Walter Industries, Inc. Q2 2008 Earnings Call Transcript

Jul.29.08 | About: Walter Energy, (WLT)

Walter Industries, Inc. (NYSE:WLT)

Q2 2008 Earnings Call Transcript

July 29, 2008 10:00 am ET

Executives

Mark Tubb – VP, IR and Strategic Planning

Vic Patrick – Vice Chairman, CFO, General Counsel & Secretary

George Richmond – CEO, Jim Walter Resources, Inc.

Mark O'Brien – Chairman & CEO, JWH Holding Company, LLC

Analysts

Jim Rollyson – Raymond James

Michael Gaugler – Brean Murray, Carret & Co.

Bob Chewning – Davenport & Company

Dan Mannes – Avondale Partners

Mark Liema [ph]

Todd Vencil – Davenport & Company

Franklin Ross – The Lynch Foundation

Operator

Welcome and thank you for standing by. I just like to remind all participants that your lines have been placed in a listen only mode until the question-and-answer session of today’s conference.

At this time I’d like to turn the meeting over to Mr. Mark Tubb. Sir, you may begin.

Mark Tubb

Thank you, Kelvin. Good morning and thank you for joining us for Walter Industries’ second quarter 2008 earnings conference call. This is call is being webcast live on the Internet and a recording of today’s call will be archived on our website for up to 30 days.

This morning, management will discuss our second quarter 2008 earnings and our outlook for the remainder of the year and may refer to forward-looking statements made in yesterday’s press release and may make these and other forward-looking statements on today’s call. For more information regarding risks associated with forward-looking statements, please refer to the Company’s SEC filings.

Today, Walter Industries’ Vice Chairman, CFO, and General Counsel Vic Patrick will discuss our business results or the quarter and our consolidated outlook for the remainder of 2008. Jim Walter Resources’ CEO George Richmond will discuss our National Resources and Sloss businesses. And JWH Holding Company Chairman and CEO Mark O’Brien will talk about our Financing and Homebuilding businesses. Once our management team has completed their prepared remarks, we will open the call to questions from our dial-in participants.

At this time, I’ll turn the call over to Vic.

Vic Patrick

Thank you, Mark, and good morning, everyone. Walter Industries recorded second quarter 2008 earnings of $0.94 per diluted share, representing net income of $50.8 million, nearly three times our second quarter 2007 net income. Our results for the quarter were led by our core Natural Resources and Sloss businesses, which posted a $54.3 million increase in operating income versus the same period last year. our first half results together with expected increases in met coal production and pricing and continued record pricing from Sloss in the second half of the year position us to realize our most profitable year ever.

Revenue and operating income in Natural Resources reflect very strong met coal sales volumes, aided by the sale of approximately $200,000 tons of purchased coal in the quarter. Our met coal sales price per ton improved both sequentially and year-over-year as pricing for the 2008-2009 contract year began to come into play. In the second quarter, pricing reflected a mix of 2007-2008 carryover tons at $101 per metric ton FOB Port and new contract year pricing, which averaged $147. We are winding down last year’s carryover tons with approximately 300,000 tons remaining to be shipped in the third quarter.

Demurrage totaled $7 million in the quarter, an average of $4 per ton, which was a $3 per ton improvement versus the first quarter. Transfer cost from mine to ship were approximately $13.50 per ton, and royalties averaged 5.5%, both in line with prior guidance.

Our natural gas business recorded operating income of approximately $6 million with gas volumes down primarily as a result of completing production at Mine No. 5. We have approximately 68% of production hedged for the remainder of 2008 at $8.63 per million Btu.

Second quarter financial results of Sloss reflected operating income that was significantly higher than expectations despite recording a $2.2 million charge related to settlement of legal matters.

At Financing and Homebuilding, operating income was down slightly primarily as a result of the impact of the additional non-cash discount charge associated with the origination of internally financed installment notes on homes completed in the quarter. As noted in our press release, the restructuring action taken in the first quarter also resulted in lower revenues in the second quarter, but better position these businesses for separation from Walter Industries.

