect that our expenses will continue at the same rate at all. We expect that legal expense for these dates[ph] will taper downward so that the legal expense for the second half of the year is likely to total the same amount as it was in the second quarter alone. So in each quarter, it might be on the order of $750,000, plus or minus.

Our financial statement footnotes cover the case and what we can say about the case. However, I will reiterate that the science and the facts of the litigation certainly support TXI.

And finally, in the list of items, looking at the weather's impact in the quarter. TXI's Texas cement shipments of 788,000 tons and California cement shipments of 397,000 tons were both up 14.5% from last year. And Texas cement shipments, as well as aggregate and ready-mix shipments, were clearly impacted by higher-than-normal rain and cold weather in the second quarter compared to last year.

As we mentioned in the earnings release, we estimate that the impact of weather on Texas cement, aggregate and ready-mix shipments reduced earnings by approximately $4 million.

Now those are the items that we highlighted in the release. For further comments on average selling prices, our average selling prices for cement were up slightly from last year, as products, geographic and customer mix all served to mask cement price [indiscernible] increases across almost all product lines and customers.

Aggregates and ready-mix price increases continue to show strong year-over-year improvement that we've seen in the last several quarters as well. As both Jamie and Mel have mentioned earlier, we expect positive pricing trends to continue in all 3 businesses.

During the November quarter, as expected, the new Hunter kiln was down for major maintenance, and that expense was $2.5 million. Recall that last year, the Midlothian plant had its major outage in the second quarter, and its cost was $5.5 million.

Now let's look into the February quarter. Recall that typical winter weather in our markets slows construction activity and results in the slowest shipping quarter for the fiscal year. Now as probably everyone on this call has experienced, so far, this quarter's weather has certainly been both wet and cold.

Regarding major cement plant maintenance through the remainder of the fiscal year. Midlothian is scheduled for its major outage this quarter, with an expected expense of approximately $6 million. The new Hunter kiln is scheduled to incur a maintenance outage, as Jamie alluded to earlier, in the fourth quarter, with a cost of $2 million to $3 million. Sustaining capital investment through the first 6 months was $17 million, and we continue to expect that sustaining capital spending for the year will be in the $35 million to $40 million range for fiscal year '14 in total.

Now through the first 6 months of the fiscal year, free cash flow -- and free cash flow is defined as net cash from operating activities less net cash used by investing activities in the statement cash flows -- free cash flow was a positive $20.5 million. This compared to a negative $15.7 million cash flow for the first half of last year.

Now this $36 million increase reflects not only the strong positive trends we have mentioned earlier, it also reflects the fact that our major capital projects to replace and improve cement plants is now behind us.

Finally, stepping back to take a broader view. January 2014 culminates over 10 years of capital intensive work and efforts to improve and increase cement capacity at all 3 of TXI's cement plants. The company is focused on its core businesses, and additional work to reorganize the structure of operations and improve efficiencies throughout the company has been successful. We look forward to continued progress in building value for our shareholders.

And now back to Les.

Thomas Lesley Vines

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is from the line of Chris Olin with Cleveland Research.

Christopher David Olin - Cleveland Research Company

Just 2 questions, and it regards the Hunter #1 kiln. 900,000 tons of cement production capacity, what would be a realistic target in terms of what you could get out of that plant over the next 12 months?

James B. Rogers

Okay, Chris, this is Jamie. I mean, what we can get out of the plant over the next 12 months, what we can get out of the plant from a capacity standpoint is 900,000 tons. What we will get out of the plant will be dependent upon the market and the customer needs over the next 12 months, and because -- I think we alluded to what this plant really allows us to do is give us some operational flexibility to serve the market needs in the short term over the next 12 months as we are continuing to commission our Hunter 2 kiln.

Christopher David Olin - Cleveland Research Company

So there'll be no start-up issues that the kiln #2 saw in terms of running at 75%?

Melvin G. Brekhus

Chris, this is Mel. The Hunter 1 kiln system is a vintage system that has proven that it can run at 900,000 tons. We had to make an adjustment to that kiln system to meet -- to conform to environmental requirements that resulted in us putting a new baghouse on the kiln, which is a significant piece of equipment. But it will not have a significant impact on the rest of the system. So we're very comfortable with what Jamie said, that we shake out the baghouse and there'll be a few things that we have to worry about there, but we'll get to that 900,000-ton rate very quickly. And then it's really a function of market demand.

