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Executives

Kenneth R. Allen – Vice President & Treasurer

Melvin G. Brekhus – President & Chief Executive Officer

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

Analysts

David McGregor – Longbow Research

Trey Grooms – Stephens Inc.

Jack Kasprzak – BB&T Capital Markets

Nitin Dahiya – Lehman Brothers

Todd Vencil – Davenport & Co.

Christopher Manuel – KeyBanc Capital Markets

Glenn Wortman – Sidoti & Company

Barry Vogel – Barry Vogel & Associates

Brad Lundy – Ivory Capital

Texas Industries, Inc. (TXI) F4Q08 Earnings Call July 10, 2008 2:00 PM ET

Operator

Welcome to the TXI fourth quarter and year-end results conference call. (Operator Instructions) I would now like to turn the conference over to Ken Allen, Treasurer of Texas Industries.

Kenneth R. Allen

Welcome to TXI’s fourth quarter and year-end teleconference. With us today Mel Brekhus, the Chief Executive Officer of TXI, and also Dick Fowler, the Chief Financial Officer. We will follow a similar format as in previous teleconferences. Mel and Dick will first provide comments and then we will follow with a Q&A session.

But, before we begin, let me 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, regulations, and claims and risks and uncertainties described more fully in the company’s reports on SEC Forms 10-Q, 10-K and 8-K.

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

Melvin G. Brekhus

We are pleased to report that our new California plant is up and running. We now have state-of-the-art cement production at all three of our plants. As you have by now read in the earnings press release, the old plant was clearly on its last legs and is, in fact, no longer operating.

The new plant is online and has shown its ability to operate very efficiently. In fact, we have run the plant for extended periods of time and at rated levels of capacity. We now employ about 35% fewer people at the plant. Efficiency improvements in fuel and electricity consumption have been of a similar magnitude.

Employees at the plant can now focus and expend energy in the positive direction of running a world-class plant rather than keeping the old plant cobbled together. While the plant has shown its ability to operate, we did decide to have some work done on it in June in order to correct design issues regarding the clinker cooler as well as other modifications in the clinker production line.

It is extremely important to have this new plant online at this time of rising energy costs because its high efficiency places us in a much better position to compete in this environment of higher energy costs.

With regard to overall demand in California, construction activity has continued to decline, led by the fall in residential construction. Today cement consumption is near capacity in the state. You will recall that we have said many times that we expect the new plant to have an incremental EBIT benefit of about $60 million annually if market conditions remain stable.

That benefit assumed that we would be able to sell roughly the full capacity of the plant at EBIT margins of around 30%. With the softer market in California, today’s increased energy costs, and the chance of lower cement prices and production, we believe it will take us longer to reach the EBIT benefit than we originally planned.

But that focus is only on the short term. We believe California will once again become the number one cement-consuming state in the nation, and TXI is well positioned to take advantage of that very attractive market.

In Texas, cement consumption has remained at high levels even though residential building has slowed. Consumption remains above capacity in the state. Imports continue to make up the difference between demand and supply and the cost of bringing imported cement in continues to remain high.

Cement price increases announced for April of $10 per ton have partially held. Prices are up on average about $4 per ton. Recall that it takes two to three quarters for price increases to be fully realized. To offset increased electricity and fuel costs, we have announced additional price increases of $5 per ton, effective July 1, 2008, in South and Central Texas and another $5 per ton effective October 1, 2008.

You have read that we sold our South Louisiana sand and gravel operations in May. These five plants shipped approximately 3 million tons in fiscal year 2008. Our efforts to improve financial results in the Aggregate side of the business over the last two years by replenishing the capital base of the segment bore through in fiscal year 2008 as well.

Operating profit in the segment increased by $10 million compared to a year ago, excluding the one-time gains that occurred in fiscal year 2008. Our capital replenishment program has largely been completed. That program, along with the sale of the South Louisiana operations, reflects our focus of strategically improving the segment’s competitive position. Depending on the market, we expect Aggregate’s average prices to continue to improve at a mid- to high-single digit annual rate.

Energy surcharges have also been announced for our Aggregate operations for September 1, 2008. Other competitors have done the same recently, in order to recoup the rise in energy costs. Our ready-mix concrete operation showed improvement during the year, despite the impact of higher diesel costs. The yards per man hour in fiscal 2008 improved by 5% over fiscal year 2007 and yards per truck improved by 10%. Overall Consumer Product segment profitability increased by $2 million.

The bottom line is that TXI strategy remains solid. The Texas market remains attractive today and will remain attractive over the long term. We have state-of-the-art equipment at Midlothian and are well underway with the expansion of our cement plant in Central Texas.

I have been in the cement, aggregate, and concrete business for 36 years and the California market has been number one or number two in market demand during most of my career. We now have the first important steps of our Cement growth plans in California. While it is experiencing some softness today, its future is very bright long term and we are in business with a long-term perspective.