Our consolidated results for the quarter included interest expense of $11.2 million, which increased as a result of additional corporate borrowing used to terminate Financing’s mortgage warehouse facilities early in the quarter. This was offset by a reduction in interest expense in the Financing segment. Corporate interest expense also included a write-off of $3.1 million in the quarter associated with the repayment of corporate debt in June with proceeds from our recent equity offering.

Capital spending in the quarter was $34.6 million with about $87 million expected in the second half and about $145 million expected for the full year.

Our balance sheet remains in very good shape with net debt at June 30 of $190 million and a net debt to total capitalization ratio of less than 30%.

At this time, I will turn the call over to George to discuss National Resources and Sloss.

George Richmond

Thanks, Vic, and good morning. looking at our met coal operations, combined production at No. 4 and 7 Mine was 1.4 million tons for the second quarter. For the first half of the year, we produced a total of 3 million tons, which was at the top end of our production expectations. No. 4 Mine performed well during the quarter, running to an annualized 3 million tons per year rate despite the scheduled miners’ vacation in the last week of June. No. 7 Mine also performed well during the – despite the longwall mining and thinner coal as we near the end of the panel late in the quarter.

Development of the Southwest "A" panel continues and longwall is scheduled to start up the week of August 25th. With 3 million tons of production in the first half and with incremental Southwest "A" tons coming on line, we remain on phase to produce 6.7 to 7.1 million tons for the full year.

Mining cost per ton for the first half of the year averaged $52.66. We expect the significant increase in longwall tons over the last four months of the year to dilute the cost on a full year basis to around $50 per ton. Our 7 East expansion also remains on track with all major infrastructure near completion and continuous mine is developing the first longwall panel.

While we are discussion mining operations, our initial [ph] lost-time incident rate tracked very near the national average in the first half of the year. As we have said before, just being average in terms of safety performance is not acceptable and we remain committed to the goal of zero injuries.

Met coal sales volume in the quarter totaled 1.7 million tons. We continue to see very strong demand from our customers for our high quality hard coking coal and we were able to meet their demand in the quarter through the sale of approximately 200,000 tons of purchased met coal blended into their existing orders. We also sold about 250,000 tons out of inventory and in the quarter with approximately quarter million tons.

Average metallurgical coal price in the second quarter increased both sequentially and year over year as we began to see the positive impact of higher pricing the 2008-2009 contracts.

Sloss posted another outstanding quarter with operating income of $15.1 million on the strength of dramatically increased coke prices. Sales for the quarter included some spot sales at $500 and above per short ton FOB plant. The coal operations of United Land, which included Tuscaloosa Resources and Kodiak Mining, produced and sold approximately a quarter of a million tons in the second quarter. Kodiak’s operating results were essentially breakeven in the second quarter, a significant improvement over the $4 million loss recorded in each of the last two quarters. The primary driver behind Kodiak’s improvement was that sales were channeled into their high priced international metallurgical coal market. Production in the second half of the year at Kodiak is expected to improve as the second continuous mining section is added.

Tuscaloosa Resources continues to perform well operationally, but was negatively impacted by high cost of diesel and explosives resulting in essentially breakeven financial results. As we announced in June, TRI made a three-year commitment beginning in January 2009 to supply customers with – a customer with 400,000 tons per year, about half its current production at $100 per ton at the mine. We continue to see strength in the steam and industrial markets and expect to contract the remaining 2009 tons at similar or higher prices.

Our outlook for high quality metallurgical coal continues to be extremely positive. With steel prices exceeding $1000 per ton the increased margin on steel more than compensates the increased raw material costs.

Met coal operations in Australia are recovering from flooding earlier this year, but infrastructure and manpower issues remain, which will continue to limit supply. Also, Eastern European coal producers are struggling to get their production to market. Recent reports suggest Poland may end up as net importer of coal this year and several Russian coal mines are faced with temporary government closure.

These and many other supply factors continue to impact an already significant worldwide shortage of high quality hard coking coal. This global shortage along with surging worldwide demand including several large capacity expansions by our customers are resulting in several enquiries about securing additional tons and advancing shipping schedules.

