Texas Industries F3Q08 (Quarter End 2/29/08) Earnings Call Transcript

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 |  About: Texas Industries (TXI)
by: SA Transcripts

Texas Industries, Inc. (NYSE:TXI)

F3Q08 Earnings Call

March 27, 2008 2:00 pm ET

Executives

Kenneth R. Allen – Vice President & Treasurer

Melvin G. Brekhus – President, Chief Executive Officer & Director

Richard M. Fowler – Chief Financial Officer, Executive Vice President Finance

Analysts

Kenneth Zener – Merrill Lynch

Nitin Dahiya – Lehman Brothers

Analyst for Jack Kasprzak – BB&T Capital Markets

Derrick [Schmoist] – Longbow Research

Christopher Manuel – Keybanc Capital Markets

Andrew O’Connor – Millennium Partners

Barry Vogel – Barry Vogel & Associates

Todd Vencil – Davenport & Co. of Virginia, Inc.

Brett Levy – Jefferies & Company

Operator

Good afternoon ladies and gentlemen and thank you for standing by. Welcome to the TXI third quarter 2008 results conference call. During today’s presentation all parties will be in a listen only mode and following the presentation the conference will be opened for questions. (Operator Instructions) This conference is being recorded today Thursday, March 27, 2008. I’d like to turn the conference over to Mr. Ken Allen, Treasurer of Texas Industries. Please go ahead sir.

Kenneth R. Allen

Good day and welcome to TXI’s third quarter teleconference. With us today as usual are Mel Brekhus, the Chief Executive Officer of TXI and also Dick Fowler, TXI’s Chief Financial Officer. Today we’ll follow our similar format as in previous teleconferences. Mel and Dick will first provide comments and then we’ll follow with a Q&A session. But, before we begin we’d like to remind you that certain statements made 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 downtime, changes in the costs of raw materials, fuel and energy and the impact of environmental laws and other regulations. For further information please refer to our annual report or Form 10K.

With that I’ll turn things over to Mel for opening comments. Mel, please go ahead.

Melvin G. Brekhusthat

Good afternoon and welcome everyone. TXI’s third quarter results were somewhat better than we anticipated and Dick will provide more details in a few moments. More importantly TXI continues to be on track in executing its strategy of both expanding cement capacity and improving margins through efficiency improvements. Recall that we are in the process of expanding cement capacity from today’s annual production of 5 million tons to approximately 8 million tons over the next several years. These capacity additions will also improve production efficiencies.

In California we are in the process or replacing 1.3 million tons of older inefficient cement capacity with 2.3 million tons of highly efficient annual production. We are currently in the commissioning phase of the project and expect that the new plant will be fully operational in June, roughly three months from now. We expect the incremental EBIT from this project to be at least $60 million or in terms of EBITDA $75 million. In either case about half of the improvement and profitability will come from improved production efficiencies and the remaining half is expected to come from the additional 1 million tons of production we are adding. In central Texas we are well underway in constructing a new 1.4 million ton [kill line] next to an existing 900,000 ton line. Construction should be finished during the winter of fiscal year 2010 about two years from now. The expected incremental benefit from the project should be at least $50 million or $65 million in EBITDA. While most of the benefit from this project will be generated from additional production there will be significant synergies to be gained as well.

These two projects and the incremental addition of production at our north Texas cement plant over the next three years or so should combine to increase cement production from today’s annual capacity of 5 million tons to almost 8 million tons. But, improved production efficiencies aren’t limited to our cement operations. Over the last year and a half we’ve been working to improve operating margins in our aggregate and consumer product business segments and the positive results have become most apparent in recent quarters. Year-to-date aggregate operating profit is up 35% and consumer product profitability has increased by 80%. We have work to do in both areas but we are certainly on a good trajectory.

On the pricing front we have a $10 per ton cement price increase announced for April in our Texas market and a $5 per ton increase announced for California. In Texas cement consumption has remained stable over the last two years as the Texas economy continues to generate a solid level of overall construction activity. In the California region reductions in cement consumption continue to be offset by declining imports keeping consumption and supply in balance.