With that, I will turn it over to Dick for his comments.

Richard M. Fowler

Our earnings release earlier today went into a lot of detail about the fourth quarter and the year with regard to the main drivers of changes in comparative earnings. Since we have provided that level of detail in the press release, my comments today will focus on items in the upcoming year that you might want to consider.

First, with the addition of the new plant in California, TXI’s annual depreciation expense will be approximately $70 million in fiscal year 2009 and that compares to 2008’s depreciation of $55.6 million.

Second, GAAP interest expense in fiscal year 2008 was $2.5 million, while our total cash interest expense was about $29.5 million. Capitalized interest for the cement plant expansions in California and Central Texas was approximately $27 million. This capitalized interest reduced the $29.5 million cash interest down to the reported GAAP interest expense of $2.5 million.

In fiscal year 2009 there will be no capitalized interest for the California plant, since it is completed. But the Central Texas plant, since it’s still under construction, will have capitalized interest in the range of $15 million to $20 million. For FY2009 capital expenditures of the Central Texas cement plant expansion will run between $200 million to $250 million. Other capital expenditures for maintenance or sustaining assets should be less than $50 million for FY2009.

The Central Texas cement plants planned outage has already taken place in this August quarter and the impact should be similar to the outage taken in last year’s first quarter, or about $3 million to $4 million.

You have already heard Mel discuss the California plant being taken offline early in this quarter, in June, to repair the clinker cooler system. In North Texas we expect the scheduled outage of our fifth kiln there to be taken in the second quarter, in a similar fashion to the planned outage that occurred in the second quarter of last year, and that outage had an impact of about $12 million in the November quarter of 2008.

Mel has mentioned the impact of energy costs on all of our businesses already, but we thought it might be helpful to provide a few rules of thumb in estimating how changes in energy costs financially impact our operations.

We have deregulated electricity markets in both Texas and California and in both states the incremental power is generally produced using a gas-fired power plant. As a result, our electricity costs are by and large determined by movements in the price of natural gas. We previously said that for every dollar of movement per million cubic feet in the price of natural gas that TXI’s cement production cost changed about $1.50 per ton. But today, with the new plant online in California, that number should be more like $1.20-$1.30 per ton.

And today, electricity costs per kWh are up approximately 50% compared to the price last summer. This has a direct impact on our Cement operations in Texas, but in California electricity costs are up by the same amount, the same percentage amount, but remember, we’re now using about one third less electricity to make a ton of cement than we did with the old plant. And this just brings home what Mel was saying earlier about the importance of having the new plant in place and operational.

With regard to coal, our costs are fairly fixed for now with the exception that movements in the price of rail transportation do impact the delivered price of coal. Our coal costs are up about 5% compared to a year ago because we are still buying coal under an existing contract. The contracts relating to our two Texas plants expires at the end of calendar year 2008, while the contract on our California plant expires at the end of TXI’s fiscal year, May 2009.

With the recent dramatic spike in coal prices, the new coal contract for our Texas facilities will likely raise the price of coal by about 40% and this will impact costs in the last five months of the fiscal year for the two Texas cement plants.

In our aggregate and ready-mix operations, the cost of diesel fuel has risen dramatically during the last few months. In aggregates, every dollar per gallon movement in the cost of diesel fuel translates into about $0.20 per ton movement in our production costs. For ready-mix, if diesel cost moves $1.00 per gallon our production cost increases about $1.00 per cubic yard. TXI’s cost of diesel is up about $1.25 per gallon compared to the cost last summer. We hope these rules of thumb are useful in estimating the impact of changing energy costs.

And finally, as Mel mentioned in his comments, TXI has price increase announcements in place for $5 per ton in Texas effective the first of July and another $5 per ton effective October 1. But remember what Mel said about the timing to realize all of a price increase: that it takes about two or three quarters to fully realize a cement price increase as we work through the backlog of work at previous price levels.

With that, I will turn things back to Mel.

Melvin G. Brekhus

As many, if not most, of you know this will be the last teleconference that Dick will participate in on behalf of Texas Industries. Dick made a decision that most, if not all, of you are aware of, to retire and therefore, this will be his last teleconference call.

I would like to take this opportunity, and therefore will, to thank Dick for the many years of dedication and commitment to Texas Industries that have benefited Texas Industries and our shareholders and wish you and your family the best as you embark on the next segment in your life.

Thanks again, Dick. And with that I will turn it over to Ken.

Kenneth R. Allen

Let’s move on into the Q&A piece.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from David McGregor - Longbow Research.

David McGregor – Longbow Research

The new Oro Grande plant, you mentioned that you are running a little behind the $60 million EBIT target. What is the current run rate?

Kenneth R. Allen

With energy being so volatile and the market being weaker out in California, it is difficult to try to estimate a run rate for profitability in a short run here. What we do know is over time, as Mel said, as California begins to recover and margins begin to get back to normalized levels, we would expect to approach that $60 million number again. But it’s hard to put a time frame on at this point.