Looking forward, we have about 60% of our met coal on price for 2009 and 100% is open for 2010.

Turning now to the coke market, as I mentioned earlier, Sloss recently sold coke at spot priced in the $500 per ton range, more than $100 higher than our contract pricing. This indicates that there may be considerable upside to the market, which bodes well for our 2009 settlements. We still have more than 90% of Sloss’ 2009 volumes to settle. Although raw material costs for Sloss will increase, we expect pricing will enable margins to remain strong.

In summary, with significant year-over-year volume increases planned for 2008, 2009, 2010, and strong met coal and coke pricing foreseen in those years, we expect to continue to realize significant revenue and income growth in our coal business.

I will now turn the call over to Mark O'Brien to discuss Financing and Homebuilding.

Mark O'Brien

Thank you, George. Good morning everyone. Although combined Home Financing and Homebuilding revenues were down $32.3 million for the quarter, operating income declined only $1.5 million versus the second quarter of last year. Continued strong results at Financing along with the recent restructuring actions at Homebuilding that generated more than $5 million in cost reduction allowed us to produce stable results even in a very difficult housing and mortgage market.

Financing’s operating income improved $1.3 million during a time when other subprime mortgage portfolios are faltering. And our outlook for continued strong cash flows from the portfolio remains solid. At Financing, we continue to generate strong, consistent earnings and cash flows from our business, reporting $14.3 million of operating income for the second quarter and $24.6 million for the first six months of the year, excluding the hedge loss.

Financing $1.8 billion installment note and loan portfolio is funded by one point billion dollars of matched maturing fixed rate term debt. The net interest income from this portfolio produces the steady, reliable earnings and cash flows that you usually generated by this business for many years.

The strong capabilities of our servicing platform at Financing are an important aspect of this performance. As we mentioned in our release, delinquencies remain low despite continued unprecedented pressure on the residential mortgage market. Our 4.1% delinquency rate is well below the national average for other services and FHA’s reported delinquency rate. In addition, our recovery remain – rates remain strong at 90% for the second quarter, and 86% on a year-to-date basis.

At Homebuilding, excluding the $4.2 million of additional discount on installment notes originated in the quarter, operating income would have been a $1 million profit illustrating that we have made excellent progress in turning this business around by elimination under performing branches, reducing overheads, and converting the business to a model based on a several [ph] financing of home sales.

As an update on backlog, we have eliminated a significant portion of the backlog of homes that will require internal financing. We funded 390 homes in the second quarter with a value of approximately $33 million. A number of contract also canceled leaving an estimated 370 homes remaining in the backlog representing a total of approximately $35 million in value to be funded.

As we look ahead to the balance of 2008, we remain confident in Financing’s continued strong portfolio performance and ability to generate solid incomes and cash flow. We remain committed to completing the separation of these businesses from Walter by year end. This initiative will create a pure play Natural Resource Company and preserve the value inherent in the Financing and Homebuilding assets. Therefore, we continue to take the actions to best position these businesses for a successful transition and remain confident that the outcome of these efforts will yield significant and meaningful benefits to our shareholders.

With that, I will turn the call back over to Vic.

Vic Patrick

Thank you, Mark. Last night, we also updated our 2008 outlook for some of our key business drivers. You will note that there were some movement between the third and fourth quarters for our coal sales outlook. This is due to approximately $100,000 tons originally planned in the third quarter but now expected to ship in the fourth quarter. We also increased our expected operating margin per ton in the first quarter by $5 per ton versus previous expectations on strengthening met coal sales prices.

As we passed the half way point of the year, we are very pleased with our results and our progress so far. We have delivered on all the expectations we have set and we are looking forward to an even more dynamic second half of the year as we realize higher volumes and prices in our core coal business. Further, we are encouraged by continued strengthening of Walter Industries outlook for 2009 and 2010 as pricing in those years remain strong and as we expand our annual rated capacity to 9 million tons for met coal annually in this timeframe.

Now that we have completed our prepared remarks, we’ll open the call for questions. Operator, can we open the call for questions, please?