With that I’ll turn it over to Dick for his financial comments. Dick, please go ahead.

Richard M. Fowler

I’ll comment on our financial results for the quarter and a few items that are in our cash flow statement for the nine months ended February. The net income for $14.6 million or $0.53 a share that we reported this morning for the February quarter had an EBIT for the quarter of $21 million. These results are down slightly from last year’s EBIT of $23 million for the quarter but this was a better result than we expected at the time of our January teleconference. The cement operations were negatively impacted in California by lower production and higher costs from the inefficiencies associated with the old equipment there reducing pre-tax earnings or EBIT by approximately $8 million. Cement results were also impacted by the unplanned downtime as a result of a large fan motor outage in December at the north Texas cement plan reducing pre-tax earnings this quarter by approximately $3 million. We mentioned this last item during our January teleconference.

TXI’s aggregate segment operating profit improved by $4 million versus last year as we encountered better weather for construction activity and because our efforts to improve margins through production efficiencies are beginning to pay off. Our consumer products segment also saw results improve $1 million over last year and this is during a period which is always difficult in the February time frame for delivering concrete. These improved results in the last two business segments incurred even with the rapidly escalating costs of diesel fuel that negatively impact both of their operations.

Moving from operations to other items in the income statement you will note that SG&A expenses declined by $6.8 million for the quarter. Stock-based compensation expense declined by $5.4 million and lower incentive expense accounted for the rest of this decline. Interest expense is zero in the current quarter versus $3.3 million last year as all of the interest expense was capitalized on our cement expansion products this year as required by GAAP. Other income was down $1.2 million as a result of lower corporate interest income and real estate income. Capital spending for the first nine months of the year has been $193 million for the two cement expansion and modernization projects. Normal replacement capital expenditures amounted to $49 million for the first nine months and they’re currently estimated to be $75 million for the entire year. Another item of note in the cash flow statement is the cash we have received from the investment in life insurance contracts, our cash surrender value of almost $90 million this year. We expect to receive an additional $10 million before June and this $100 million of cash has been a part of our financing strategy for our major expansion projects for some time. One other item of note on the financing front is our recently completed $150 million bank term loan that was funded last week. This term loan was completed with members of our existing $200 million credit facility.

That concludes my comments Mel, so I’ll turn things back over to you.

Melvin G. Brekhusthat

I just want to take a few moments to reinforce my earlier comments. At TXI we are clearly looking forward into fiscal year 2009 and beyond. As I said earlier we remain committed to our goal of achieving a combined EBTI margin for the company of greater than 20% in fiscal year 2009. The benefits of the new California plant will drive the lion’s share of that improvement but we also expect to achieve better results in our other operations as well. With the new California capacity quickly coming into place now it won’t be that long before we start the new central Texas cement capacity commissioning. With that expansion and the additional tons to be gained from the increase in production at the north Texas plant we will have increased total cement production by approximately 60% over the next several years. A good part of our confidence comes from understanding that we are focused on very attractive long term markets Texas and California. Further, the Texas region which accounts for 80% of TXI sales continues to show real near term strength especially compared with many other markets in the US. As a matter of fact, the Dallas Morning News reported today in a front page article that the US Census Bureau Statistic show the DFW area enjoyed the biggest population increase in the nation from 2006 to 2007. Furthermore, of the top 10 metro areas for growth during 2007 in the nation DFW is number one, Houston number four, Austin number eight and San Antonio number 10. We have a solid strategic plan in place to profitably grow TXI in the near future and we have 2,700 plus capable employees excited about executing our plans. I thank them for their effort and dedication.

With that, I’ll turn things back to Ken.

Kenneth R. Allen

Vince, we’re ready to move into the Q&A session. I’ll turn things back over to you.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from the line of Kenneth Zener with Merrill Lynch. Please go ahead.

Kenneth Zener – Merrill Lynch

Given the pricing trend that occurred could you – following last quarter I think there was a lot of confusion about product mix and regional mix. Could you talk about what your perspective pricing in California? I saw that you announced a $5 increase but could you also address the kind of product mix as you move more towards the bulk area and how much of your new volume you’ve already established through contracts? Because, I think a lot of people are concerned about price deflation notwithstanding price increases that you’re talking about.