Melvin G. Brekhus

David, it’s extremely important that everyone understands that the key is that we have the equipment in place now that makes us the efficient operator and puts us in a position where we can capitalize on those efficiencies and get to the incremental EBIT when market conditions allow.

David McGregor – Longbow Research

I’m just trying to get a sense of are we closer to $30 million, is it $50 million? Can you at least give us some sense of order magnitude or at least address the, you talked so much in your communications with the investment community about the $60 million EBIT, $75 million EBITDA. Now you’re saying you are shy of that. I think a little update would be helpful.

Melvin G. Brekhus

We are going to get there, David. It’s a matter of time.

David McGregor – Longbow Research

Can you give us a sense of when you expect that might occur? Obviously that’s a harder question to answer. I thought I was making it easier for you.

Melvin G. Brekhus

You’re not making it easier because what we said was that when market conditions would allow us, we would get to that level. The equipment has the capacity to give us the efficiencies that will get us there. All we have to do is have market conditions that allow us to get there. And we aren’t going to be able to, and won’t, to forecast that in these volatile times.

David McGregor – Longbow Research

So under these current market conditions, what would that represent?

Kenneth R. Allen

David, it’s difficult with energy bouncing around and this softness in California to really know how to judge that over the next year.

David McGregor – Longbow Research

I’m not asking you to analyze it on a basis of what’s bouncing around; just based on where numbers are today what would it represent?

Melvin G. Brekhus

We’ve given you the best answer we can give you, David.

David McGregor – Longbow Research

What’s the update on terms of percentage of cost? I appreciate the sensitivity analysis, but where is coal as a percentage of cost today?

Melvin G. Brekhus

Dick said earlier in his comments, year-over-year for us coal is only up about 5%.

David McGregor – Longbow Research

The new Oro Grande plant, where are your production levels now?

Melvin G. Brekhus

The important thing is that we’ve been running at capacity for extended periods of time so we can run at the rated capacity that we said would get us to an annualized rate of around 2.2 million.

David McGregor – Longbow Research

And you are running at a 2.2 million rate now?

Melvin G. Brekhus

We’re running the plant at a capacity level that would get us there. It’s a run rate. Just as we did when we started up Midlothian. We get it up to the run rate, but in the first year, your run rate during the year doesn’t kin to be what it will be the next year when you’ve hammered out all the kinks in the equipment.

David McGregor – Longbow Research

What percentage of that new Oro Grande tonnage is being sold locally versus being shipped into Eastern markets or Northern markets?

Melvin G. Brekhus

David, I don’t have the exact number here but the vast majority of that is in the Southern California market with very little of it going East or North.

David McGregor – Longbow Research

Can you give me some sense of what’s happening with respect to import pricing in California and how that would compare with the pricing of your product today?

Melvin G. Brekhus

The question you asked was about import pricing and what has happened, for all practical purposes, imports have ceased to come into California because the cost of the cement, as well as the shipping costs, are approaching, if not exceeding, local market pricing.

David McGregor – Longbow Research

Are you concerned at all about a downturn in cement pricing in California at this point?

Melvin G. Brekhus

It gets back to why we wouldn’t give you the information you wanted regarding EBIT. We don’t know what’s going to happen with the market. We do know, what we said, that residential decline precipitated commercial decline. Public works has not kicked in yet and so the demand has declined as much as 20% more than domestic capacity to pretty close to capacity. The question remains, are we at the bottom?

Operator

Your next question comes from Trey Grooms - Stephens Inc.

Trey Grooms – Stephens Inc.

On the price increases, the one for July, what are you hearing as far as traction on that price increase in Texas, thus far?

Melvin G. Brekhus

Trey, I will remind you that that’s a $5 price increase in South and Central Texas, and the traction is very good on that.

Trey Grooms – Stephens Inc.

As far as California, I know it’s difficult out there, but last quarter you had mentioned that there was an April price increase announced for California that was pushed back to June. There was no mention of it and I assume that got pushed back as well. But, are there any plans for you to try to increase price in that market at all, for the rest of the year?

Melvin G. Brekhus

Yes, we will look at that, Trey, and we will try to increase the price, primarily because of what we talked about, and that’s the increases in fuel and electrical costs. But right now there are no price announcements in California and in the short term I don’t think there will be, but I think in the longer term we’re all being impacted by the higher energy costs and we will see some price announcements coming out.

Trey Grooms – Stephens Inc.

Sticking with California for a minute, you mentioned that demand is at capacity roughly. Is that after the recent capacity increases, including your own, or is that before?

Melvin G. Brekhus

No, that’s after, Trey, and I would point out that while I have said, and resaid, recently in this teleconference, that demand is near capacity. I would like to point out that the May results are out from the Portland Cement Association and those indicate that in May year-over-year demand in California increased by 5%. That’s the first time we’ve seen a year-over-year increase in a long time. But, one month does not develop a trend.