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) Our first question comes from Jim Rollyson from Raymond James. You may ask your question.

Jim Rollyson – Raymond James

Good morning, gentlemen.

Mark O'Brien

Good morning.

Vic Patrick

Good morning, Jim.

Jim Rollyson – Raymond James

George, could you possibly give us just kind of a status update on how every thing is progressing to move up towards that 9 million tons over the next couple of years both maybe at the mine and the port?

George Richmond

Yeah, the – well, first of all the Southwest "A" panel, as you noticed, we think that longwall – well we know that longwall will start up the week of the 25th of August. Okay? Regarding the expansion, the No. 7 Mine on vacation right now and doing a considerable amount of transfer work, for example, commissioning the bunker, setting up this second hoist, bypassing some conveyor belt. So we are doing a couple of weeks transition from the – all the infrastructure, the hoist, the fans, the overland conveyor belt that carries the coal from No. 7 to No. 5 is complete. We are in the process of starting up the – restarting up the No. 5 plant to – going through its trials and ensure we got no problems.

From a development point of view, the two sections that are developing the longwall, our mine in south and that really is the critical path of when the longwall exactly starts up.

Regarding the stake docks and transportation, we have got some conveyor belts that have already started, but the big jump in their throughput rate will occur – it’s a little late to the normal but it will be before the Southwest "A" panel’s coal arrives at the state dock. So, so far so good. One of the modification we are going to do we are actually going to speed up our ability to load through the barge as well as an additional tool to move coal from the mines to the port.

Jim Rollyson – Raymond James

So, everything basically sounds like it’s on track. That’s good. Have you guys – obviously you are trying to get – just to maintain your focus to get this expansion completed and get the volumes up, but you always talk about the potential resources to the west of you for future development and based on where pricing obviously outlook is and where your volumes are headed, you guys will have the cash to spend to do something there. Do you – have you done any work – further work on looking at development of some of those resources?

George Richmond

I will prefer not to get into too much of that today, Jim.

Jim Rollyson – Raymond James

Okay. Then last question from me, obviously a lot of M&A going on around you. And thoughts on what’s going on? Any discussions you guys have had with anybody that you’d care to comment on?

Vic Patrick

Well, Jim, you know what I am going to say to that. (inaudible) we are not going to – in terms of other people’s transactions we are not going to comment on other people’s transactions. In terms of ours we can't you know that’s against our policy to comment on anything that would be going on. Speaking more generally about activity in the space, obviously it’s proceeding. Obviously, there is significant interest and I would expect that to continue.

Jim Rollyson – Raymond James

Excellent. Nice quarter guys. Thanks.

Operator

Our next question comes from Michael Gaugler. You may ask your question.

Vic Patrick

Michael, you are there? Operator, we are not getting Michael queued up. If we – Michael, you are there?

Michael Gaugler – Brean Murray, Carret & Co.

I am. Can you hear there?

Vic Patrick

Yeah, I can hear you now.

Michael Gaugler – Brean Murray, Carret & Co.

Great. Good morning everyone. Congrats on the quarter.

Vic Patrick

Thank you.

Michael Gaugler – Brean Murray, Carret & Co.

Just a couple of quick questions. The purchased met coal in the quarter, I was kind of surprised to see that given the production volumes. Should we expect to see that going forward in those types of amounts for the remainder of the year?

George Richmond

Michael, we have the opportunities to add volume through purchasing. However, we’ve got to work through the marketing. We had a couple of customers that were short on volume. Some of this is not the same quality. So, there was some adjustments in specs and they allowed us to stretch our customers’ volumes out, given them more volume for the next shipments [ph] of a little bit lower quality, or lower specification. We have the volume available going forward. However, whether it goes into the steam market or the met market we’ll have to determine work through the marketing.

Michael Gaugler – Brean Murray, Carret & Co.

Okay. Next stop, switching over to nat gas, I saw the cost of sales were up noticeably. Any particular reason for that? And should we expect those levels of cost to stay relatively constant?