Christopher David Olin - Cleveland Research Company

Great. And then in terms of just pricing, that incremental volume, can I assume it'll be priced at the prevailing stock markets out there, so we should see some type of boost in addition to the price increases out there?

James B. Rogers

Do you want to run through the mix answer or how do you want it?

Thomas Lesley Vines

Well, Chris, I think what it will do is it will fold into our normal customer mix, right? So it'll be a part of serving all of the segments that we serve. And we typically -- we have -- we certainly serve our silo customers. Their business is growing, and we've talked in the past about how 1/3 of those shipments or half of those shipments to our silo customers take spot pricing essentially. The other half are subject to short-term pricing agreements, and their pricing adjusts accordingly. And then the other 1/3, the final 1/3 of our shipments go to highways and civil projects that are a function of when the contract was bid and the escalators that are inherent in that. So those tons really are going to feed into that mix and take the pricing accordingly.

Operator

Our next question is from the line of Kathryn Thompson with Thompson Research Group.

Christopher E. White - Thompson Research Group, LLC

It's Chris calling in for Kathryn today. I wanted to start asking a question on third-party cement sales. And I'm wondering whether or not you'll be able to pass on the price increases at the scheduled dates for the third-party sales, or are there previous contracts arranged that are going to force you to delay the price increase to those guys?

James B. Rogers

Yes, Chris, this is Jamie. These third-party cement sales are -- we are -- the short answer is we are passing on the price. We are or we have already passed on price increases to the third-party players. None of these contracts, by the way, are long-term nature in terms of pricing.

Christopher E. White - Thompson Research Group, LLC

The third-party contracts?

James B. Rogers

Correct.

Christopher E. White - Thompson Research Group, LLC

Okay, that's helpful. And then can you talk a little bit about the logic behind the 2-tier pricing approach in California versus Texas?

James B. Rogers

Yes, Chris, I'll take that as well. That's -- what we're doing is following a pattern that we did last year. We did the same thing last year. And we announced in January and in April last year, and that's -- we're following that same pattern this year, where the early returns are good on the January price increase. And then, of course, the April pricing increase is equally important to us, and we have confidence in that occurring as well.

Christopher E. White - Thompson Research Group, LLC

So is April subject to January price increase being accepted?

James B. Rogers

Well, no, no. I mean, there are really 2 different price increases: the $3.50 in January and the $5 in April.

Christopher E. White - Thompson Research Group, LLC

Okay. And final question, as far as end markets go, could you talk a little bit about, in both California and Texas, which end markets you're seeing the most strength in: residential, non-res or public?

James B. Rogers

I mean, I believe all 3. I mean, we've had a good run, and we'll continue to have a good run with the civil and highway work. I think our backlog strength year-over-year reflects that. I mean, I think in all 3 of our product lines, we have the highest backlog we had in 5 years. And most, if not all of that, is civil highway. But what we've really seen is the return of the commercial and the residential. And the figures that we alluded to before are all supporting how that manifests itself in terms of our cement sales and other product sales.

Kenneth R. Allen

Sure. And just to add a little bit of a footnote, everything Jamie said was absolutely true in Texas. In California, we really haven't seen public works be as strong as in Texas there, and that's been one of the factors in our ability to sell some higher-priced cement. That's been one of the mix factors that we've talked about. Again, though, with the governmental spending that's coming up federally, we would expect the public works spending even in California to begin to pick up at some point, just a little hard to determine when.

Operator

Our next question is from the line Trey Grooms with Stephens.

Unknown Analyst

This is actually Blake stepping in for Trey. My first question is around the incremental volume from the Hunter kiln in the quarter versus last year. So what did the Texas volumes look like in the quarter, excluding that incremental volume?

Kenneth R. Allen

Yes, Trey, and I'm sorry, you were saying what did the Texas volumes look like, excluding which -- you were cutting out, I apologize.

Unknown Analyst

I'm sorry. Excluding the volume from the Hunter kiln, the incremental volume?

Kenneth R. Allen

Yes, are you talking about the Hunter #1 kiln or -- the way we talk about Texas markets is there are -- there is a North Texas market, a Central Texas market and a Houston market, if you will. But the 788,000 tons really is more the whole Texas market, and we really don't break it out by individual markets in our public documents or disclosures.