Trey Grooms – Stephens Inc.

Lastly, you touched on your EBITDA guidance, or expectations and EBIT guidance, for the Oro Grande plant and what’s happening there. But, also, on your guidance for your EBIT margin expectations for fiscal 2009, you didn’t touch on that one. Could you give us a little bit of color on that and your expectations there?

Richard M. Fowler

Trey, we had previously set a goal for something over 20% in terms of EBIT margins and with what’s happened, particularly in energy price spikes and softness out in California, we haven’t changed our goal at all. When you look at overall margins in EBIT for cement businesses and for aggregate businesses and ready-mix businesses and you put them together, our long-term, not even our long-term, just our goal if reaching an EBIT margin of something greater than 20% still fits. But with energy spiking and with the softness out in California, we think it’s going to take us a little longer to get there.

Trey Grooms – Stephens Inc.

Again, back to David’s question on Oro Grande, I don’t want to beat it to death, but where we stand today if you’re looking out, if it’s not FY2009 now, do you think it’s a possibility for the next year? And some of that is going to hinge on pricing ability, but do you have any feel for giving an update on timing?

Richard M. Fowler

Really, it’s difficult because of what’s happened primarily with energy. If we have a sense of energy stabilizing or coming down, and you’re right with traction on prices, and basically getting a sense of where margins are going to fall out and stabilize, we will have a little better idea, but right now it’s too early to know.

Operator

Your next question comes from Jack Kasprzak - BB&T Capital Markets.

Jack Kasprzak – BB&T Capital Markets

Just on that subject of the $60 million of EBIT, the goal for Oro Grande, would you say it’s more of a demand issue, that demand has fallen off recently, not allowing you to get to a sold-out run rate for the plant for the full year, or is more this recent spike in energy costs that’s caused a push-out in attaining that goal?

Kenneth R. Allen

Really, it’s going to be a combination of both. That’s a good point.

Melvin G. Brekhus

Jack, I want to point out that the equipment that we have in place is running at the efficiency levels that we wanted it to run at, regarding electrical consumption, regarding fuel usage, regarding capacity rates for the kiln and for the finish mill. So we’re in a position, when the market conditions are right, and we have reasonable costs or our prices are able to overcome aberrations in cost, we’re going to reach the EBIT margin that we talked about.

And the important thing is, over time, we are going to get there. We are going to get to where our cement plants have an EBIT margin of 30% or greater. We are going to get to where our aggregates are in the mid-20s, we are going to get to where our concrete is in the high single digits of EBIT margins. And when we do, then we’re going to get the 20%+ EBIT margins. That is still our goal; we’re not changing our goal. We are just looking at a temporary situation that compresses that number.

Jack Kasprzak – BB&T Capital Markets

And on the subject of, you gave us those sensitivities on energy, thank you for that, that’s very helpful. But just in terms of coal, specifically, for trying to get a basis for thinking about the potential impact there, would a coal cost per ton of, say, $8 or $9 be a decent guess, would you think?

Kenneth R. Allen

That’s going to be in the ballpark, with coal being about 20% of the cost of production, per unit.

Jack Kasprzak – BB&T Capital Markets

Switching gears a bit, I wanted to ask about this Brazilian outfit that filed early clearance under Hart-Scott-Rodino to take an investment in Texas Industries. But I haven’t seen anything recently with regard to what it was and order of magnitude. Did I miss a filing, or can you give us any update on that situation?

Melvin G. Brekhus

Jack, as a matter of policy we don’t talk about things like that. Everything that is public about that filing, you can get because it is public.

Richard M. Fowler

But, Jack, there has not been a public filing for 13-D.

Jack Kasprzak – BB&T Capital Markets

So I didn’t miss anything.

Richard M. Fowler

No.

Jack Kasprzak – BB&T Capital Markets

That’s all we can say?

Richard M. Fowler

Yes.

Operator

Your next question comes from Nitin Dahiya - Lehman Brothers.

Nitin Dahiya – Lehman Brothers

On the California increase, did you say that the June increase also got deferred?

Kenneth R. Allen

The California price increase for June did not take. But you did hear Mel say that we expected to try to move prices up in California at some point.

Nitin Dahiya – Lehman Brothers

When you look at the Texas increase, and you said some of it stuck, and obviously it still needs to see how much of it is finally going to stick, and then when you look at the incremental increases that you’ve announced, let’s say I’m standing on the first of January and looking ahead, would all these increases taken together be enough to fully offset your import cost increases?

Kenneth R. Allen

In Texas it will come awfully close. In California, of course, we haven’t said there were price increases that are announced. But in Texas it would come awfully close.

Nitin Dahiya – Lehman Brothers

If they all stick.

Kenneth R. Allen

Yes.

