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Texas Industries, Inc. (NYSE:TXI)

F2Q08 Earnings Call

January 4, 2008 2 pm ET

Executives

Ken Allen - Treasurer

Mel Brekhus – Chief Executive Officer

Dick Fowler – Chief Financial Officer

Analysts

Ken Zener – Merrill Lynch

Jack Kasprzak – BB&T Capital Markets

Todd Vencil – Davenport

[Miten Dehia] – Lehman Brothers

Andrew Root – Alkeon Capital

David MacGregor – Longbow Research

[Chris Emrol – TD Capital Markets]

Operator

Welcome to the TXI second quarter results conference call. [Operator Instructions] I would now like to turn the conference over to Mr. Ken Allen, Treasurer.

Ken Allen

Welcome again to TXI second quarter teleconference. With us today, as usual, are Mel Brekhus, Chief Executive Officer of TXI and also Dick Fowler, Chief Financial Officer. We’ll follow a similar format as in previous teleconferences with Mel and Dick first providing comments and then we’ll follow up with a Q&A session.

Before we begin we’d like to remind you that certain statements contained in this teleconference are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from future results expressed or implied by such forward looking statements. Potential risks and uncertainties include but are not limited to the impact of competitive pressures and changing economic and financial conditions on our business the level of construction activity in our markets, abnormal periods of inclement weather, unexpected periods of equipment down time, changes in the cost of raw materials, fuel and energy and the impact of environmental laws and other regulations.

For further information please refer to form 10K and with that I’ll turn things over to Mel for opening comments.

Mel Brekhus

Good afternoon and Happy New Year to everyone. As we begin a new year it’s almost impossible not to pick up a paper and read about challenging economic conditions in the economy. Oil prices have exceeded $100 per barrel. In construction residential building is off by 25% throughout the nation and even more in some markets like California. Credit for residential construction is certainly more difficult today and the credit markets in general are tighter. Even so as we look at the market conditions for construction materials, particularly in Texas Industries markets in Texas and California and even more particularly for TXI’s major product line of cement we continue to be encouraged.

Consumption of cement on a world wide basis continues to be strong. In the US cement consumption has declined but it still excees domestic capacity by a wide margin. Imports are needed to supply customer needs but they carry very low margins in comparison to cement produced domestically and almost all imported cement is brought in by the companies that make cement in the US. As a result there is no incentive to bring in more cement than is required to meet market demand. On top of this world wide cement demand has created such a shortage of cement shipping capacity that overseas shipping rates have once again increased beginning in January. There are a number of positives related to TXI that don’t make the papers and the news.

Looking more specifically at TXI’s major market in Texas, recall that about 80% of TXI’s revenues come from the Texas region. Total consumption of cement in the state for the last 12 months has remained level with that of the same period for a year ago. This has occurred while housing starts are down in the state by 25% and during a period of almost three quarters of a year of extreme wet weather. Obviously non-residential and public works construction have been keeping demand levels fairly constant over the last year.

What this means for Texas is that total consumption of cement of about 17 million tons per year continues to exceed capacity of about 12 million tons leaving a gap of five million tons to be filled in by imports. While we aren’t in the business of forecasting we do believe that cement consumption in Texas will likely weaken somewhat in the coming months. Non-residential contracts are beginning to decline and it looks like near term highway contracts will decline somewhat before picking up again as new major highway programs begin to kick in.

Focusing a little bit more on highway work, the state of Texas is beginning to see a shift of funding for major highway projects away from the state and towards other more local public entities like the North Texas Toll Way Authority, the Harris County Toll Way Authority and many other representing specific population centers throughout the state.

Where calendar year 2006 saw roughly $5 billion in highway project contracts let during the year and the lions share was funded through the state government, calendar year 2007 will likely see a total of about $3.7 billion in contracts let. These contracts typically impact cement consumption one to two years depending upon the type of project. We’ve been benefiting from the contracts let in year 2006 and will continue to benefit going forward. Even so there may be something of a short term slowdown in the next year or two for highway construction if state funding declines somewhat.