Unknown Analyst

Okay, fair enough. And then second question, the weather has continued to be pretty tough this winter in Texas. So how do we kind of think about the weather impact to the February quarter?

Kenneth R. Allen

You're right. The weather has been -- this is Ken. The weather has been tough. It's hard to know whether it's been a lot worse in Texas than it was last year, but certainly, the weather is going to have its impact on our shipments and already has. We'll just have to see how the rest of the quarter plays out. We're hoping for better weather.

Melvin G. Brekhus

But all the weather is going to do is delay projects. The demand is still very strong in Texas. And yes, we had a week of ice in North Texas, more than North Texas, in December. But the overall demand is there, and it'll bode well for us as we move forward.

Unknown Analyst

Okay, sounds good. And then last one, I know it's early, but how's the pricing announced for January and California going thus far? And how do you expect that to kind of, I guess, play out?

James B. Rogers

Yes, I mean, the early returns are good from our customers and we're pleased with the reaction.

Operator

Our next question is from the line of Garik Shmois with Longbow Research.

Garik S. Shmois - Longbow Research LLC

This first question is on pricing. You indicated that market prices are generally higher than your reported prices and you have some pretty significant price increases in the market in both California and in Texas. But when is it realistic to expect to see these pretty strong price increases that had been implemented both in calendar '13, as well as in the early phases of the calendar '14, be reflected in the P&L? And I guess, as a follow-up to that, would you expect it to be a step function increase or would it, for modeling purposes, be more of a gradual ramp up?

Thomas Lesley Vines

Yes, Garik, the bottom line is, as we've said on a number of occasions, that our pricing is up. If you consider same product, same market, same customer, product's up. What you see in our reported average price are some issues related to mix. The -- I would expect, in terms of the price increases that we expect to realize this spring, that they would fit the model. We talked about the 1/3 of our shipments take the price immediately. So on April 1, the pricing -- the $8 price increase in Texas and we expect 1/3 of our cement shipments to start to be billed at that price. The other 1/3, where we have larger customers who make volume commitments to us and, hence, we enter into some pricing agreements where the timing is a little bit different, and we said those are short term arrangements, we would expect their price to go up that $8 or thereabouts at the next scheduled time to reset the price. In terms of the 1/3 of the shipments that are to civil highway type projects, the shipments won't change immediately because that pricing was set in the past, but what those happen immediately is the new work that we start to bid on will reflect the changed market price. And so it will work its way in as we get to shipments. I would add on the civil side that many of these contracts do have escalators in them. So the shipments that we're committed to, we would expect pricing to go up. And it's been 18 months since we've entered into a multi-year agreement that did not have an escalator.

Garik S. Shmois - Longbow Research LLC

Okay. All right. And I guess, just one last follow-up question on pricing. With the restart-up of the Hunter 1 kiln, is there any outsized mix headwind or how you're going to market with the incremental cement that would end up being an incremental negative to pricing? Obviously, you're confident the market could absorb the capacity you're bringing on sooner. But are some of the projects perhaps that you're targeting with incremental capacity -- a potential mix headwind is what I'm getting at?

James B. Rogers

Garik, it's Jamie. I mean, the reason we brought up the kiln a couple of months before we originally intended was because of the market strength and market demand overall, I mean, in Central Texas and in the other markets that we serve. As you've probably seen from the numbers, I mean, Texas, once again, in 2013 will end over 1 million tons more demand than it did in 2013. And we are in an excellent position at the company with our assets, but also with Hunter 1 and the flexibility it provides, to supply a good portion of that incremental demand.

Melvin G. Brekhus

And, Garik, this is Mel. You've been around long enough to remember, when we started up Midlothian, those headwinds you were talking about were not -- were there and we didn't successfully navigate them as well as we have this time. Consider what we have done and consider that, a year ago, we had much less production capabilities, lower market share. We've increased our production capabilities, we've increased our market share and we've increased our price.

Garik S. Shmois - Longbow Research LLC

Okay. No, that make sense. Just one last question for you, probably, Mel. News reports that surfaced over the last month indicated that the company perhaps is looking to put itself up for sale. I'm just wondering if you could comment on the validity of those reports and if the board is, in fact, willing to actively explore the sale of the company?

Melvin G. Brekhus

Well, as you know, Garik, Texas Industries has a long-standing policy of not commenting on market rumors and we're going to keep that policy.