Nitin Dahiya – Lehman Brothers

It’s not that you have built in a 50% margin that only one of the two sticks. You probably would want both of them to stick for the margin to even out?

Kenneth R. Allen

Yes. Our goal and our intent is to get both of those price increases.

Nitin Dahiya – Lehman Brothers

On the CapEx capitalization, next year total CapEx is going to be close to $300 million, $250 million to $300 million.

Kenneth R. Allen

Those were the numbers that Dick’s comments would triangulate to; you’re right.

Nitin Dahiya – Lehman Brothers

But when I look at the capitalization, you almost will need two days of additional debt during the year to just finance that. And also, the second part is that if you issue notes, my understanding of the credit agreement is that you need to pay down the term loan that you have taken. Is that correct?

Kenneth R. Allen

That’s correct.

Nitin Dahiya – Lehman Brothers

So I would think you probably need the 150 of that, at least another 100, at least a $250 million to $300 million debt issuance, in one form or the other, during the year. Do those numbers make sense?

Kenneth R. Allen

Yes, Nitin, you’ve done some good homework there. I tell you, you’re right, we probably at some point in the next part of the fiscal year need to acquire some external capital. At this point we’re really not able to say how much that would be because we haven’t made a public comment on that. But I do think you’ve done some good homework there.

Operator

Your next question comes from Todd Vencil - Davenport & Co.

Todd Vencil – Davenport & Co.

On the old California plant, are we going to see any drag from that in the first quarter, do you think?

Melvin G. Brekhus

No, Todd, we shut that down somewhere in the fourth quarter and haven’t operated it since, and won’t.

Todd Vencil – Davenport & Co.

On that $4 increase you said you got in Texas, do you feel like you phased it part of the way in and you are going to get a bit more or did you get $4 out of the $10 across Texas and that’s all you’re going to get, or did you maybe get $10 in South and Central Texas and $0 in North Texas? How should I think about that?

Melvin G. Brekhus

You’ve got every part of that right, Todd. I think the best way for you to look at it is that the $10 price increase, the traction we got was $4. But look at the $5 and the $5 going forward as something that we have a lot of confidence in. The July $5 already has the traction; we’re pretty certain that October will, also. But remember, again, that the total, when you add them all up, is going to take two to three quarters to get there.

Todd Vencil – Davenport & Co.

So what about aggregates and concrete? Any price increases in the outlook there?

Melvin G. Brekhus

Yes, as I mentioned in my prepared remarks, we are looking at high single digit increases in aggregates over this next fiscal year and we are trying to increase concrete prices. And while we’ve had very little traction, we’ve had some in that arena. I think we’re going to see more effort in the near-term because of the high cost of diesel. All ready-mix producers are suffering because of the high cost of diesel, all in the same boat, and I think we’re going to try to recover those costs, and I think we will be more successful than we have been in the past.

Todd Vencil – Davenport & Co.

A theoretical question, not asking you to predict what is going to happen in the market, but predict how you might respond to it. In California you seem to be leaving the door open to saying consumption might end up being below capacity, you don’t really know, you’re talking about relative weakness in prices. Given that you just brought on a new plant, faced with a shortfall in demand versus volume in the market, can you talk about how you would think about how you would respond vis-à-vis maybe taking some shut downs versus cutting your prices?

Melvin G. Brekhus

What we would do, Todd, is first of all we would run as efficiently as we possibly can with our equipment, based upon the market demand. And if the demand went to a point where domestic capacity was greater than domestic demand, then we would adjust our production to meet that while maintaining our market share.

Todd Vencil – Davenport & Co.

When I back out the extraordinary gains in the quarter and then back into what I think the implied EPS would be in the quarter, I’m getting a tax rate in the mid-20%s. Am I thinking about that right?

Richard M. Fowler

We will file our 10-K tomorrow morning and in there you will see that our tax rate for the year is I believe right around 30%. You have to look at the whole year. A 30% tax rate is not out of the ordinary for us. It’s somewhere in the 30% to 31% range on a normal basis, with the manufacturing credits that you get and the percentage depletion.

Todd Vencil – Davenport & Co.

Put another way, if I look at the extraordinary gains that you list in the detail that you provide on the website, and I think about that in terms of the $12 million after-tax number you talk about in the press release, I’m getting to a number that is a few percentage points above your typical, as you say, 30% to 31% run rate.

Richard M. Fowler

Typically when you give a number, tax affected, you use 35% as the tax rate because that is your incremental tax rate. And so that is what you would do. On your next dollar of income, you’re going to tax it at 35%.

Operator

Your next question comes from Christopher Manuel - KeyBanc Capital Markets.

Christopher Manuel – KeyBanc Capital Markets

Typically when you talk about supply and demand out in California, you typically like to encompass the whole Nevada, Arizona, etc. region. If you were to look at it that way, maybe provide a little more color on how you feel that supply/demand balance would shake out.

