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Texas Industries, Inc. (NYSE:TXI)

F1Q09 Earnings Call

September 25, 2008 1:00 2:00 ET

Executives

Linda English - Manager of Investor Communications

Melvin G. Brekhus - President, Chief Executive Officer, Director

Kenneth R. Allen - Chief Financial Officer, Vice President - Finance

Analysts

Christopher Manuel - KeyBanc Capital Markets

Derrick [Schmoist] – Longbow Research

Trey Grooms - Stephens, Inc.

[Glenn Wartman] - Sidoti & Company

Todd Vencil - Davenport & Company LLC

Katherine Thompson - Avondale Partners

Nitin Dahiya – Lehman Brothers

Meryl Witmer - Eagle Capital

[Mike Detz] - J.P. Morgan

Michael Terwilliger - Bank of America Securities

Louis Sarkes - Chesapeake Partners

Operator

Welcome to the TXI first quarter results conference call. (Operator Instructions) I’ll now turn the conference over to your host Linda English, Manager of Investor Communications.

Linda English

I’m Linda English, Manager of Investor Communications, and I have the privilege of introducing our senior management team today: President and CEO Mel Brekhus, Vice President - Finance and CFO Ken Allen. We will follow a similar format as in previous teleconferences. Mel and Ken will first provide comments for the quarter and follow with Q&A.

Before we begin, I’d just like to remind you that certain statements contained in this call 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 the impact of competitive pressures and changing economic and financial conditions on our business, the level of construction activity in our markets, abnormal periods of inclement weather, unexpected periods of equipment down time, changes in the cost of raw materials, fuel and energy, and the impact of environmental laws, regulations and claims and risks and uncertainties described more fully in the company’s reports on SEC Forms 10Q, 10K and 8K.

And now for opening comments, Mel please go ahead.

Melvin G. Brekhus

We are currently experiencing a tale of two markets related to TXI’s operations. The Texas economy which is the dominant driver of TXI sales continues to grow and add jobs. Construction in the state also continues to generate a level of cement consumption that significantly exceeds cement production. We have even seen modest cement price appreciation in this state.

Construction activity in California on the other hand continues to decline. We believe demand for cement in the state is less than the capacity to make cement and that we may not have found the bottom of the cycle there. We have recently experienced a decline in realized cement prices in California as well, both as we ship cement further from the plant and as prices have in fact declined.

In Texas the expansion of our Central Texas cement plant continues to make progress with production expected to begin by late calendar 2009 or early 2010. This plant will add 1.4 million tons of new cement-producing capacity to a plant that already makes approximately 900,000 tons of cement very efficiently.

Our efforts to augment counter production from the large kiln at our North Texas cement plant continued to yield results. In fact the kiln set clinker production records during the August quarter. In order to manage clinker inventories and maximize the efficiencies inherent in the large kiln, we have decided to idle the two smaller kilns at the plant until clinker inventory levels are brought back in line.

Turning to California, we are pleased with the new plant’s capabilities but market conditions are not allowing us to operate the plant at capacity. As a result we are not achieving the financial results or efficiencies from the new plant that we expected to achieve under more normal market conditions. What we do have is a plant that should allow us to achieve world class production efficiencies when operating at full capacity. The California market is clearly a different market today but we believe the state will recover and once again become the largest cement market in the US.

It also appears that construction activity in Texas has begun to slow but we believe that the Texas economy’s much better fundamentals will allow it to weather the current economic uncertainty and volatility without such a dramatic decline in construction activity.

With regard to TXI’s other operations, aggregate pricing has continued to show an upward trend. During the quarter TXI acquired sand and gravel assets near Austin that will enhance our ability to serve that attractive long-term market. The action was essentially a redeployment of assets as proceeds from the sale of TXI’s sand and gravel assets in South Louisiana were used to finance the acquisition.