Melvin G. Brekhusthat

The price decrease that you saw year-over-year is a result of us selling more cement in Texas than we sold in California and selling less packaged cements and more bulk cement. That is the reason for the year-over-year difference.

Kenneth Zener – Merrill Lynch

Right. That I understand. I guess when you’re looking at it prospectively though for the new volume, just looking at California how do you think that mix is going to be impacting the pricing in the California markets? So, if pricing was $105 a ton does it look like your new contracts are going to be lower because you’re going to have such a greater mix from bulk?

Melvin G. Brekhusthat

No, no that’s not what’s going to happen. What’s going to happen is as we bring the California production on line and to market the sequential pricing trend will be up. We’ll be selling more cement in California as our mix and we’ll be selling additional product.

Kenneth Zener – Merrill Lynch

Okay. Could you just maybe some of the cost components here with coal for instance, how much you think that is going to be squeezing the cost side?

Melvin G. Brekhusthat

I will but I’ll answer it this way, the cost of energy is going up. The cost of oil is over $100 a barrel, the cost of natural gas is as high right now as $0.10 a million, the cost of coal is likely to go up also over time and that’s why we believe that the pricing initiatives that we have announced in Texas and in California have a good chance for traction because the industry needs to recuperate the cost increases and the effect that that has had on margins.

Kenneth Zener – Merrill Lynch

Certainly. So, when you think about that price increase actually which just keeping you neutral relative to your inflation?

Melvin G. Brekhusthat

That’s not the case with the price increases that we have out today, announced today. What I’m referring to is what I think will happen in the future. The future not being today but over the course of the next year.

Kenneth Zener – Merrill Lynch

Okay.

Melvin G. Brekhusthat

[Inaudible] price increases.

Kenneth Zener – Merrill Lynch

Do you guys have any updated guidance? Or are you guys holding with what you had for obviously the incremental EBTIDA that you guys had presented a few weeks ago at a conference?

Melvin G. Brekhusthat

You’re essentially correct. We are focusing on, as I said in my prepared comments, the future. That’s what’s really important to us is that we execute our strategic plan, our profitable growth plan in cement and that we continue to focus on increasing margins in our other business units, aggregates and consumer products.

Kenneth Zener – Merrill Lynch

Okay. Now, did you guys give May guidance? I clicked over a little late, I apologize.

Melvin G. Brekhusthat

No.

Kenneth Zener – Merrill Lynch

Would you like to?

Melvin G. Brekhusthat

No.

Operator

Our next question is from the line of Nitin Dahiya with Lehman Brothers. Please go ahead.

Nitin Dahiya – Lehman Brothers

I saw the new term loan that you entered into and obviously pretty good pricing there. But, do you see that as a semi permanent kind of financing? Or, as you mentioned on the last call that you would probably still be looking to issue bonds I guess at some point when you can?

Kenneth R. Allen

One of the nice things about the term loan is we certainly have the flexibility to access the high yield credit markets or other markets if they get attractive. It’s just going to be a matter of what looks like the best alternative to step into.

Nitin Dahiya – Lehman Brothers

So Ken from a capital ex point of view this obviously makes it top heavy especially with the cap ex in to 09. Any clarity into how you weigh that versus obviously the lower cost of the term loan?

Kenneth R. Allen

I’m not sure what you mean by top heavy?

Nitin Dahiya – Lehman Brothers

I meant just revolver and term loan would probably become fairly a large part of the structure as you go into 09?

Kenneth R. Allen

Yeah, that depends on how much we draw under the revolver too doesn’t it. What we have in place today is just a very flexible, very efficient capital structure and it gives us a lot of flexibility to accomplish our growth strategy as well.

Nitin Dahiya – Lehman Brothers

Thanks. You mentioned in the press release that pricing on the agg side and also on the concrete side was also reasonably good. Looking ahead especially as you see demand kind of slowing a little how do you see those two holding up?