Operator

The next question is from the line of Jack Kasprzak with BB&T Capital Markets.

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

Jamie, if you said it, I missed it and I apologize, but are there ready-mix price increases out in Texas right now for 2014?

James B. Rogers

Yes, Jack, I didn't say it. And the reason I didn't say it is that we price our ready-mix kind of more on a job-by-job basis, and certainly a market and a sub-market basis. And we found that's a more effective way to communicate pricing than to send out broad-based letters. But as you can see, with the trends of our pricing year-over-year in ready-mix, the trend is positive and we certainly would expect that trend to continue, and the data we have underlying that supports positive trends continuing.

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

I mean, do you sort of fundamentally believe that with cement prices rising that ready-mix prices should continue to rise as well? Is that a reasonable way to look at the setup here?

James B. Rogers

Yes, I believe the entire supply chain is rising and yes, I agree with your assessment.

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

Okay. Maybe this is for Ken. On the issue of the weather, thanks for the color on all the onetime items, can you just maybe talk a little bit more about the, I guess, the methodology there? Did you look at that on a shipment days basis in the quarter versus the last quarter? Or how did you -- because that's a pretty precise number, maybe a little color there will be helpful.

Kenneth R. Allen

Jack, good question. We've looked at it several ways. We looked at how many days in the quarter were impacted by weather significantly versus a year ago. And correlated that also with what we probably had a good chance of shipping with current market conditions versus what we did. We feel like the $4 million -- and you're right, there's a range around that. But we really feel like we've been conservative on that. We -- you know how rain can impact aggregate production and also impact efficiencies in the ready-mix operations. We really didn't try to capture any of the negative impact from those 2 things. So we feel like that $4 million is probably a conservative number. If we really sharpened our pencil, it would be higher than that. But we didn't -- we wanted to give you all some guidance on what we thought the impact of shipments was going to be.

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

Okay. Last question is the earnings report in the quarter, the loss has very little tax effect, de minimis tax. When we're looking at those onetime items of $12 million and trying to strip them out, would you say that they would also have a de minimis tax effect, i.e. just sort of divide it by the 28.6 million shares? Is there something else to consider there?

Thomas Lesley Vines

Jack, this is Les. That is what I would do. I mean, the bottom line is that given where we're at in the cycle and the losses that we've had, we're just not benefiting from a tax standpoint, our losses.

Operator

Next question is from the line of Todd Vencil with Sterne Agee.

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

So if I look at the charges, or not the charges, the costs that you guys called out in the press release, some of them, obviously, would appear to accrue solely to the cement segment, that being the Hunter 1 refurbishment costs, Hunter 2 start-up costs. I mean, how should we think -- I mean, did all of these apply solely to the operating income in the cement segment or was some of them in other places?

Kenneth R. Allen

Todd, that's a good question. The only thing that would apply to more than just cement was the weather. And again, the weather was a primary impact in Texas as well.

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

Got it, okay. So for the other -- the other 4 were all -- the refurbishment cost, the Hunter 2 startup, the environmental compliance and non-operating legal costs, that all solely accounted for in the cement segment?

Kenneth R. Allen

Yes.

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

Okay, great. So just to circle around some of the questions about pricing and the tempo at which you guys are going to realize these price increases. So did you end up pre-selling any of the capacity that you brought back on with Hunter 1 or did you not decide to do that? Because I recall, on the last call, you said you hadn't decided yet how you're going to approach that.

James B. Rogers

Yes, Todd, this is Jamie. I think the simplest answer is no, that we're -- we brought it up to meet the demand as it's coming to us and we're being responsible about how we're meeting that demand. And I'm excited -- I mentioned already our backlogs and how strong they are as an indicator. But I just want to echo something Mel said, that what we're doing here is we are meeting this extra demand in a growing market and at the same -- and increasing market share, as Mel alluded to. And we're in an excellent position to do that, but we're also doing that in an environment with the ability to raise prices, which is a nice position to be in given the timing of these capacity increases.