By now you’re probably aware that we have announced significant ready mix concrete price increases in the neighborhood of 25% effective for October 1. TXI is extremely efficient with regard to labor and truck utilization but raw material and transportation costs have risen significantly and price relief is needed in order to attain acceptable returns for this business.

During the quarter TXI attained $300 million in debt financing. The proceeds were used to pay off approximately $180 million in bank debt and the remainder of the net proceeds will be used to finance the Central Texas expansion. The financing is important because it places TXI in a strong position to weather current economic conditions and continue our strategic cement growth initiatives. When the general economy recovers, we plan to be in position to take full advantage of it.

With that I’ll turn it over to Ken.

Kenneth R. Allen

You’ve probably noticed that the earnings release has a different format than past releases. Our objective with this release and earnings releases going forward is to focus on the results of our three business segments: Cement which accounts for the lion’s share of TXI’s earnings, aggregates and also consumer products.

I’ll provide more detail by segment, but first in summary at a consolidated level, net income during the quarter of $10.7 million trailed net income in the same quarter last year of $17.9 million. At the pre-tax line, income declined by just under $11 million. Gross profit among all three segments dropped while selling, general and administration expenses declined due to lower incentive and stock compensation expense. Other income increased primarily due to the bonus received from the execution of an oil and gas lease contract in North Texas. Interest expense primarily increased as capitalized interest related to the California cement plant expansion was no longer incurred.

And with that let’s move on to the results for the quarter and focus on cement. As you can see from the release in the individual profit and loss statement for cement, cement operating profit declined by $0.5 million in the August quarter just ended compared to the same quarter last year.

Total cement shipments declined 6%. Cement shipments in Texas of 876,000 tons were about even with those in last year’s first quarter. Shipments in California actually declined from 410,000 tons in the quarter a year ago to 342,000 tons in this quarter. California shipments in the fourth quarter ended May 31, 2008 totaled 356,000 tons.

We were able to keep shipments fairly stable from the fourth quarter to the first quarter in spite of the scheduled maintenance down time we experienced in June but nevertheless and as Mel has already indicated, it’s clear that the weak construction market in California is not allowing us to take advantage of the additional capacity we brought on line last spring.

Combined average cement prices declined 4% year-over-year. In Texas prices actually increased by 1% compared to a year ago. In California on the other hand realized prices declined by an average of 8% for bulk and packaged cement.

On the cost side, the impact of scheduled maintenance at TXI’s cement plants was actually a plus for the quarter. The California and Central Texas cement plants were down for scheduled maintenance during the August quarter and we estimate that the scheduled maintenance down time for the California plant reduced profit by about $5 million to $6 million while the scheduled maintenance at the Central Texas plant reduced profit by about $6 million as well.

In last year’s quarter, just to give you a comparison, TXI’s North Texas plant was down for scheduled maintenance and had a negative impact on profit of $12 million while the Central Texas plant was down as well at a cost of approximately $3 million to $4 million. So when you compare this quarter versus a year ago, scheduled maintenance costs were actually lower in combination by about $4 million.

With regard to scheduled maintenance at the North Texas plant, the plant is scheduled to be down for maintenance in the quarter ending November 30, the quarter that we’re in right now.

Energy costs for cement particularly in the area of electricity were higher than those of a year ago offsetting the lower costs related to maintenance expense. On average cement electricity costs per kilowatt hour were higher by 35% to 40% compared to a year ago.

Depreciation expense for the segment increased by $3.4 million reflecting the increase in assets related to the new plant in California.

As Mel alluded to earlier, market conditions in California are not allowing us to run the new plant at its full capacity and as a result we are also not able to gain the efficiency improvements as we expected. In last year’s August quarter the older plants with both higher prices and higher shipments did slightly better than break-even at the operating profit line. Now in this year’s quarter, after removing the negative impact of the scheduled maintenance that we’ve already talked about, the new plant was basically at a break-even level as well. We’re disappointed to have such a weak construction market as we bring on the new plant in California, but on the other hand we are really pleased to have the new plant in place rather than the old plant.