The new major projects are being put in place by the local entities I just mentioned that should work to offset the decline at the state level. For instance in the Houston area $4.5 billion of projects is scheduled to come and in the Dallas area another $4 to $5 billion of projects including a project to build a toll way in the Trinity River area. At the State level $3 billion of additional bonding capacity was added in the last legislative session in Austin and in the November elections just past $5 billion in general obligation bond initiatives to supplement State highway fund were also passed subject to enabling legislation.

Together the numbers I’ve just mentioned accumulate to about $15 to $20 billion of funding and these are just a sample of the new funding initiatives that are being developed in Texas. Granted the new money will not have much impact on the demand for construction materials in the next year but the longer term outlook for highway funding and construction continues to look very solid in Texas.

In the nearer term recall that TXI announced the cement price increase for Texas of $10 per ton effective January. Most other producers in the state have announced an April effective date and it looks like TXI’s effective date will move to April as well. While Texas market conditions aren’t quite as positive as they were two years ago we remain encouraged that overall conditions will continue to be solid.

In California demand for cement has declined from a peak of 17.5 million tons to less than 15.5 million tons today. Housing starts are off by about 35% and commercial construction contract awards are declining as well. However, highway contract awards have increased by 35% in calendar year 2007 after increasing by 45% in calendar year 2006.

As I mentioned before these highway contract awards impact cement consumption one to two years down the road so they have and should continue to somewhat offset the impact of the declines in other areas of construction. Further we expect that the large bonding initiative passed a year ago in November will begin to have impact sometime in 2008.

With demand for cement in California less than 15.5 million tons and the cement capacity today of roughly 13 million tons there remains a substantial portion of cement demand that needs to be supplied by imports. When the market definition is broadened to include the Las Vegas and Phoenix area even more imported cement is required. Even though cement consumption in California has declined imported cement has declined as well keeping the market fairly well in balance. As a result cement price in California has been reasonably stable.

Turning to TXI’s California modernization and expansion project we are getting the plan up but we are about a month behind where we thought we would be when we provided an update in September’s teleconference. During this time the old plant, which will be replaced by state of the art equipment, should continue to struggle both in production and efficiencies compared to a year ago. Believe me our number one priority is to get the new plant up and running so that we can shut the old one down as soon as possible.

We anticipate that the plant will be fully operational in June of 2008. At that point we continue to believe that incremental EBIT benefits from the project will be at least $60 million or $75 million in EBITDA. Due to construction delays, changes in scope and resultant modifications to the project it looks like the cost of the new plant will be in the neighborhood of $385 to $400 million instead of the $360 million estimate communicated in September.

We have done a good job preparing the market for the one million tons of new capacity that we will be adding in the California market. To date we have pre-sold about 300,000 annualized tons of product that we currently purchase and re-sell. These customers will be switching from sources of imported cement to cement produced by TXI as the new capacity comes online.

In addition to our California expansion, the project in Texas to expand cement capacity continue on pace. Our Central Texas Cement Plant expansion will add 1.4 million tons of additional capacity and our projects to expand production at the North Texas Cement Plant will add another half million tons over time. Off of today’s current five million tons of total cement capacity, all three projects should take TXI’s production to almost eight million tons.

Finally in the November quarter just ended our success in improving margins became more apparent. Operating margins for the Aggregate segment improved from 10.4% in last years quarter to 14.6% this year while the Consumer Products segment which is comprised mainly of our redi-mix concrete operations improved from 3% to 4.7%.

In the September 2006 teleconference we announced margin improvement goals for the company. Our overall goal was for TXI’s consolidated operating margin to be above 20% for fiscal year 2009. To reach this goal substantial margin improvements in Aggregates and Redi-Mix Concrete would be required and the new production equipment in California would need to be up and running. Further, increased margins would be a result of internal improvements in addition to price improvements. As I mentioned at the beginning of my comments economic conditions are more difficult than they were in September 2006 but we continue to hold ourselves to our goals.