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

Makes a lot of sense to me. One other question, if I can. So you accelerated Hunter 1 largely in part because, I guess, certainly, the demand in the market has exceeded what you're anticipating and you felt like you wanted to have this. You mentioned a couple of times that it's going to give you the flexibility to be able to do the things that you needed to do in Hunter 2 to get that kind of up to operating efficiently. Have you had problems there that you weren't anticipating, or bigger problems perhaps than you were anticipating on Hunter 2 in terms of the start up? And whether the answer to that is yes or no, can you talk about some of the things that you're going to do there? It sounds like you're just -- not just sort of running it and letting it break in, if you will, but also some work you're going to do on it in the fourth quarter. Can you talk about what some of that is?

Kenneth R. Allen

Todd, this is Ken. Look, this is all just real normal stuff. We're still breaking in the new kiln, and the original kiln is going to give us some flexibility here to run when we take the other kiln down. Remember that when you're breaking in a new kiln, you're running and then you're shutting down, you're running and then you're shutting down. This maintenance period here in the fourth quarter is more of a normal piece just to do some normal repair work. This is all good.

Operator

Our next question is from the line of Seth Yeager with Jefferies.

Seth B. Yeager - Jefferies LLC, Fixed Income Research

So by my math now, it looks like on a full year basis, you all should start to begin generating some nice free cash flow at these levels of activity, particularly in Texas. What do you see is the best return on capital with Hunter now completed? Are you looking at any additional vertical integration, reinstituting a shareholder dividend? Or are there some refinancing options on the balance sheet you might consider with the leverage coming down?

Melvin G. Brekhus

Seth, this is Mel. We are going to look at all those things you mentioned, as we have looked at all those things you mentioned in the past. But I do want to emphasize for you and the rest on this conference call, what we're doing right now is making sure that we take advantage of the capital that we have spent over the past 10 years and we're in a position to significantly enhance our earnings capacity by making sure that we take advantage of this market demand moving in the direction -- in a positive direction in this cycle and making sure that we capture all the efficiencies of the 3 cement plants that we have now that are state-of-the-art cement plants, with the ready-mix footprint that we have that's never been any better for TXI in the Texas region, and with a very quality low-cost aggregate position that we have in the company. And that's going to be where we look to put our capital to make sure that we get those returns. In the future, we're going to look at all those other things that you discussed, as we have done in the past.

Seth B. Yeager - Jefferies LLC, Fixed Income Research

Okay. No, that's fair enough. And maybe this is a follow-up on what you said on the ready-mix side. Given your -- the backlog that you mentioned in pricing, up pretty significantly. You have a different asset base since the last upturn. How should we think about incremental operating margins in that segment? And just maybe generically, are your private -- are your smaller private competitors being pretty rational in pricing as well?

Kenneth R. Allen

Seth, I'll -- this is Ken, I'll take the first part and then Jamie can take the second part of the question. So I think your question was, what are the incremental margins on ready-mix as we think about volumes improving. We're selling ready-mix now in the $80- to $90-a-yard range and -- on average, and it's higher than that in a number of our other markets. Incremental yardage can generate $10 to $15 a yard in incremental profit.

Seth B. Yeager - Jefferies LLC, Fixed Income Research

And how does that compare with now that you have more of a presence in Central Texas? I mean, is that sort of just the same dynamic from the last upturn? Or are you able to squeeze a little more out just on that asset base?

Kenneth R. Allen

I'm not sure what you're asking, but let me try to answer that more generally. One of the things that's happened in the last few years I think you're hitting the nail right on the head with, is we have expanded and improved our ability to serve the Central Texas region, both from a cement standpoint and from a vertically integrated standpoint, to where we can go at that with all 3 product lines. And so it's getting a little harder to talk about incremental profit in one versus another. What we're looking to do here in a place like Central Texas, where we've done all this work the last few years, okay, is to then combine all of our strengths together to do exactly what you said and make that opportunity going forward on an incremental basis better than it was before.

Seth B. Yeager - Jefferies LLC, Fixed Income Research

That's helpful. And just maybe any commentary around some of the smaller private guys?

James B. Rogers

Well, Seth, here's how I answer that question. I mean, we've -- as you mentioned, our footprint is a lot broader and a lot different than it was even a couple of years ago. And what we found is we are in dozens of submarkets that have their own unique market characteristics. So with that as a backdrop, the supply and demand imbalance in our ready-mix business, generally speaking across-the-board, has been more pronounced. And we're having more difficulty meeting daily demand sometimes in some these of submarkets, and that is -- I mean, that speaks well to the market, of course, in the demand side, but it also helps explain some of our pricing strength. I'm speaking for ourselves here.