Kenneth R. Allen

There is still likely a gap between demand and capacity in the other two states. And so that is a positive. What Mel is trying to communicate, though, is we have seen a continued decline in demand in California and demand and capacity are getting nearer one another.

Christopher Manuel – KeyBanc Capital Markets

And I think it’s a safe assumption to say that those other regions are also declining as well, but when I think of the whole region, it’s still a modest million ton or so gap. Would that be fair?

Melvin G. Brekhus

That would be fair.

Christopher Manuel – KeyBanc Capital Markets

Can you provide some more color as well, when you think out in California of the types of cement, wet versus dry, as to what that capacity in California, what that would like?

Melvin G. Brekhus

Chris, there is no wet capacity clinker production in California, or for that matter, in the California region. There is no wet capacity.

Christopher Manuel – KeyBanc Capital Markets

When you think about further prices increases out there for where your coal falls off, I think you said the end of the calendar year.

Kenneth R. Allen

Chris, end of the fiscal year out in California, about a year from now.

Christopher Manuel – KeyBanc Capital Markets

With the price increases you put in place today down in Texas, you talked about how you feel that will offset where you’re sitting today with energy. Do you anticipate that it becomes more challenging to put further price increases through if demand, if that same gap that’s closed in California begins to close in Texas, as well?

Melvin G. Brekhus

Chris, I think that if you have local demand that exceeds local capacity, you’re not going to have as much pressure on pricing as you would have if local demand is less than local capacity. That is historically what’s happened in the cement business. But in Texas, you might note from data that I’m sure you have, we haven’t experienced the decline that the rest of the country has. And we still have a lot of room between demand and domestic capacity, even with us doing what we’re doing at Hunter and Simex doing what they’re doing at San Marcos. And long term, in Texas, I feel very comfortable that we will continue to be an import state.

Christopher Manuel – KeyBanc Capital Markets

What I’m struggling with, Mel, is that with supply/demand balance being so favorable for a producer, there seems to be some challenge pushing some of the price increases through that have already been, the $10 that was asked, only $4 or so went through, and I’m trying to understand what’s behind some of that challenge with such a favorable balance.

Melvin G. Brekhus

So are we. Because you are being very logical, and sometimes the competitive landscape is not so logical. But one of the reasons is that we do have significant imports into Houston and import parity has some effect on pricing and getting pricing and getting the traction on pricing. And that’s one of the reasons that we have as much confidence as we have today, that the import cost into Houston is only escalating and that’s going to bode well for these price increases that we previously talked about.

Christopher Manuel – KeyBanc Capital Markets

So when I think about North Texas, I think that the price increases you had announced were for South and Central, so if I think about North Texas where imports are less of a factor, what is the pricing dynamic like there? Do you have further increases announced or pending? You don’t pretend that there would be additional support for a price increase in North Texas.

Melvin G. Brekhus

We don’t have anything announced, Chris, but the foundation is there that will support activities as we go forward to seek price increases. We just don’t have anything announced at this time. And, I would remind you that there was a time when North Texas pricing was that which held and got the traction and South Texas didn’t. So some of this is South Texas catching up.

Operator

Your next question comes from Glenn Wortman - Sidoti & Company.

Glenn Wortman – Sidoti & Company

When did you start shipping the new production from the California plant?

Melvin G. Brekhus

When we started producing, in March-April.

Glenn Wortman – Sidoti & Company

Also, just as a percentage of sales, the fourth quarter SG&A was around 12%, which was extremely high compared to past historical comparisons. Do you expect that to continue? What can we think about as far as a percentage?

Kenneth R. Allen

The big reason it was so high was because we had quite a movement in the stock price in the fourth quarter. And recall that we’ve got a little over 250,000 shares of stock that we mark to market. If you took that out, or just think longer term, and take that piece of the SG&A out, because that’s not a cash piece, our SG&A tends to run about 9% of sales over a period of time. Good questions.

Glenn Wortman – Sidoti & Company

I know we’ve talked about pricing on aggregates and ready-mix, but what do you foresee in volume for both of those segments?

Kenneth R. Allen

Glenn, was your question what do you see in terms of volume in aggregate and ready-mix going forward?

Glenn Wortman – Sidoti & Company

Yes.

Kenneth R. Allen

Our aggregate and ready-mix operations are focused in the Texas region. And the Texas region continues to be pretty solid. And they will tend to follow construction activity there.

Glenn Wortman – Sidoti & Company

I think I’ve heard before that ready-mix is more heavily weighted to the residential sector in Texas.

Kenneth R. Allen

Compared to cement, ready-mix is more weighted towards residential, that’s true. But we’ve already gone through something of a downturn in residential construction and our operations tend to be a little more focused in non-residential, as well.

Glenn Wortman – Sidoti & Company

So just on the Midlothian upgrade, I know you are in the midst of adding 500,000 tons to your capacity. How far along are you in that process?