Melvin G. Brekhusthat

What we expect in aggregates over the next year is high single digit price increases. That’s the trend that we’ve been experiencing and we expect it to continue. We also expect that concrete pricing will go up. It too is effected by the cost of energy particularly diesel, the price of diesel I think year-over-year I think is up somewhere in the neighborhood of $1 a gallon and I’m not sure if this is a rule of thumb that many use but I would suggest that $1 increase a gallon in diesel could be as much as a $1 per cubic yard increase in cost to deliver that product. So, we need to recover that. The industry I’m sure has an eye on this issue and I expect pricing in concrete to go up for that reason as well as other inflationary reasons.

Nitin Dahiya – Lehman Brothers

Lastly, in terms of working capital with the new plant coming on would working capital be growth similar to what it has been in the past? Or, are there any geographic defenses in terms of the terms that you have?

Kenneth R. Allen

There’s no change compared to what we have done in the past.

Operator

Our next question is from the line of Jack Kasprzak with BB&T Capital Markets. Please go ahead.

Analyst for Jack Kasprzak – BB&T Capital Markets

You mentioned the $5 per ton cement increase in California, when is that effective?

Melvin G. Brekhusthat

We had announced that for April but all indications are that due to competitive issues in the marketplace that has been pushed to a June 1st price increase of $5 per ton.

Analyst for Jack Kasprzak – BB&T Capital Markets

Okay. Thank you. In your January call you mentioned that the Hunter plant may do scheduled maintenance, I don’t believe you said anything about that today. Did that in fact take place? And was it around the $2 to $3 million range that you expected?

Kenneth R. Allen

Paul actually just with the timing I think you recall Dick said that we let the plants go down and when the plants go down, we thought they might, the Hunter plant might go down in the February quarter, it did not.

Analyst for Jack Kasprzak – BB&T Capital Markets

I guess lastly your Redi-Mix volumes were very impressive. Was that just an issue of better weather or was something else a factor there?

Melvin G. Brekhusthat

Well, on the short term the factor was primarily that we had good weather and the bad weather that we did have was Redi-Mix weather which happens on the weekend when it doesn’t adversely impact us as much. But, in the long term the real answer is that the predominance of our Redi-Mix business is in north Texas and the growth in the state of Texas that I mentioned earlier with DFW being the number one population growth leader in the nation last year is the reason why we have the demand and why the volume will continue to get even better as we move forward over the next few years.

Operator

Our next question is from the line of Derrick [Schmoist] with Longbow Research. Please go ahead.

Derrick [Schmoist] – Longbow Research

I was just wondering first off if you’d be able to break out the cement volume growth in Texas versus California?

Melvin G. Brekhusthat

No, we don’t do that.

Derrick [Schmoist] – Longbow Research

But, is it safe to assume that your cement performance in Texas was similar to what we saw in the two product aggregates and Redi-Mix?

Richard M. Fowler

What you are asking is did our Texas volumes in cement grow like they did in aggregate and Redi-Mix?

Derrick [Schmoist] – Longbow Research

Exactly.

Richard M. Fowler

And they were certainly up because we had good weather comparisons but I don’t know if I’d say they were as much as some of the other groups but they were up in Texas.

Derrick [Schmoist] – Longbow Research

Could you talk about what you’re seeing in California on the competitive side? If you’re seeing any of your competition shut down capacity due to concerns of oversupply in the market?

Melvin G. Brekhusthat

I’m not aware of any production shutdowns other than routine maintenance shutdowns. I am aware that our competitors have decreased their imports and to date decreasing those imports have maintained a pretty stable market.

Derrick [Schmoist] – Longbow Research

Then just also can you comment on as we sit here a quarter in to the year just your outlook for state spending in both Texas and California and if that’s changed since the last time we spoke at the end of last quarter?