Turning to the aggregate operations, operating profit declined by $2.5 million in the quarter compared to a year ago. Realized prices for stone, sand and gravel maintained a positive trend while total shipments were down for stone, sand and gravel primarily because we no longer own the South Louisiana sand and gravel assets. Higher diesel and electricity costs for the stone, sand and gravel operations also accounted for approximately $2 million of the decline in operating profit.

In the consumer product segment which is composed primarily of TXI’s ready-mix concrete operations increased average prices were more than offset by a 5% decline in concrete shipments and also offset by higher raw material and diesel costs. As a result operating profit declined by $4.5 million.

During the quarter TXI entered into an oil and gas lease agreement and received $4.4 million in bonus payments as a result. In the other income line $2.8 million of the $4.4 million went to the North Texas cement plant because most of the property covered in the agreement is located at that plant. While we’re certainly interested in attaining an income stream from natural gas sales that could serve as a natural hedge to our energy costs, any estimate as to the potential impact from this project would be extremely speculative at this time.

Corporate G&A expense declined $3.9 million in the quarter compared to the same period last year, incentive expense dropped $2.4 million, and stock-based compensation expense declined by $2.3 million.

With regard to interest expense now, last year’s interest expense in the first quarter was fully offset by capitalized interest associated with the California cement plant capital project. That project was completed last spring and as a result, capitalized interest in this quarter was only due to the Central Texas expansion which is still in its fairly early stages so capitalized interest is fairly low. As a result, the P&L interest expense number in the income statement was $7.2 million.

Also you can see in the P&L line as a result of financing completed during August $900,000 in unamortized debt expense was also written off.

During the first quarter total capital spending of $89 million included $47 million and that includes capitalized interest for the Central Texas cement plant expansion and it also included $26 million for the acquisition of the sand and gravel assets near Austin, Texas.

Looking at current conditions, as natural gas prices declined from the recent peak this summer we have begun to see our electricity costs decline as well. As we mentioned in the July teleconference we have completed a negotiation of our Texas coal contract for our cement plants in Texas, and beginning January 1, 2009 the cost of coal for TXI’s Texas operations will increase by approximately 40%. We’re still in the process of negotiating the coal contract for the California plant. The current contract out in California will expire in May of 2009.

Again I mentioned earlier that the North Texas plant will be down for scheduled maintenance in the November quarter. In the November quarter last year we had no major planned outages.

With regard to interest expense as we move forward, after the financing accomplished in August we are currently at a quarterly run rate for interest expense before capitalized interest of about $11 million to $12 million a quarter. Capitalized interest in the first quarter of $1.8 million will increase in the November quarter as the accumulative investment in the Central Texas cement plant expansion project builds. Recall again that capitalized interest actually reduces interest expense on the P&L.

These are challenging times in many ways. Just as skyrocketing energy costs began to subside, Hurricane Ike hit the Texas coast and after a period of time here required for the cleanup work to be accomplished, construction in the impacted Texas market should recover. In the meantime construction activity in the areas impacted by Ike will be slower than normal. TXI employees are doing a great job of getting our operations that were impacted by the hurricane back up and running by the way.

We’ll move into the Q&A session of the teleconference.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Christopher Manuel - KeyBanc Capital Markets.

Christopher Manuel - KeyBanc Capital Markets

Mel, can you talk a little bit about what you’re seeing today in California? Have cement prices continued to decline or have we stabilized here? And number two, what you’re seeing with respect to capacity coming out? Is it pretty uniform across different players or a little bit what the landscape’s like?

Melvin G. Brekhus

What we’re seeing with pricing is some decline in pricing that is related to competitive issues. It’s not significant but it is happening. And then of course in our particular case you’re seeing some price compression of the fact that we’re shipping product further and therefore our mill nets are lower.