George Richmond

Yeah, Michael, I guess you also noticed the volumes were down, which is a 5 ton. The volumes – the volume some of it volume variance and that’s somewhat associates with when we closed the No. 5 Mine, we still continued to get gas out of the mine. That is now drifted off and we are really only producing gob gas from tow longwalls as we bring the Southwest "A" panel and then the expansion on line I expect the gob gas to increase and I think the cost will normalize a little more.

Michael Gaugler – Brean Murray, Carret & Co.

Okay. And just one last one. Sloss, given the strong momentum you are seeing there, any plans or thoughts to expand capacity?

George Richmond

No, we have nothing on the drawing board.

Michael Gaugler – Brean Murray, Carret & Co.

Okay. Thanks guys.

George Richmond

Thank you.

Operator

Our next question comes from Bob Chewning with Davenport. And you may ask your question.

Bob Chewning – Davenport & Company

Good morning.

Vic Patrick

Good morning.

George Richmond

Good morning.

Bob Chewning – Davenport & Company

Looks like your production is going to be for the second half between 3.7 and 4.1. can you give us any color as to the breakout by quarter sort of follow sort of the guidance?

George Richmond

Yeah – I think the volumes in the (inaudible) – the obviously the million tons in the last four months approximately a million tons from the No. 7 expansion which will be September, October, November, and December. And the – it will be a little over in the third quarter, we have a longwall move at No. 4, and vacation now. So it will be a little stronger in the fourth quarter on the regular run rate.

Bob Chewning – Davenport & Company

Okay. And in terms of current inventories, where do they lie?

George Richmond

We’ve got – going into the quarter we’ve got approximately a quarter million tons going into the third quarter.

Bob Chewning – Davenport & Company

Okay. And I think Vic mentioned 300,000 tons in the third quarter being priced at lower price. What was the price associated with that?

George Richmond

That’s the 101.

Bob Chewning – Davenport & Company

The 101?

George Richmond

Yeah.

Bob Chewning – Davenport & Company

And how did that lapse over into the third? Was that just – (inaudible) deliveries or –?

George Richmond

No, that’s somewhat just how the shipments fell. I think that number was in our third quarter margins and it was planned.

Bob Chewning – Davenport & Company

Okay, okay. And lastly, the demurrage, how should we look at that going forward?

George Richmond

Well, it’s been down a little bit this quarter with very old pooled out with the three factors, one, increase in availability of No. 7 coal the docks one switched out – the Southwest "A" panel. Two, the improved throughput rates of the docks, so therefore they load both faster and the waiting time is less. And lastly, we have negotiated quite a few caps into the dollars per day demurrage that we can pay per (inaudible) so that should also reduce it. So, we fully expect it to reduce going forward.

Bob Chewning – Davenport & Company

Okay. Well, that’ great. And one last thing. Can you give us any feel for current sales price realization with Kodiak and Tuscaloosa on current tons?

George Richmond

This year’s TRI’s sales approximately $60 a ton. And Kodiak sales back of the mind just around $100 a ton, but we have seen some upside on that. We have negotiated some business [ph] going forward close to the $150 range.

Bob Chewning – Davenport & Company

Okay. Alright. That’s great. Thank you.

Operator

Our next question comes from Dan Mannes with Avondale. You may ask your question.

Dan Mannes – Avondale Partners

Good morning, everybody. Great quarter. A couple of follow-up question, first on the blending opportunity. Can you just give us any color on I guess availability of purchased coal through the balance of the year? I don’t know if this is a specific person that you are buying from or – I have suspicions but just would like to hear what the outlook is for that since it seems like a nice way to blend in and get some extra revenues.

George Richmond

Yeah, right now we are expecting a couple of hundred thousand tons in the second half. There is more than available but again you know whether it goes into the steam market at a lot lower price depends on the customer’s needs and their willingness to modify the specifications a little bit.

Dan Mannes – Avondale Partners

But, as a followup to that, I mean it looks like in the quarter you gave approximately 60 some bucks a ton for it. Given that it may have either some metallurgical qualities or some ability to be blended into met, is the cost of that also going to go up over time?