Before I turn things over to Dick I want to take the time to specifically commend the employees at TXI. Even though market conditions are more challenging we are all anxious to see the successful start up of Ore Grande Plant and further margin improvements in our Aggregates and Consumer Products groups. There will be a few bumps along the road, there have been and we are currently encountering a few, but we won’t be distracted by them. It’s the TXI employees who continue to make solid progress in building TXI into a larger and more profitable company and I commend them for their effort. With that I’ll turn it over to Dick.

Dick Fowler

First I’ll review the results for the November quarter and then I’ll talk about the February quarter that we’ve just begun. Overall the November quarters results were about as expected. EBIT for last years quarter was about $47 million but that included the cement dumping settlement income that you may recall of $20 million. We also had the impact of a scheduled maintenance shut down at TXI’s North Texas Cement Plant which reduced EBIT in that quarter by about $10 million.

Adjusting for these two factors EBIT for last years quarter was about $37 million. For comparison EBIT for the most recent November quarter was $43 million. This was an improvement of $6 million over last year but almost all of the improvement was due to lower stock based compensation expense this year. Adjusting for the stock based compensation expense the two quarters results were about equal which is in line with the guidance we provided in our September teleconference.

Results for TXI’s Aggregate and Redi-Mix Concrete operations did show year over year improvement. EBIT or operating profit for the Aggregate business improved from $6.8 million to $11.1 million. That was mainly on higher shipments and prices. The Consumer Products segment, which is principally our Redi-Mix Concrete operations improved operating profit from $2.6 million to $4.6 million. That was driven primarily by increased shipments. On the other hand continued lower production and inefficiencies at the old California plant reduced EBIT by $7 million compared to last years results.

This is slightly more than the $5 million impact that was incurred during the August quarter in that we were expecting for this quarter. Once all these factors are considered the November quarter just ended was in line with our expectations and our guidance.

Now looking at capital spending for the first half of the fiscal year it was $175 million. We still have $10 to $20 million remaining on the California Cement Plant project and expenditures for the Central Texas Cement expansion project will begin to increase in the second half of this fiscal year. That means capital spending for the entire year should be in the neighborhood of $300 to $325 million if the spending on the Central Texas Plant occurs as we think it will.

The other item to mention in the cash flow statement is the investments in life insurance contracts. During the November quarter we received approximately $70 million in cash from the cash surrender value of these contracts. We have another $30 to $35 million in cash that we expect to receive before the end of this fiscal year. This $100 million has always been a part of our financing strategy for the cement plant expansions that are underway.

Looking at the February quarter you may recall that last years quarterly EBIT was $23 million. These results were negatively impacted by unseasonably cold temperatures, ice and wet weather. This just reinforces what we’ve always said about the third quarter and that is that the uncertainties of the weather make estimating financial results with any accuracy almost impossible for TXI. With this in mind we’re going to provide some directional guidance for the third quarter along with some information that should be considered in thinking about the results for this current February quarter.

Starting off with last years EBIT base of $23 million; first that quarter included $3 million of stock based compensation expense in it. The amount that we’re going to have in the current quarter whether it’s an expense or a credit to income will depend on how the stock price changes during the quarter. We will certainly tell you what that stock price change and impact on stock based compensation expense was when we report our results. Second, with more seasonal weather this year rather than what we had last year Aggregate and Concrete results should be improved. It’s just difficult to know by how much because the operating results for these two businesses are the ones most impacted by the weather.

Next, we know that the old plant in California had a negative impact of about $7 million in the November quarter and this is probably not a bad guess for the February quarter until we know more about the commissioning of the new plant. The fourth item this quarter we expect to see a shift in cement product mix away from the residential area and more towards public works. That means we usually have normally selling prices that are lower in the public works area.

Next, over the holidays we had an unplanned outage at the North Texas Cement Plant as a fan motor actually a 6,000 horse power fan motor, went out. It has been fixed and is now back up and running but the 10 days that we could not make clinker are estimated to have had a $3 million negative impact on profits for this quarter. We were able to continue to grind clinker from inventory and sell it so shipments weren’t impacted appreciatively but the kill down time did impact our cost negatively.