The capacity question that you asked will probably take a little bit more time to determine. What I stated in my prepared comments was, and I do believe them, is that we think that the demand in the California region is now less than the domestic capacity and all the imports have been turned off. But in spite of that we think it’s less than domestic capacity. That of course will put pressure on all of the producers. There has been some capacity reduction in part of the California region that has been made public by some of the other companies. We obviously are not running at capacity of our new facility. We’re running in the neighborhood of 60% to 70% of capacity to supply the market at this time, and I think we’ll see rationalization in the market place from other producers also. But time will tell.

Christopher Manuel - KeyBanc Capital Markets

Your inventory situation in California, as you did the transition from the old plant to the new plant, my understanding was you were going to build some inventory in. Is that still there? Were you able to mitigate that or where are you today?

Melvin G. Brekhus

We built a little bit of inventory which you would expect us to do. That’s so that we have that cushion in the event that we have an outage during the commissioning or early operation of the facility. But I believe we’re managing that quite well. That has not increased significantly in the first quarter and we do not plan for it to increase significantly going forward.

Christopher Manuel - KeyBanc Capital Markets

Last question Ken. As you look to your second quarter, it sounds like you’re going to have a little more maintenance probably. If I understood your earlier comments right, it was about $3 million to $4 million last year at that Central Texas plant that you didn’t have in the same quarter this year or you will have. Is there any reason to believe that the second quarter will be much different than your first quarter from an EBIT perspective?

Kenneth R. Allen

From the scheduled maintenance side, remember first quarter a year ago the North Texas plant was down for scheduled maintenance. It wasn’t down in our first quarter this year. It’ll be down in the second quarter, the quarter we’re in. A year ago it had roughly a $12 million impact on operating profit.

Christopher Manuel - KeyBanc Capital Markets

All else equal, California probably won’t be much different first quarter versus second quarter? I mainly think about the maintenance? Is that a good way of thinking about it?

Kenneth R. Allen

That’s a piece of the puzzle. In today’s times with volatility and energy and things like that too, I’d encourage you not just to focus on one piece. But you focused on a big piece.

Operator

Our next question comes from Derrick [Schmoist] – Longbow Research.

Garrick Schmoice - Longbow Research

Thanks for the granularity in the press release and in the comments. We appreciate it. My first question is in South Central Texas, the October price increase. Can you give us a little more color what you’re seeing as we approach that date?

Melvin G. Brekhus

Yes, I can. As we approach the October 1 date we feel very confident that the price increase that was announced in South Texas will hold. You might recall that price increase was a $10 per ton price increase in the South Texas market, predominantly in the Houston market, and we feel very comfortable that that price or something very close to it will hold in the market place.

Garrick Schmoice - Longbow Research

You mentioned taking down two of the kilns in Midlothian. Is there anything else that as you look out in the near term that you could do to cut costs at this point? Any other perhaps low-hanging fruit or actions that you could take?

Melvin G. Brekhus

I don’t know about low-hanging fruit. You were doing okay until you said that. I think we’ve got most of the low-hanging fruit. But we are looking at every conceivable way to reduce our costs, not just at Midlothian but also at our Hunter plant and also at our new facility in Oro Grande. And we will be evaluating and reviewing every possible way that we can reduce the costs.

Garrick Schmoice - Longbow Research

In California, obviously demand is weak there but towards the end of the prior quarter we were starting to see a little bit more of an increase in infrastructure spending. Has that trend continued at all or can we assume that California volumes are going to remain weak for the foreseeable future?

Melvin G. Brekhus

We have seen more bid lettings on the public works side. The question of course is, will that continue? We hope it does. We know that the bond money is there. But once again that’s going to take a little bit of time to develop. But the good news is that the bid lettings have increased.