Melvin G. Brekhusthat

I don’t think it has changed. We still have the initiatives in place in California. It will take some time as I stated in several teleconference calls for that money to flow through to construction material projects but it will. And in Texas we continue to have a very strong public works market because in this state we not only use the federal highway funds but we have state highway funds and we have private funds. We’re very innovative in this state and as a result we’ve got construction projects going on across the state in public works. That certainly is one of the reasons why our cement demand for the past 12 months has been at approximately 17 million tons and has not gone down like cement consumption has in the rest of the country.

Derrick [Schmoist] – Longbow Research

Sure. Then just lastly housekeeping, was this third quarter, was this the last quarter you’re capitalizing the interest?

Kenneth R. Allen

No, we’ll continue to capitalize some interest, it’s hard to know exactly the timing but at some point in the fourth quarter we’re likely to stop that it’s a guess but it’s hard to know exactly when.

Richard M. Fowler

That will be on the California project Derrick. We have the project in central Texas that’s going to be underway for about two more years and we will capitalize interest on that project as we’re required to do. But, at this point in time the capital spending on it is pretty modest but it will grow over time.

Operator

Our next question is from the line of Chris Manuel with Keybanc Capital Markets. Please go ahead.

Christopher Manuel – Keybanc Capital Markets

A couple of questions for you, first of all more kind of a housekeeping question to tie up an earlier comment you made but with respect to the present price increases that you’re in the market with today those probably don’t reflect the most recent energy environment that we’ve seen here over the last let’s call it months where oil has gone to $110 and diesels gone up an extra buck and natural gas etcetera. Would you anticipate or do you think that you need to go back to the market to get another price increase in cement in order to still hit your objective of greater than 20% EBIT margin for 2009? Do you think you need more price to get that?

Melvin G. Brekhusthat

No, we don’t. We don’t think we need more price to hit the 20%. What I was referring to is as we go forward if the cost of energy continues to be at the rate it is today or even greater then there will have to be price increases going forward and I’m talking beyond the 2009 fiscal year. There will have to be price increases going forward to preserve those kinds of margins.

Christopher Manuel – Keybanc Capital Markets

Okay that’s helpful. So just to summarize and that was good color Mel is that at present environment where we sit with what’s announced going through you should still be able to do your 20% target next year?

Melvin G. Brekhusthat

I feel confident that we can.

Christopher Manuel – Keybanc Capital Markets

Okay. Next question is in your press release you talked about the timing of the Ore Grande plant for commissioning being in June. Being we’re getting closer to June can you help us maybe fine tune that a bit? Is it more towards the beginning of the month or more towards the end of the month?

Melvin G. Brekhusthat

I don’t think that that kind of fine tuning is necessary. What’s important is that we’re going through the commissioning as we said we would. We’ve commissioned through the raw mill, we’ve commissioned through the pre-heater tower, we’ve commissioned through the kill, we’re commissioning through the cooler and ancillary equipment and we feel comfortable that as we continue this commissioning process and we finish up the finish mill work that has to be done we will be operational by the beginning of the fiscal year.

Christopher Manuel – Keybanc Capital Markets

Okay. Can I ask a separate question but related is that I think you indicated that the drag in the third quarter was about $8 million for the old plant or the inefficiencies I should say, can you give us an approximation of what you think they might be for your fourth fiscal quarter and what might spill over a little into the first fiscal quarter of 09 if any?

Melvin G. Brekhusthat

No, we would have to speculate and we’re not very good at speculating. We’re just going to have to continue the commissioning process and what will happen will happen and we’ll report to you after it happens.

Christopher Manuel – Keybanc Capital Markets

Okay. Last question is last quarter you had indicated to us that, if memory serves, 200,000 of your extra million tons you had presold to market. Where do you stand today with that extra million tons as to what’s presold?

Melvin G. Brekhusthat

Based upon our plan for commissioning and providing the product to the marketplace we’re comfortable that with the anticipated production we have in our plan is we go from commissioning into full operation that we’ll be able to sell the output of the new facility at Ore Grande.

Christopher Manuel – Keybanc Capital Markets

Okay. So, you haven’t completed pre-selling at all but quite frankly, a lot of that comes over a 12 month period so you don’t need to have it all presold.

Melvin G. Brekhusthat

That’s correct.