Finally, at our Central Texas Plant we are scheduled to be down for a few days this quarter to do some kill and other maintenance items. The impact there will probably be in the neighborhood of $2 to $3 million.

This is a pretty lengthy list of items but in the absence of providing an overall point or range of guidance for the quarter we wanted to provide you with all this information. Obviously there’s more negative news than positive which says that we expect that TXI’s EBIT in the current February quarter will be lower than what it was last year. However, most of the items that I’ve just mentioned that should negatively impact the quarterly comparison are one off items at our cement plants.

Where their pricing outlook for cement is concerned we do want to be clear that what we are seeing is more of a shift in our mix of cement products and market rather than a trend of actual price declines. This is true in both Texas and California. In going forward in California as we bring on new production these additional tons will be sold more as bulk products rather than package products. As a result of this mix shift our average price in California will show a decline in the coming quarters.

Finally, even though we expect our California average price to decline due to the shifts we’ve got in the mix of cement products and markets I just mentioned this doesn’t impact our expectations for the incremental profitability of the expansion and modernization project. As Mel indicated earlier we still expect that the incremental EBIT from the project will be at least $60 million or in EBITDA terms $75 million. That concludes my comment, Ken I’ll turn it back to you.

Ken Allen

I’ll turn things over for the Q&A session please go ahead.

Question-and-Answer Session

Operator

At this time we will conduct the question and answer session. [Operator Instructions] Our first question comes from the line of Ken Zener with Merrill Lynch.

Ken Zener – Merrill Lynch

With the weak job data today it’s all about the macro outlook and as I think about your new plan in Southern California, the new volume coming online I think it’s roughly 15% to 20% market still imports. Do you envision the point, I know you kind of talked about the next year or two outlook where that demand can solve 15% in which case the supply and demand would be matched and normal pricing inflation would kick in giving the slow down in demand. If you can pull back from some of your past experience because while they have public works side obviously if the economy keeps deteriorating it would seem to me that there would be some risk to that actual public work project. It’s kind of a duress, it you think it’s a potential for the 15% to go down, your past experience between the lags between public works and slow downs in residential, commercial and a down economy?

Mel Brekhus

I think that the difference between the domestic capacity of cement in California and the demand is such that we have quite a cushion, first and foremost. Secondly as I stated in my prepared comments because of the cost of imported cement, particularly the cost of shipping, the higher costs of products in the marketplace is now coming from offshore not domestically. The domestic suppliers who are the ones that import the cement and also are the ones that produce the cement in the California region are going to continue to maximize their domestic operations first and foremost.

The second part of the question I think you were talking about could public works take a longer time to come to fruition. Our experience has been that it can take a longer time to come to fruition and for the actual jobs to be let and constructed but they always are. When the funds are appropriated the work is done it is sometimes just a case of how long it takes for that to get done. Remember you’re talking about California, you’re talking about a state that has had, I think, about twice the national average in population growth over the last decade and has infrastructure requirements that just absolutely have to be addressed.

Ken Zener – Merrill Lynch

That’s obviously the big overriding concern here today. We talk about cement price deflation due to the ball first packaging. Is it sequentially similar to the decline that we’ve seen in the second quarter from the first quarter, $250 is that the range that you guys are kind of thinking about?

Mel Brekhus

It will kind of depend; yes it is going to be something like that. You’ve pegged it right. I would also add that that’s an average price for all of TXI so as we sell more in California that’s going to be a positive thing but we are going to be selling less package and we are going to be selling into lower priced markets so that’s a negative. We’ve got some positive things that are happening there too. I think you’re in the neighborhood.

Ken Zener – Merrill Lynch

I know with the last quarter on the Aggregate pricing, this quarter was very strong. How much of that was just related to mix within the Aggregate areas as opposed to like for like basis?

Mel Brekhus

Most of it in mix.

Ken Zener – Merrill Lynch

Is that something we can expect to continue or is that something where you guys don’t have good necessarily visibility on?

Mel Brekhus

I think the best answer to that is that we anticipate over the next calendar year to see prices up in high single digits as a percentage of current price.