Garrick Schmoice - Longbow Research

Just one last question on pricing. It seems like there’s been quite a bit of pain now in the California market. People are bringing down pricing. But seeing the ready-mix price increase announcement and that may or may not hold to various degrees. Is there talk about another go around for cement price increase in California to maybe try to recover some of the margin compression that’s occurred here recently?

Melvin G. Brekhus

Yes, there is. We are certainly reviewing that. You may be aware that there are some current price increases in the market place by some of the international cement producers that cover the entire country that are announced for January 1 of 2009, and we’re looking at the possibility of a price increase at that time also.

Operator

Our next question comes from Trey Grooms - Stephens, Inc.

Trey Grooms - Stephens, Inc.

A quick question on Texas. We’re kind of hearing this across the board as well that construction activity in Texas has slowed somewhat. Do you have a feel for where cement consumption is in Texas right now?

Melvin G. Brekhus

The problem is that we do have a very good feel for where it is because we have the excise tax in Texas. And if you look at the reports that are put out by the State of Texas based on that excise tax, the cement consumption in Texas for 2008 will be slightly greater or 5% greater than the cement consumption in 2007. But in spite of that, what we’re sensing is that because of the decline in residential construction, the commercial construction that declined subsequently, and the overall economy of the country and the difficulty associated with credit that there is the potential of softening going forward. But we’re just sensing that Trey. We’re not seeing it in the numbers yet.

Trey Grooms - Stephens, Inc.

On aggregates pricing being up in the quarter, can you give us an idea of what was going on there and if the sale of those Louisiana assets played any role there?

Kenneth R. Allen

Yes. The general direction of the stone, sand and gravel pricing is up. There was some mix impact as we sold the South Louisiana operations. They’re average price was lower than the average price for all operations combined. So there was some impact there, but still the general trend is up.

Trey Grooms - Stephens, Inc.

You touched on this a little bit, but I was going to see if you could give us a little bit more color on the prices as far as the decline there in California in cement. How much of that is a true price drop and how much is just the freight, taking it further?

Kenneth R. Allen

Good question. We’re looking at the year-over-year price drop, and just very, very roughly, it’s about half due to mix and half due to price. And some of that latter is just going to be due to shipping further away from the plant.

Trey Grooms - Stephens, Inc.

If you touched on this, I apologize. The SG&A being lower in the quarter, I know you outlined a couple of things, but is that a good run rate that we could go for at least for the next couple of quarters until we get to the fourth quarter?

Kenneth R. Allen

Good question again. The volatility in SG&A is really going to be determined by the stock-based compensation, so it’s a little hard to get a handle on that. Over time, if you look for a year, our total SG&A on a consolidated basis tends to run about 9% of sales. But it’ll move around in the quarters as incentive, stock-based compensation and other things change.

Operator

Our next question comes from [Glenn Wartman] - Sidoti & Company.

[Glenn Wartman] - Sidoti & Company

As other cement markets deteriorate around Texas, do you think that perhaps any domestic production from outside the state will try to find its way into Texas?

Melvin G. Brekhus

I think Glenn that the opportunities for producers outside of the state to enter into Texas is already occurring to the extent that cement for example from Florida is now making its way into Houston, where we need it, and in the past that would have come from some foreign country. But instead it’s now coming from Florida. We also have some producers that are close enough that they consider part of Texas their natural markets. They continue to supply but they have not been irrational. As the market in the rest of the United States has declined over this past year, we have not seen efforts by competitors to come great distances into the Texas market to try to make up for the sales that they don’t have in their home markets.

[Glenn Wartman] - Sidoti & Company

Can you also address the timing and size of the planned inventory draw-down at the North Texas plant?

Kenneth R. Allen

We have not set an exact timetable for that. We’re just going to let the new kiln run and we’ll see how long it takes us to adjust for inventory.

Melvin G. Brekhus

And one more comment there. While we’re doing that, we’re going to go down in the second quarter and we’re going to do repairs. And one of the things that we’re going to do is a part of the work to improve the efficiency of the new kiln system and increase its productive capabilities. So we will not only be managing inventory over the next however many months, we will be trying to maximize the production of the number five kiln.