Christopher Manuel – Keybanc Capital Markets

But, would it be safe to assume that you’re further along today than you were three months ago when we spoke?

Melvin G. Brekhusthat

Yes.

Operator

Our next question is from the line of Andrew O’Connor with Millennium Partners. Please go ahead.

Andrew O’Connor – Millennium Partners

From a seasonal point of view how would you characterize your cement end markets in Texas and California at this point in the calendar year relative to prior years at this time? Would it be better or worse?

Melvin G. Brekhusthat

I’d say seasonally we’re better in Texas and it’s because of the backlog of work that we have. And seasonally, I would say that we’re worse in California because of the decline that we’ve seen in the residential market and spill over into commercial.

Andrew O’Connor – Millennium Partners

Okay. I’m just trying to gage your outlook as we swing in to the warmer months and perhaps more construction activity and how you feel about how this year is shaping up seasonally relative to history.

Melvin G. Brekhusthat

I think that in spite of what I had previously said the seasonality of it is probably very similar year-over-year, it’s just that on the demand side in Texas that curve, that shipping curve is still there like it has been and the shipping curve is the same in California except that it is with less demand.

Operator

Our next question is from the line of Barry Vogel with Barry Vogel & Associates. Please go ahead.

Barry Vogel – Barry Vogel & Associates

I know you talked a little bit about capital expenditures, maintenance cap ex and all that stuff, if you have $75 million in maintenance cap ex this year what would be the balance of spending for the expansion of fiscal 08? And, can you give us your best guess for fiscal 09?

Richard M. Fowler

Barry, the spending on the California project is just about complete. It’s really hard to project what we’re going to spend at Hunter because we’re in the very early stages of the construction phase there. We’re still comfortable that the entire project is going to spend at the rate of about $325 to $350 million but it’s just hard to target what we’re going to spend in the next 60 days. So we’re not – as Mel said earlier it would be a guess and we’re not trying to guess on that but we’re still comfortable that the overall project costs will be what we were talking about there.

Barry Vogel – Barry Vogel & Associates

Well, I had put down after the last call and subsequent conversations that your cap ex this year would be about $315 million. Is that going to be close?

Kenneth R. Allen

Barry, that’s what we said, I think we said in the January teleconference $300 to $325 and as Dick said, it’s hard – if we don’t get there it will be because it sloshes over into the next year. The big thing to think about is that we’re on track with our Hunter expansion.

Barry Vogel – Barry Vogel & Associates

Alright. Then we talked about fiscal 09 again, not knowing precise numbers, you talked about $300 million in fiscal 09. Is that still a number that is going to be close?

Kenneth R. Allen

Barry, the bulk of capital spending in fiscal year 09 will be for Hunter.

Barry Vogel – Barry Vogel & Associates

Right but you will have maintenance cap ex?

Kenneth R. Allen

And we’ll have maintenance cap ex on top of that and whether it gets all the way to $300 or not is a good question and we don’t know what the answer to that is yet.

Barry Vogel – Barry Vogel & Associates

Okay. And D&A Dick for this year and next year?

Richard M. Fowler

I think next year –

Kenneth R. Allen

Barry, we’re running about $55 this year and with Ore Grande added to that –

Richard M. Fowler

It will be about $70 to $75.

Kenneth R. Allen

Yeah.

Barry Vogel – Barry Vogel & Associates

Okay. Talking about this energy thing and we know you’re electric power in Texas I believe is fueled with natural gas and natural gas has all of a sudden woken up from a slumber in the last few months, can you give us a number like all in energy cost per ton for the corporation? Or each of the first three quarters of the year? Do you have numbers like that?

Kenneth R. Allen

Barry, we don’t.

Barry Vogel – Barry Vogel & Associates

Okay. You don’t, okay. And as far as the pre-tax costs on the California situation obviously they’ve gone to a higher level and I would expect and maybe just even generalize here that it probably and again, probably be in the range of $5 to $10 million in the fourth quarter?

Richard M. Fowler

Barry, we’re not going to guess on it.