Operator

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

Jack Kasprzak – BB&T Capital Markets

I wanted to ask first will this be the last quarter of capitalized interest for the California Plant?

Ken Allen

Probably, there’s a small chance that we would stop capitalizing interest during the third quarter but if we do there would be only a small amount of interest begin to flow into the third quarter P&L. If I were modeling the company just for ease and simplicity I’d assume our interest expense is almost zero for the third quarter.

Jack Kasprzak – BB&T Capital Markets

In the third quarter and then probably fourth quarter a more full quarter?

Ken Allen

A more full quarter. I don’t want to be precise because it depends on the timing.

Jack Kasprzak – BB&T Capital Markets

The comment in the Press Release about the California Plant and it’s only a month I don’t want to get too hung up on one month is this just sort, would you describe it as just a normal delay or how should we think about what’s going on?

Mel Brekhus

I think the way to look that that is like we’ve looked at projects that we’ve had in the past and let’s use the Midlothian modernization and expansion as an example. The people that are doing the work, the general contractors, TXI’s engineers, the original equipment manufacturers, everyone involved sets a schedule. They set an aggressive schedule and we are glad that they do. They seldom meet that aggressive schedule and this is the case similar to Midlothian where they haven’t met the schedule, they are disappointed because they thought they could, but they haven’t met that aggressive schedule, it’s very normal. At the Midlothian Plant when we expanded that, we were about two months behind the commissioning of that facility. This one is modestly ahead of that but it’s normal.

Jack Kasprzak – BB&T Capital Markets

I also wanted to ask about pricing the $10 a ton price increase for cement in Texas. If memory serves that was originally scheduled for the beginning of the year, is this just the case where not everybody else came out for January instead April and we’re just looking at the spring now?

Mel Brekhus

Yes, that’s precisely what happened. We had announced it for January, the competitive pricing announcement in Texas were exclusively for April and we shifted to April.

Jack Kasprzak – BB&T Capital Markets

The Redi-Mix pricing, that seems to be holding up pretty well. What can you say about what’s going on there. Is that trend still in tact or is there anything incremental you can tell us about concrete pricing?

Mel Brekhus

I think the trend is in tact. I’m disappointed that we aren’t increasing the price of Redi-Mix more than we are and I think the industry, the Redi-Mix industry, if they want to get reasonable margins we’ll have to look at increasing their pricing because the material costs are going up. The price of cement is going up, the price of aggregates is going up and the cost of fuels to deliver the product, all those things are going up and so I like the trend but I think we have to improve the spreads.

Jack Kasprzak – BB&T Capital Markets

Is there a price increase for 08’ right now in Texas?

Mel Brekhus

There is an announced price increase in Texas in the first quarter and it varies all over the board but more toward the March area. The number is $5 to $8 range per cubic yard. We can get back to you on that one.

Operator

Our next question comes from the line of Todd Vencil with Davenport.

Todd Vencil – Davenport

I want to get some clarification on your earlier comments on your average prices. I’m just confused about whether you’re talking about California, average price coming on sequentially or if that’s overall. Were you indicating you think your average price is going to come down again sequentially in the third quarter from the second quarter overall?

Mel Brekhus

Yes, overall modestly and that is a millded price, that’s all products, all geography.

Todd Vencil – Davenport

You did say that you don’t think that any particular product in a given geography those prices are relatively stable?

Mel Brekhus

We think they are relatively stable we are just participating in different markets now.

Todd Vencil – Davenport

Your follow-up comment was that given the price increase do you have anything that’s been delayed from the spring that you anticipate that year on year for this year prices are going to be up in the high single digits? Did I hear that correctly?

Mel Brekhus

The first part was about the cement pricing and yes we feel comfortable with cement pricing in April. When I was talking about the prices going up in the high single digits I was referring to aggregate prices in the calendar year.

Todd Vencil – Davenport

Let’s shift gears a little bit to the California expansion. You mentioned that you’d been buying and re-selling 300,000 tons to sort of prep the market and then you and I have talked at other times about other things that you might have done to go out and find a home for the new production that you’re bringing on. How do you feel at this point given the California market about your ability to place the additional million tons that you are bringing on in California when it comes on in June?