Operator

We have 4 remaining questions in queue. And our next question is from the line of Ted Grace with Susquehanna.

Ted Grace - Susquehanna Financial Group, LLLP, Research Division

So maybe as a follow-on to the conversation we just had on ready-mix supply/demand, could you just talk at a high-level how we should be thinking about or what you are seeing in terms of imports of cement into Texas? Obviously, ready-mix is more of a very local product. But can you just really walk through what you're seeing kind of at a high level?

James B. Rogers

Yes, I'll try a crack at that. I mean, it wasn't that long ago that Texas needed over, I think, 5 million tons or so of imported cement because of the demand and the limited domestic supply in Texas. And we're getting -- we're moving towards that again. What I think our assets allow us to do and put us in a unique and favorable position to do is to supply the market from our domestic plants and delay the need for imported cement. I think over time, in the near term and medium term, we're going to need imports to meet the demand in Texas.

Ted Grace - Susquehanna Financial Group, LLLP, Research Division

Okay. But you're not seeing imports -- I mean, obviously, when anybody looks at Texas, even a blind man could figure out Texas is where you want to be. So you're not seeing people look at it opportunistically as a place to import even if they've got a transportation or a logistical disadvantage?

Melvin G. Brekhus

Ted, you've heard me say this before, this is Mel. Imports into Texas, whether they come from offshore or from some other location in the United States, should be supplemental and supplemental in nature only. Currently, those imports are supplemental. And the answer to your question is we're not seeing anyone that isn't treating imports that way. One reason for that is that all of the domestic suppliers in the State of Texas are the ones that control the import terminals in Houston and other locations.

Ted Grace - Susquehanna Financial Group, LLLP, Research Division

Okay, that's great to hear. The second thing I wanted to ask, and I don't know if it's a Mel question or a Jamie question or a Ken question or somebody else, but can you just talk generally about what you're seeing in the M&A market, kind of how the environment feels, buy and selling cement assets in particular? I guess it's been our sense that, at a broad level, deals are getting done at something like $175 to $200 a ton. But could you characterize kind of how you encourage us to think about the national market for assets? And maybe anything you're looking at in terms of opportunities on the buy side?

Melvin G. Brekhus

Yes, Ted, this is Mel. There's been little activity on the M&A side, and that activity that has occurred has -- is old. I can't really remember the last M&A activity that involved cement. I think it was Eagle and Lafarge, but you can look that up. And as far as aggregates and concrete go, I can't think of anything that has adjusted in any way the way people look at the M&A market.

Ted Grace - Susquehanna Financial Group, LLLP, Research Division

And have you looked at anything? I mean, obviously, you guys are in the best markets so we appreciate that, but at a certain price, any asset can be interesting. So do you guys look opportunistically at assets outside of your core markets?

Melvin G. Brekhus

Yes. As I have a said in the past, we constantly look at opportunistic events. The swap that we did with Trinity is a good example of an opportunistic event. And we're always looking for those opportunities, and that's just a part of our business development.

Ted Grace - Susquehanna Financial Group, LLLP, Research Division

Okay. And then the last thing I was just hoping -- I think this is a Ken question. Ken, is there anything that you can just walk through, the third and fourth quarter, kind of the onetime or the recurring maintenance expenses we should build into our models and what they were last year? I know personally, I've had some confusion on the modeling side. I know when investors call us, they've also been somewhat confused about the timing of historical costs and what we should anticipate so that we can more accurately model those onetime events or those kind of like transient events?

Kenneth R. Allen

Yes, well, there -- we had the large Midlothian shutdown last year in the November quarter, okay? And so there were really -- there was really nothing of note in the second half of the year that would move the needle because we were commissioning the Hunter -- the new Hunter kiln and we took the original Hunter kiln down in the spring time for its shutdown, as Mel already alluded to. We didn't bring it back up or do any work. So the February quarter and the May quarter of last year really had nothing of note for major maintenance in it that we recall.

Ted Grace - Susquehanna Financial Group, LLLP, Research Division

Okay. And then looking forward to this February and May quarter, can you just calibrate us for what we should be expecting so we can more accurately model it?