Barry Vogel – Barry Vogel & Associates

But you’ve been consistent in the first three quarters.

Richard M. Fowler

Barry, Mel said we’re not going to guess on what’s going to happen in the fourth quarter. We’re not going to guess on it.

Barry Vogel – Barry Vogel & Associates

Okay. One other questions, do you have an approximate operating rates for your Texas facility in the third quarter as well as California?

Melvin G. Brekhusthat

No. We don’t divulge those Barry, we never have.

Operator

Our next question is from the line of Todd Vencil With Davenport & Company. Please go ahead.

Todd Vencil – Davenport & Co. of Virginia, Inc.

I’m batting a little bit of cleanup here so I’m just going to circle around a bunch of things other people have asked. Hunter didn’t go down in the February quarter, do you anticipate it’s going to come down in the May quarter? Or, has it comes down?

Melvin G. Brekhusthat

When it tells us it’s time to come down it will come down and we’ll repair it.

Todd Vencil – Davenport & Co. of Virginia, Inc.

Okay. Fair enough. Just in thinking about your plans in California and I’m just trying to think of not pinning you down to any kind of date or anything but just thinking about how the handoff is actually expected to work, does it become a point where maybe you shut down the old plant ahead of the new plant being up? Or, are you going to be running the two plants at the same time at some point? How should we think about that?

Melvin G. Brekhusthat

As we go through the commissioning we will idle the old plant as quickly as we can. In fact, we’re in the process of doing that. But, once again, this is a process that takes time and we’re going through that process and the objective of course is to idle the old plant as quickly as possible.

Todd Vencil – Davenport & Co. of Virginia, Inc.

And you’ve got seven kills there right? Am I right?

Melvin G. Brekhusthat

Yes.

Todd Vencil – Davenport & Co. of Virginia, Inc.

So you can just – I assume you’re kind of walking through and kind of talking one kill down at a time?

Melvin G. Brekhusthat

That’s a good assumption.

Todd Vencil – Davenport & Co. of Virginia, Inc.

Fair enough. You’ve said consistently since the last quarter and today and in your press release and I appreciate it that you think the pricing trends for your average cement price is going to be up as well of course as any given location given the price increases but that your average cement price is going to trend up and I wanted to maybe see if you’re feeling like that’s going to occur in the May quarter? Or, what you may expect specifically in the average price in the May quarter and if that maybe comes in August or thereafter?

Melvin G. Brekhusthat

The point is not when it comes but that it will come and the trending will start soon. You know when our price increases are.

Todd Vencil – Davenport & Co. of Virginia, Inc.

Indeed.

Melvin G. Brekhusthat

So you can do the math. We expect the price increase in Texas April 1st and June 1st in California and you can plug that in.

Todd Vencil – Davenport & Co. of Virginia, Inc.

Okay. And of course, the other part of the plug on that was when would you begin to get the incremental tons in California and I understand that you’re going to be fully up and running in June. Again, just thinking about the mechanics on this never having started up a cement plant myself, or at least its been a while. Do you start to see production out of that before you’re sort of running at rate? Or, is it not work like that?

Melvin G. Brekhusthat

No, it works like that but it is actually a process that since you haven’t done it for a while you’ve probably forgotten this, I’ll remind you it’s not something that is terribly predictable.

Todd Vencil – Davenport & Co. of Virginia, Inc.

Right.

Melvin G. Brekhusthat

You have to go through the commissioning process which we’re comfortable we’re going to get there by the beginning of next fiscal year but how we get there remains to be seen but we’ll report to you later about that.

Todd Vencil – Davenport & Co. of Virginia, Inc.

Beautiful. Thinking about the two markets Texas and California, do you have a feeling at this point for what – and given that you said both of those markets are kind of in balance supply and demand wise and in California that’s due to taking some of the imports down, some of your competitive imports down. Do you a feel for what the level in terms of an annual run rate of tons, the level in importing in each of those markets is right now?