[Glenn Wartman] - Sidoti & Company

In Texas, I’m certain that the state as a whole is very strong but would you say some markets within Texas are stronger than others, perhaps the South and Central Texas appears to be stronger because you’re getting better pricing down there?

Melvin G. Brekhus

It ebbs and flows. I would say that as we speak because of the oil and gas business, you could say that the Houston market and the Central Texas market have been a little bit stronger. But on the other hand we have the Barnett Shale in North Texas so we’re enjoying the prosperity that comes with that. And Central Texas has been strong and I think will continue to be strong as we build that I-35 corridor of trade.

Operator

Our next question comes from Todd Vencil - Davenport & Company LLC.

Todd Vencil - Davenport & Company LLC

I want to take a little run at the question Trey asked on prices in California. Ken, just thinking about it a little bit differently. Of that 8% decline you said you guys have seen and that was on a year-over-year basis for just what’s being sold in California, can you break that out kind of ignoring the transportation issues on the stuff you’re hauling?

Kenneth R. Allen

Todd, ask it again. I’m not quite following you.

Todd Vencil - Davenport & Company LLC

You said that prices in California were down about 8% but that there was an issue in there of some of the fact that the prices in the local market had declined and others it was a decline in mill net because you were hauling some of it further distances. On a given job same location, can you give a feel for how much prices have declined in California?

Kenneth R. Allen

Todd that’s going to be real specific by market. I don’t know really how to generalize on that.

Todd Vencil - Davenport & Company LLC

Detailed question. You mentioned in the text of the press release a $1.7 million gain from a mission credit sales. I didn’t see that show up in the segment breakout where you do actually break out the other gains, the oil and gas bonus payment.

Kenneth R. Allen

It’s in there in the cement operations and it’s in other income in cement operations.

Todd Vencil - Davenport & Company LLC

Do you have a rough per share number on what that was? Should I just use the 35% tax rate on that?

Kenneth R. Allen

Just use 35% on that.

Todd Vencil - Davenport & Company LLC

With regard to the $25 price increase, we’re aware at least one other competitor has put out a press release that that is what they’re doing. What are you hearing from your customers and are other producers also following on that on the concrete prices?

Melvin G. Brekhus

What we’re hearing from our customers is encouraging. They realize that we are facing the cost pressures that we’re facing and they understand why we need the price increase, and they are actually receptive to that as long as all the other producers are also covering their costs. But we’re very enthusiastic about the opportunity for this price increase, we need it, we’re not the only ones that have been public about that. We don’t talk to our competitors about that but they have put out price increases in North Texas and in South Texas and Central Texas that are similar, and we look forward to the price increase.

Todd Vencil - Davenport & Company LLC

You mentioned that you’re running the new California plant right now at 60% to 70% of capacity. How’s the plant running at this point and does it run well at that level?

Melvin G. Brekhus

Yes. That’s what’s really encouraging. We are able to run the plant at about 60% to 70% of capacity and run it consistently at that level. And that’s a tribute to the engineers internally and externally that designed this plant because I have a lot of experience in the cement industry and most pre-heater precalciner plants don’t like to run below 90% of capacity. But the design is such with this one that we’re able to run it at 60% to 70% of capacity. And we don’t get all of the efficiencies that we would like to get but we’re getting the majority of them in the incremental cash costs of producing, and that’s very encouraging.

Todd Vencil - Davenport & Company LLC

At this level given where your costs are and where your prices are, you said you more or less broke even I think in the August quarter. Is this basically a break-even run level, that 60% to 70% capacity utilization?