Kenneth R. Allen

Sure. No, and that's fine. I -- like I said in my opening comments, and that's perfectly fine, my opening comments were pretty long. The Midlothian major outage will be in this February quarter, Ted. And it will probably around $6 million, plus or minus. And then as we've alluded to a little earlier as well, the new Hunter kiln is scheduled to go down for an outage in the fourth quarter and we think that will cost in the neighborhood of $2 million to $3 million in expense.

Ted Grace - Susquehanna Financial Group, LLLP, Research Division

Okay. And that's it? That's all we should anticipate?

Kenneth R. Allen

Yes, that's correct.

Operator

And your next question is from the line of Jim Barrett with CL King & Associates.

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

Ken, the $35 million to $40 million in capital expenditure that you expect for this year, is that the level we should expect for '15 and '16 prior to any plans to expand Midlothian?

Kenneth R. Allen

Jim, that's a good question. I think ongoing maintenance capital expenditures for the company, as we're situated today, is probably $40 million to $45 million a year. That's on a base of much higher depreciation expense. And then anything we would invest in above that, it might be Midlothian, there might be some other income-generating, high-return projects as well that we might do in the future as well.

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

And you've spoken about Midlothian on the last call in terms of expanding its capacity. How many months will it take from the day you start expanding capacity to the day that, that capacity will be available to customers?

James B. Rogers

Yes, Jim, this is Jamie. That's a little more involved and that project would require us to take that plant down to make downstream cooler modifications and enhancements. And I can't give you the specific answer right now. It's on our drawing board and it's something that we can do and we will plan to do later. But it's not in the near, near term.

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

Okay. And, Jamie, this may be a question for you or Ken. The real estate sale that was recorded in the quarter, can you give us a sense as to what you think the market value is of the real estate on your books? And is there a timeframe to liquidate this real estate, given the fact that the end markets are improving?

Kenneth R. Allen

Jim, good question, and we get that many times. When you look over the years in markets where real estate is moving at all, we generally have other income in the $5 million to $10 million-a-year range and a good piece of that is typically real estate sales of smaller handfuls. And that's the way we really encourage people to think about our real estate portfolio.

Operator

The next question is from the line of Brent Thielman with D.A. Davidson & Co.

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

Just so I understand the methodology a little better, the $4 million or $4-odd million loss from weather in Q2, I know you can't say one quarter or another because weather is working against you still. But should we anticipate you recognizing that $4 million sometime in the second half? Is that a fair way to think about it?

Kenneth R. Allen

Because it was just delayed?

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

That's right.

Kenneth R. Allen

Yes, there'll be -- again, depending on how the weather plays out in the future, we would expect those jobs to come in and catch up to at least some extent. We're looking at a very strong shipping season as we go into the spring already. So that's going to be an interesting market environment and dynamic, which will all be good for us.

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

Sure. And then -- I'm sorry, I joined late, so if you touched on this, I apologize. But the loss in concrete coming off a pretty good Q1, is that just due to some extended downtime because of the weather?

Kenneth R. Allen

I don't know that I would use the word downtime there, but yes. The -- seasonally, the spring and summer quarters are our better quarters in ready-mix business and they begin to tail off in the fall. And then the quarter we're in today is usually a very challenging quarter for ready-mix because of the weather, exactly like you said.

Operator

Next question is from the line of Wayne Pinsent with Gabelli & Company.

Wayne Pinsent

I just wanted -- most of my questions have been answered but I just -- and I'm sorry if I missed it, but just wanted to see if you could lay out by cement plant that you usually do where capacity is right now?

James B. Rogers

Wayne, this is Jamie. I mean, we're -- all these number are -- they're moving targets and they're moving in the right direction. But Midlothian, I'd say, is close to full capacity. But year-to-date, it's about 85%, somewhere in that range. Hunter, I think Ken alluded to this earlier and mentioned 70% to 75%, that's Hunter 2. Let me be specific there, that's Hunter 2. We're also bringing on Hunter 1, as we alluded to, that we started in December. And OG -- sorry, Oro Grande, our California plant, is a little bit under 70%.

Operator

At this time, I'd like to turn the call back to Mr. Vines for closing remarks.

Thomas Lesley Vines

Thank you, Douglas. Well, everyone, we certainly appreciate the time again, and your interest. And we look forward to talking to you in March when we discuss our third quarter results. Have a good day.

Operator

And ladies and gentlemen, this does conclude our conference for today. We'd like to thank you for your participation, and you may now disconnect.

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