Mel Brekhus

I feel very comfortable that we’re going to be able to do that. Our sales and marketing team has put together a plan that started a number of years ago that as I mentioned in my prepared comments has already got us 300,000 of the million ton placed and has plans in place to take care the rest of it as we move through the commissioning and come online fully operational by June of 2008 with sales in all segments of the market and in most rational ways.

Todd Vencil – Davenport

You haven’t talked in the past about specific prices in the California market, the Texas market could you give us sort of a, so we can get our arms around it, give us a percentage difference or some range on the difference between California and Texas and the difference between bulk versus packaged?

Mel Brekhus

We haven’t given you that information in the past and I think we’ll just continue to maintain that stance. Thanks for asking though.

Operator

Our next question comes from the line of [Miten Dehia] with Lehman Brothers

[Miten Dehia] – Lehman Brothers

I’m sorry I missed this. You did say that California pricing will be flat on an apples to apples basis but what about the other markets? If you take out [inaudible] pricing for the quarter?

Mel Brekhus

I’m sorry, you’re going to have to repeat your question to me.

[Miten Dehia] – Lehman Brothers

In California you said that pricing was roughly flat but all the pricing was down primarily because of mix so am I to read that Texas pricing was also flat year over year?

Mel Brekhus

Yes

[Miten Dehia] – Lehman Brothers

So all the change was just mix?

Mel Brekhus

Yes, just product mix.

[Miten Dehia] – Lehman Brothers

For the third quarter because the pricing that you’re taking going to be effective until April so for the third quarter I should again assume that pricing will roughly be flat year over year?

Mel Brekhus

Flat to slight decline because of the product mix again.

[Miten Dehia] – Lehman Brothers

No, I’m excluding mix.

Mel Brekhus

Okay, then flat.

[Miten Dehia] – Lehman Brothers

What should we be using for a cash tax rate? Should we just use something close to your book taxes for the year or something lower?

Dick Fowler

I think the actual tax payments will be lower than the book taxes. There will be deferred taxes in the year.

[Miten Dehia] – Lehman Brothers

Probably cash tax similar to last year maybe?

Dick Fowler

I can just tell you it will be lower than our book rate.

[Miten Dehia] – Lehman Brothers

On the liquidity fund would you comment on, are you comfortable with the size of the revolver right now. Obviously you are going to get $30 million from the life insurance and [inaudible]. This year and looking into next year are you going to have all this capex do you think you need a greater availability on revolver or coming to the market additional debt?

Ken Allen

That’s a good question I think we said in September’s teleconference as well that with the larger size of the expansion in Hunter we do expect at some point to access the debt capital markets for some long term debt. We don’t know exactly the timing would be and that sort of thing but with our balance sheet in the shape its in we just don’t think we’ll have any trouble accessing that.

[Miten Dehia] – Lehman Brothers

If I heard you correctly long term, so that would mean more of the nature of notes?

Ken Allen

Exactly.

Operator

Our next question comes from the line of Andrew Root with Alkeon Capital.

Andrew Root – Alkeon Capital

I may have missed this with the many different parts of the pricing that’s been discussed. Can you just review your 2008 pricing plans for aggregate in Texas and California?

Mel Brekhus

Our aggregate plans in TXI are confined to the Texas market for all practical purposes because the only aggregates we have in California are lightweight aggregate. The answer to your question we expect pricing increases in the high single digits as a percentage of current selling price for 2008 in aggregates.

Andrew Root – Alkeon Capital

When would that be effective?

Mel Brekhus

That’s going to be happening over the 12 month period at various stages depending upon product line. Depending upon whether its concrete aggregate or its asphalt aggregate or its construction aggregate.

Andrew Root – Alkeon Capital

For modeling purposes I should model in an average asp bump of 5% to 8% for 08’ for aggregate in Texas or that that’s the number that gets phased in over the year so it will be more like 4% or 5%?