George Richmond

We – I don’t think we are willing to specify – to specifically talk about what price we are going to purchase coal, but I don’t think it’s in our best interest.

Dan Mannes – Avondale Partners

Okay. Moving over briefly to TRI it looks like cost were up a bit this quarter at least based on your commentary. Can you talk a little bit – we know about the $100 for next year, but for the balance of this year, potentially seeing some margins expansion there, especially given the higher production costs.

George Richmond

I am sorry, I missed the first part of that question.

Dan Mannes – Avondale Partners

Just on TRI, you – we know that the higher contract pricing for ’09 but for the balance of ’08 given the higher input cost we have some opportunity for some margin expansion there as well—

George Richmond

No, I think TRI, we are trying to pass through some of the increased costs, but I think it will probably do a little better within this quarter, but I think it’s margin improvement is going to start in January.

Dan Mannes – Avondale Partners

Okay. And then the last thing. With the startup of the Southwest "A" in the third quarter any incremental cost just with that startup I mean should be expect maybe a bigger cost structure there until that gets up and running? So anything unique in Q3 we should be looking at?

George Richmond

No – until it starts, we are obviously developing more continuous mining sections than normal, so for the quarter the July-August, we would expect relative line – cost line will operate in both – when we start the longwall then we start diluting the mine cost significantly because obviously the longwall coal is very cheap relative to continuous mining section coal. So from August down we will start diluting the cost of that mine.

Dan Mannes – Avondale Partners

Understood. But no sort of set up cost or anything like that with the actual longwall –?

George Richmond

No, no, once the longwall is installed they start producing. It’s the continuous mines that cost the – take the largest cost and we have been paying for that all year.

Dan Mannes – Avondale Partners

Got you. And just last question just on Homebuilding and Financing, obviously not a full update this quarter. Can you give us any color as to the direction of what you are doing there change, devolve, I mean has your thinking in terms of the ultimate separation evolved since the last time you talked about it.

Mark O'Brien

You know, we’ve been doing a awful lot work with our consultants to make sure what we do is efficient to the shareholders. And I think at this point in time other than the announcement that we have made about the restructuring of Homebuilding to prepare those businesses for the separation I think that’s about all we can say at this point. We are moving along nicely, but.

Dan Mannes – Avondale Partners

I guess the followup to that is what would be the biggest risk to it not being done by the end of the year? Are there any major regulatory barriers you are heading into or any other issues we should be thinking about?

Mark O'Brien

I don’t know if there are any major regulatory issues. There are obviously regulatory issues in the time constraint that is associated with them. But we believe those are all manageable.

Dan Mannes – Avondale Partners

Okay. Great. Well, thanks guys.

Operator

Our next question comes from Mark Liema [ph]. You may ask your question.

Mark Liema

Good day, guys.

Vic Patrick

Hey Mark.

Mark Liema

The global market seems to be tightening day by day for met coal even with the impact of the flood easing. Can you comment on what you are seeing globally and whether that’s going to change your thoughts on maybe how long you hold out before committing coal next year?

George Richmond

Well, we are at the time of the year where we consider a relatively quiet period. There are requests for spot coal and some coals. And I think it’s in the – I think we are in the early stages of the domestic settlements. I think there is some enquiries out, but it’s relatively quiet. As we go into the contract year obviously the customers will – if they have got concerns about volume, they will tend to try move earlier. On the other side of it, we’ll obviously go when we feel it’s in our best interest to maximize pricing based on the market. So – right now I think we are in a relatively quiet period and we are not hearing a tremendous amount of information.

Mark Liema

Or do you have any sense of where you would peg the market if you had to do things today?

George Richmond

Well the number we’d peg – when we go into the market or where the pricing would hold?

Mark Liema

Where the price would be –

George Richmond

I think the – we are too late into the season now to be talking about what – where we are going to set – where we are going to try and achieve the market. I mean we obviously think the market is going to be very strong. I don’t think we can say much more than that.

Mark Liema

What was your take on the recent signings for semi soft and PCI in Australia?

George Richmond

They were – I mean you are talking about the $240?