Melvin G. Brekhus

We’re well over 150,000 tons along in that process and we have had several planned outages that will get us to that figure in the next couple of years.

Kenneth R. Allen

We’re a couple or three years away there, Glenn.

Glenn Wortman – Sidoti & Company

I know you alluded to that in May the volume in cement was up in California about 5% year-over-year. And not to make too much out of one month, but would you attribute that, if you had to make a guess, just to public works starting to kick in?

Melvin G. Brekhus

No, in California I would attribute it to all segments of the construction market because there isn’t anything that stands out. Which is a good thing; I’m glad that it’s across all phases.

Operator

Your next question comes from Barry Vogel - Barry Vogel & Associates.

Barry Vogel – Barry Vogel & Associates

I just want to quantify the California hit, which was in your press release, on page 1 at $33.6 million, and I’m assuming that’s mutually exclusive of the famous $60 million EBIT benefit. Am I correct?

Kenneth R. Allen

Barry, if you’re asking if we would just expect to improve from that or would we expect to improve from results, say in fiscal year 2007, in California, the answer is a lot closer to improving from fiscal year 2007 results than improving from fiscal year 2008 results. It’s just going to be a matter of time and how long it takes us to get there. That $60 million number really triangulates to earning something like 30% EBIT margins in cement, match what goods, cement capacity, as [inaudible] over time and will again, at least.

Barry Vogel – Barry Vogel & Associates

What I’m trying to do is simplify. In other words, if we pro forma the $33.6 million and we added back to whatever your profits were in cement last year, that changes the base going forward and if conditions were more favorable we would then add $60 million in theory to EBIT, is that correct?

Kenneth R. Allen

If I understand you correctly, that’s true. We don’t want to use a base of [$33 million] or [$34 million] to add our $60 million to.

Barry Vogel – Barry Vogel & Associates

In theory, and again, I just want to make sure I have this right, if things improved to what you were hopeful for when you started using the $60 million EBIT benefit, you would have, all things being equal, a $93.6 million increase in operating profits for cement in fiscal 2009.

Kenneth R. Allen

It’s certainly significantly more than the $60 million. If you take the $2.3 million in turns and put a price on that and a 30% EBIT margin, you’re going to be somewhere in the ballpark on your number. I don’t want to just confirm your number out of hand. You’re right; we’re talking about significant improvement there.

Barry Vogel – Barry Vogel & Associates

You talked about what you expect for shipments for the new facility this year but I’m not clear about what you were talking about. In other words, in fiscal 2009, what is your best guess for shipments out of the new facility in California?

Kenneth R. Allen

Barry, we expect shipments to be up from fiscal year 2008, but it’s going to be dependent on what the market does out there. As Mel said, we expect to at least, if demand is above capacity, we would expect to be approaching capacity and production and sales at some point during the year and going forward, if demand falls below capacity we would expect to maintain our market share based on our capacity.

Barry Vogel – Barry Vogel & Associates

So that 2 million tons that we were talking about, that’s probably not a bad number to be producing out of California for fiscal 2009?

Kenneth R. Allen

We haven’t said a number, Barry.

Barry Vogel – Barry Vogel & Associates

As far as the fuel thing, I’ve lived with the steel industry’s problems with scrap and energy, and of course a few years ago Nucor famously started a surcharge mechanism and it was very successful, to say the least. And here I notice that you’re talking about a surcharge for energy for aggregate, which I hadn’t heard about before. Is that surcharge for aggregate produces just in your local areas or is it happening throughout the aggregate business in the United States?

Melvin G. Brekhus

Barry, I can’t answer definitely if it’s throughout the United States. It’s in more areas than just our area but it is definitely in our area and Ken can give you more information on this offline, but our surcharge will be tied to an index, a Gulf Coast Diesel Price Index. And so, in some ways it is similar to what the steel people did a few years ago. In our Gulf Coast region. I can’t speak for the rest of the country.

Barry Vogel – Barry Vogel & Associates

Now, having said that, has there been any talk in the cement industry with getting these significant increases in energy costs? Right now that’s the trend and if it continues everybody is going to be squeezed.

Melvin G. Brekhus

Barry, I think that if everyone does get squeezed, there will be more talk about it. But in the cement business, it’s not always as simple as it is in the aggregates business where you’re just dealing with diesel. Because in the cement business energy sources come from varying supplies and not everyone feels the same pain.

Barry Vogel – Barry Vogel & Associates

Right, but this is obviously an insidious situation for anyone who uses energy.

Melvin G. Brekhus

Yes, and that’s why I think you are right. I think we are going to see something like you’re talking about, whereas we haven’t seen it in the past.

Barry Vogel – Barry Vogel & Associates

That would be a help, I think, for the industry.

Melvin G. Brekhus

Yes, absolutely.