Melvin G. Brekhusthat

I don’t know what the level of importing is. I will tell you that the demand in Texas is something that we measure with an excise tax that occurs in Texas and demand is at about 17 million tons as we look at it today in Texas and that is very similar to what it was last year so it’s flat. The demand in California has gone down, we don’t have an excise tax in California so we don’t know what that is but we do know that it’s gone down considerably and of course, you’ve read about what’s happen in that marketplace so it’s not a surprise.

Todd Vencil – Davenport & Co. of Virginia, Inc.

Right.

Melvin G. Brekhusthat

Back to your original question on the imports, the imports have been backed off in California to the extent that the market is stable. The imports in Texas have been backed off but obviously haven’t been backed off to the extent that they have been in California but I don’t the exact number on that. We’re not an importer.

Todd Vencil – Davenport & Co. of Virginia, Inc.

Sure. No, understood. Okay. Then again, just sort of cleaning up some stuff and this just kind of occurred to me today, when you talk about your guidance of getting greater than 20% EBIT margin for next year are you thinking about that in terms of your net sales? Or, your sales including freight?

Kenneth R. Allen

It would be on our net sales that we report on our financial statements [inaudible] freight.

Todd Vencil – Davenport & Co. of Virginia, Inc.

I’m sorry, you do include freight?

Kenneth R. Allen

We do include freight.

Todd Vencil – Davenport & Co. of Virginia, Inc.

So I think the way that you report it and maybe this is just my model so let me look at it, I’m not picking nets but it’s an important net in terms of understanding what you’re doing. I’m looking at net sales plus delivery equals total revenues?

Kenneth R. Allen

Yes.

Todd Vencil – Davenport & Co. of Virginia, Inc.

So we’re thinking on what I just called there total revenues?

Kenneth R. Allen

Yes.

Operator

(Operator Instructions) Our next question is from the line of Brett Levy with Jefferies & Company. Please go ahead.

Brett Levy – Jefferies & Company

My questions have been answered.

Operator

Our next question is a follow up from the line of Todd Vencil with Davenport & Company. Please go ahead.

Todd Vencil – Davenport & Co. of Virginia, Inc.

Just again circling back around to clean some stuff up, you mentioned that some of the benefit or some of the improvement in the aggregate business was from weather and others were from production efficiencies would you guys care to try and split that and tell us how much came from the efficiencies that you gained?

Melvin G. Brekhusthat

No, we’d rather not do that Todd.

Todd Vencil – Davenport & Co. of Virginia, Inc.

Fair enough. Thinking about without pinning you down on the timing of when you stop and when you start capitalizing interest, do you have a feel for say fiscal 09 how much interest you expect to see run through the income statement?

Richard M. Fowler

In fiscal 09 Todd I wouldn’t expect that there would be much, if any, interest that will be capitalized on the California project and so then it will be the average investment that we have in the central Texas expansion project and as you heard us say earlier we haven’t at this point in time developed a number that we’re comfortable saying what the capital spending will be for FY 09 for that project. But, it will be substantially less than the investments we’ve had cumulatively on the two projects. But, I can’t even guess at it right now.

Todd Vencil – Davenport & Co. of Virginia, Inc.

Okay. It sounds like that answer adds up to some, right?

Richard M. Fowler

Yes. It will be some but definitely not all.

Todd Vencil – Davenport & Co. of Virginia, Inc.

Then the final question for me, where there’s been a benefit the past couple of quarters in Texas, as I recall the May quarter last year was pretty wet down there. How’s the quarter started to date for you guys?

Melvin G. Brekhusthat

Weather has been all over the board just like it usually is in this period of time in Texas. So I would say that because Texas has such swings in weather I would say that the weather is average.

Operator

Thank you. There are no further questions at this time. I’d like to turn it back to management for any closing remarks.

Kenneth R. Allen

Thanks. Our next teleconference will be in July. We look forward to you joining us then. Have a good spring.

Operator

Thank you. Ladies and gentlemen this concludes the TXI third quarter 2008 results conference call. If you’d like to hear a replay of today’s conference please dial 800-405-2236 or 303-590-3000 using the access code of 11110158 followed by the pound key. AT&T would like to thank you for your participation. You may now disconnect.

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