Mark Liema

Yes.

George Richmond

Yeah. It seems that looks about in line with the last year’s high quality market. I don’t think there is much of a weakening there or maybe not a lot of strengthening.

Mark Liema

Okay. Very good. Thank you guys.

Operator

Our next question comes from Todd Vencil with Davenport. You may ask your question.

Todd Vencil – Davenport & Company

Hi guys, thanks a lot. A couple of quick questions on Financing. How much do you have out on the revolver – on the corporate revolver that’s associated with loan you are holding?

Mark O'Brien

I don’t think we have any. I mean obviously cash is plentiful [ph] and we paid off the revolver. We did the debt – I mean the equity offering and you could assume that those two offset each other. But, once again, it’s plentiful [ph].

Todd Vencil – Davenport & Company

Okay. Fair enough. And then second question will be – when I look at the rate of cancellations in the quarter it really kind of jumped up both as a percentage of gross new contracts and as a percentage of your beginning backlog. What was up with that? Is that basically a function of the fact that you guys are moving to external financing and maybe having more buyers not qualify there?

Mark O'Brien

I think the proper way to look at that is each one of those installment notes that are in backlog carry a significant discount. So it’s arguably in our best interest to have them disappear. As a matter of policy, we honor all the contracts that we have and people who have made financial commitments in reliance on those contracts we are moving forward. On the other hand we’ve got some stipulation in our Homebuilding contract that permit us – if the homebuyer is not taking sort of action to eliminate from our backlog and we are doing that.

Todd Vencil – Davenport & Company

So you guys are – I am sorry just so I understand – you guys have taken steps to sort of more aggressively scrub that backlog?

Mark O'Brien

That’s correct.

Todd Vencil – Davenport & Company

Okay. And on what basis, if you can kind of generally talk about what you are looking at to scrub that out?

Mark O'Brien

As I said in our remarks, we had significant cancellation during the quarter. We would expect to have significant cancellations of our installment note backlog, those that we got forward through the March-April timeframe.

Todd Vencil – Davenport & Company

Yeah.

Mark O'Brien

And we would expect those cancellations to be – expect and hope that those cancellations would be significant [ph].

Todd Vencil – Davenport & Company

Got it. Okay, thanks a lot.

Operator

Our next question comes from Franklin Ross with The Lynch Foundation. You may ask your question.

Franklin Ross – The Lynch Foundation

How are you guys doing? Great quarter. Can you guys talk about your CapEx going forward ’09 and ’10?

Vic Patrick

Well, we are looking at for ’09 is about $75 million to $80 million total with Natural Resources at about $67 million to $72 million of that. But obviously we haven’t completed the 2009 business plan, so that will be subject to some adjustment.

Franklin Ross – The Lynch Foundation

Okay. And when you look at your mining costs, can you talk at all about longwall efficiencies going forward and past ’09?

George Richmond

Well, the No. 4 Mine, which is really operating in – the – I guess an annualized rate of about 3 million tons which it has several years, their cost is in the mid to high 40s and that’s where we’d expect it. No. 7 is being quite a bit above that because we are basically being operating two longwall mine from a cross point of view with the production only from one longwall. So as we get to the normal rate where both longwalls at the mine are repeating and moving and repeating on a regular basis, I would expect the cost of No. 7 Mine to come down similar to No. 4 but probably a couple of dollars a ton higher because they mine in thinner coal and there is a little bit more of wear and tear on the equipment and the maintenance cost are a little higher. So I think that’s where we see the range when we get to the normalized operation.

Franklin Ross – The Lynch Foundation

Okay. Can you quantify the cost per ton on Mine No. 7 or what you are expecting –?

George Richmond

Yeah, it will be close to the $50 a ton.

Franklin Ross – The Lynch Foundation

Alright. Thank you very much.

Operator

(Operator instructions)

Vic Patrick

Alright, and seeing no further questions, that concludes our call this morning. Thanks again for your continued interest in Walter Industries.

Operator

That concludes today’s conference call. You may now disconnect at this time. Thank you for your participation.

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