Dick Fowler

For year over year increases I would take what Mel’s assuming of roughly 5% to 8%.

Operator

Our next question comes from the line of David MacGregor with Longbow Research.

David MacGregor – Longbow Research

I wonder if you could help me with this mix shift between public works products which you said you would be selling at a lower price. Can you help us quantify, roughly, the delta?

Mel Brekhus

I think you’re seeing part of the delta show up sequentially but that delta varies because as you know in public works we may bid a job 12 months ago and be delivering to that job today and the price 12 months ago was less than the price is today and on state work for example those prices are fixed and there is no way to get any relief from those fixed prices. The delta varies too much for me to be able to tell you with any precision what it might be for any modeling you might do other than what we’ve already indicated. The aggregate pricing decline might be.

David MacGregor – Longbow Research

How much of the delta would be accounted for by the difference of timing versus maybe just more aggressive bidding on this?

Mel Brekhus

The public works is almost exclusively on timing. An example of a delta that would be negative that doesn’t have to do with bidding but has strictly to do with product mix would be selling less package as a percentage of your total sales, like in California.

David MacGregor – Longbow Research

The Hunter ramp ups to 1.4 million tons, what’s the timing on that?

Mel Brekhus

We’re looking at as we sit here today; we are looking at a commissioning of that facility in the winter of fiscal year 2010.

David MacGregor – Longbow Research

Finally on Oro Grande you’ve got, my understanding of this, correct me if I’m wrong, you are going to have output from two plants for a short period of time and I’m just wondering if you could comment on your expected cement volume over the next couple of quarters.

Mel Brekhus

We have the permits and permissions in place to be able to run the existing plant while we commission the new plant. As I said in my prepared comments our objective will be to get the new plant running and running well as quickly as possible so we can shut the existing plant down because it’s inefficient it is very high cost and we don’t want to be distracted by it. To answer your question, is there going to be some incremental or what’s imbedded in your question is, is there going to be some incremental volume production increase because you can run both facilities. Not really, there’s not going to be much of that at all. Our objective is going to be to get the new one up and running and get the old one shut down as quickly as possible. We may run a portion of the existing plant to help us get the new one up and running as quickly as possible but that would be the only reason we would do it.

David MacGregor – Longbow Research

You mentioned that you pre-sold about 300,000 on the incremental million tons; you mentioned you have plans in place for the balance. Can you give us some sense of the end market mix on that million tons? How much of it’s going into public works versus how much in non-residential or residential?

Mel Brekhus

Let me put it this way the mix that we have today will be different in the future because we will be selling more bulk we will be selling more through the redi-mix concrete business in California and by the way Redi-Mix concrete producers in California also do the vast majority of the public works. It’s hard to separate those and say what is the percentage of public works versus what is the percentage of residential. Unlike Texas where you have more road contractors doing their own concrete work in California most of them being supplied by Redi-Mix. We will be participating in whatever the residential market is, whatever the public works whatever the commercial market is we’ll just be selling more bulk cement, grey cement, type two five cement in California as a percentage of our business different from today where a pretty large percentage of our business

Operator

Our next question comes from the line [Chris Emrol with TD Capital Markets].

[Chris Emrol – TD Capital Markets]

One the price side I understand that the increase in Texas is moved back a bit. Any thoughts on the California of a potential price increase. Mel at the beginning of your remarks you talked about how freight costs were going up for imported cement do you think that that may portend to a potential price increase in the California market as well?

Mel Brekhus

As we sit here today there are no indications of a price increase in the first calendar quarter of 2008 in California and we’ll just have to see what happens in that market going forward. I believe that although there have been significant declines in California from a demand standpoint I think that that is such a great market and has such opportunity in the public works that needs to be done in the population growth that continues there that it won’t be long before we’ll need considerable amounts of imported cement to meet the demand of that market as well as the adjoining markets in Nevada and Arizona and that will bode well for pricing.