Barry Vogel – Barry Vogel & Associates

Thank you very much and let’s hope that $60 million EBIT, which is very famous right now.

Melvin G. Brekhus

Yes, I’ve made it famous, haven’t I? I still insist that that is a reasonable goal.

Operator

Your next question comes from Brad Lundy - Ivory Capital.

Brad Lundy – Ivory Capital

I know that the California price increase was pushed out somewhat. Has there been any weakness in the pricing in California in the last recent months or has that remained completely flat?

Melvin G. Brekhus

Brad, there hasn’t been a weakness in the price but there has been a compression in margins because of the cost of transportation to the various markets.

Brad Lundy – Ivory Capital

But at this point you are not experiencing any pricing declines; it’s holding its ground.

Melvin G. Brekhus

Correct.

Brad Lundy – Ivory Capital

I believe you mentioned in the prepared remarks that the Texas portion of the coal reset, that contract, would get reset some 40% above current levels. I was curious what the California contract would look like if it got reset to market prices.

Melvin G. Brekhus

If we reset it today it would be very similar.

Operator

Your next question comes from David McGregor - Longbow Research.

David McGregor – Longbow Research

Just on the emissions credits, can you help us in terms of how we should think about this going forward, you’ve got excess capacity out there. Are these credits all being driven off the new Oro Grande or any of this off the old Oro Grande? What would be your thoughts with respect to monetizing excess credit going forward?

Melvin G. Brekhus

David, that’s a one-time event and I think that’s the way you should look at it because it wasn’t driven off Oro Grande at all. It was driven off the decision we made at our White operation at Crestmore and that’s the way I would look at it. Because we are going to keep emissions as long as we have any intentions of operating.

When we make a decision to sell emissions it’s because we’ve made a decision to discontinue operations. We sold some emissions a few years ago at our Codine plant in Houston; that was because we were running out of reserves and we closed the Codine lightweight aggregate plant down and sold the property. That’s when we sell emissions. We don’t routinely do that.

David McGregor – Longbow Research

Any other property sales planned over the next 12 months?

Melvin G. Brekhus

I think I’ve got to give you the same answer that we give you every time. We sell property and it generates between $5 million and $10 million a year. And we don’t have any definitive plans on selling any property but that’s what we tend to do on a fiscal year basis.

David McGregor – Longbow Research

Just finally, I pressed you pretty hard on the $60 million EBIT question earlier in the call. The value of the company is down about 15% to 16% since the beginning of this conference call. It’s the second time it has happened in three quarters. You’ve made that $60 million such an important cornerstone of your communication with the Street over the last couple of years, that to just to pull it out and not replace it with any thinking or guidance or communication on that is really negative to the value of the firm. And I would just encourage you to try and develop something communicative over the next few days.

Operator

Your last question is a follow-up from Christopher Manuel - KeyBanc Capital Markets.

Christopher Manuel – KeyBanc Capital Markets

It’s hard to follow along with what David just said, but judging by the turmoil that investors obviously must be going through trying to understand what 2009 could look like for TXI, I want to try to start from a bridge to help me understand a bit. If we start from, it looks about $155 million of EBITDA you had here in 2008; you will have an extra $15 million of depreciation from the new facility so that would take us to a $170 million-ish number. It sounds like, Ken, from your earlier comments that the drag from the old facility, that was about $34 million or so would be gone, would be another add back.

We won’t have another million tons of capacity and even if we took a 20% margin, up to 30% you aspire to, in tax adjustments that could be another $16 million or so. So this gets us to something in the neighborhood of $220 million-ish for 2009. Are there any other large puts or takes that we should be thinking about or that we may be missing as to how to think about what TXI can do in 2009?

Kenneth R. Allen

With Dick’s comments earlier on energy and our comments on the direction of pricing in Texas and that sort of thing, we’ve tried to be as fulsome as we can be.

Christopher Manuel – KeyBanc Capital Markets

There will be some continued improvement, I would think, in aggregates and consumer products beyond where you are today. Would that be fair?

Kenneth R. Allen

If the price increases and surcharges are holding in good shape and that sort of thing, that’s a reasonable assumption to make.

Christopher Manuel – KeyBanc Capital Markets

Obviously the new capacity is more efficient than the old in California, but would it be a fair assumption to make that with it now being closer to balance in California that your extra savings gets offset with supply/demand or would you anticipate putting some of that into your own pocket?

Kenneth R. Allen

Where energy costs are higher, but our efficiencies are a little better?

Christopher Manuel – KeyBanc Capital Markets

Yes.

Kenneth R. Allen

There are so many moving parts there. Mel’s earlier comment, we’ve got the new capacity in place and it’s so much more efficient than our old plant capacity. We’re just going to work through this year.

Have a good summer. We will hear and talk with you at the September teleconference.

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Source: Texas Industries, Inc. F4Q08 (Qtr End 05/31/08) Earnings Call Transcript
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