[Chris Emrol – TD Capital Markets]

The second question I had was as I look the results from the quarter your volumes were really strong particularly aggregates and redi-mix when I looked at yards and tons up. As you look through the balance of the year what’s the trajectory look thus far, particularly with respect to the jobs data today for non-residential construction indicated that there were some job sell offs. As we think about what your volumes may look like for aggregates and for redi-mix for the balance of the year how do you think about that?

Mel Brekhus

We feel pretty good about them because as you know they are concentrated in the Texas region. They are concentrated in the region that I described as a region that has cement consumption over the past 12 months similar to the previous 12 months. As we go forward, as I stated, I expect some decline but when you consider the fact that the rest of the country is having the declines that they are having in cement consumption to the extent that the Portland Cement Associations economist is indicating somewhere between 6% and 7% decline and we are flat at Texas, that looks good for our aggregates business and that looks good for our concrete business because they are concentrated in the Texas market.

[Chris Emrol – TD Capital Markets]

As you think about back half of the year probably can you still continue to have up volumes in aggregates and redi-mix or do you think that sort of nets out to more of a flattish?

Mel Brekhus

I think we have the opportunity to increase our sales in both redi-mix concrete and in aggregates. We do have some production issues that we’ll have to work on in aggregates if the demand is strong enough but we know what they are and we know what it takes to fix them.

[Chris Emrol – TD Capital Markets]

The last question I had is with respect to, I think you talked about the Hunter commissioning. The extra half a million tons that comes on in Midlothian how does that phase through the fiscal 09’ year, the half a million tons coming online?

Mel Brekhus

That will be phased in over time so there may be anywhere from 20% to 30% of that being phased in through that 09’, I actually said commissioning by winter of fiscal year 2010. That’s the way I would look at that. That’s something that comes in over time and we get 20% to 30% of it during that time period.

Operator

[Operator Instructions] Our next question comes from the line of Ken Zener with Merrill Lynch.

Ken Zener – Merrill Lynch

I had some follow up on the pricing and it seems to me that you said basically that the sequential decline second quarter from first quarter was largely mix related?

Mel Brekhus

Yes

Ken Zener – Merrill Lynch

That sequential decline will continue into the third quarter, more or less, again will be predominantly mix related, meaning the regional mix?

Mel Brekhus

Yes it will be regional mix as we go third quarter into fourth quarter its going to be not only regional but it will also be products that we’re selling.

Ken Zener – Merrill Lynch

Correct but the bulk of the decline, so if we call if out of two quarters it’s a $5 decline 95 to 90 it sounds like three quarters of that was mix related. Then begs the question as you increase capacity inCalifornia how does that influence the mix two quarters out when the plant is actually operational. Obviously the market is taking your comments to meaning that it’s on a run rate. I just want you to confirm whether that is actually what you were thinking and saying or if you would expect some price versioned upward based upon regional mix when your California plant opens?

Ken Allen

That’s a good question. As we bring on the California production, California prices are higher than they are in Texas and so you’ll see the mix change back in a more positive direction as well. If we’ve given you the impression that we expect several quarters of price decline because of mix change that is not what we are trying to say at all, that’s a great question. We’re just saying here in the short run as we’re getting more tons out of Texas and relatively fewer tons right now out of California the mix changes is going the other way. Once we get more production out of our California plant that mix change will tend to go in a more positive direction. When you think about TXI’s overall price.

Ken Zener – Merrill Lynch

Right, so if you’re losing three quarters of your pricing over the next three quarters due to mix would it be reasonable to assume you are going to get two thirds of that back as the California production comes up, i.e. $2 or $3 if you have a $5 deflation?

Ken Allen

That’s probably not a bad assumption.

Ken Zener – Merrill Lynch

The 5% to 8% increase you expected in aggregates that was like for like excluding mix, is that correct?

Mel Brekhus

That’s correct.

Operator

There are no further questions so I’d like to turn it back to management for closing remarks.

Ken Allen

Thanks again for joining us and we look forward to having you join us in our March teleconference. Have a good year.

Operator

That does conclude our conference for today, thank you for your participation.

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Source: Texas Industries F2Q08 (Qtr End 11/30/07)Earnings Call Transcript
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