Melvin G. Brekhus

Yes, that’s what it looks like because remember that the increment EBIT that we were going to get from the production facility was because we were going to reduce our costs. And we analyzed our production runs at roughly 60% to 70% and we’re getting about a third of the incremental EBIT that we were looking for in cost reduction running at this level, but unfortunately with the price declines that we’ve had out there we’ve about eaten up that benefit that we’d gotten in not using as much fuel per ton of clinker, not using as much power per ton of cement, and producing significantly more tons with fewer man hours.

Todd Vencil - Davenport & Company LLC

On the question of electricity, you mentioned Ken I think that that has begun to come down and natural gas costs have obviously come down pretty significantly. How quick a pass-through is that on electricity costs? How quickly do the electricity costs in your market respond to a change in the natural gas costs in the market?

Kenneth R. Allen

Usually it occurs fairly rapidly but this summer even though gas was coming down, Texas demand for kilowatt hours and electricity just generally in the economy was very high and it took us a little while to get through the summer peak season to see our cost of electricity come down. But we’ve seen it come down.

Todd Vencil - Davenport & Company LLC

I don’t know if you can quantify this, but at the current level of electricity cost do you have a feel for what the current level of electricity cost is relative to where you were in the August quarter?

Kenneth R. Allen

I tell you we’re kind of early in the quarter and I hate to put a number out there that’ll be applied to the whole quarter as volatile as everything is.

Melvin G. Brekhus

Just a little bit of color on that. You might have read in the Wall Street Journal that Chesapeake a significant producer of natural gas has decided to back off on drilling. And the reason that they’re backing off is with the price of natural gas going down, they don’t want to drill and produce gas. They want the price to go back up and if all of their competitors follow suit, the price of gas could go back up shortly.

Operator

Our next question comes from Katherine Thompson - Avondale Partners.

Katherine Thompson - Avondale Partners

My first set of questions is on pricing. You realized about a $4 per ton price increase in April and you had about a $5 per ton for cement in July. My question to you is, how well did that July price increase stick? And in light of that and the results today, how much do you think you can get in your October price increase?

Melvin G. Brekhus

I think that answer Katherine to your question is more important regarding October because you have in front of you what the price changes have been by segment and you also should have some sequential data. I don’t have that at my fingertips. We got some price increases over the past year over those dates that you were talking about but what it resulted in was what Ken said, about $1 year-over-year. The October price increase in Texas for South Texas and Central Texas of $10 a ton is very firm.

Katherine Thompson - Avondale Partners

So you think you’ll be able to get all of that?

Melvin G. Brekhus

We think we’ll get all of that and if not, very close to all of it.

Katherine Thompson - Avondale Partners

You’d also mentioned aggregate energy surcharges starting in early September. How is that progressing?

Kenneth R. Allen

That’s a good question. At the end of the day we tried to get those surcharges in place and honestly we don’t think they’re going to hold.

Katherine Thompson - Avondale Partners

Can you give us a general range of what you were attempting to pass on?

Kenneth R. Allen

It would have to be very general because it’s very much by plant and by market.

Katherine Thompson - Avondale Partners

I’m just trying to get a general idea of a range.

Melvin G. Brekhus

We were trying to pass on the increases in diesel costs and that depended upon what the price of diesel was in the particular market and whether it went up or not.

Katherine Thompson - Avondale Partners

Not to beat a dead horse with your two kilns that were idled in Midlothian, you had indicated that this could be possibly six months or more. When do you think these could come on line and what would be the key decision for you to decide to bring those two kilns back on line? What would you need to see to put those back on line?

Melvin G. Brekhus

We would have to have our inventory at a level that makes us comfortable and we would have to see demand that required us to start those kilns up because the number five kiln on its own would not meet that demand and we’d start them up immediately.

Katherine Thompson - Avondale Partners

I assume that would include the remaining kilns that are up in operation or running essentially 80% to 90% capacity utilization?

Melvin G. Brekhus

Yes. The one kiln that remains is the very large kiln at Midlothian. It’s a state-of-the-art pre-heater precalciner kiln. We’re going to run it at its capacity and we’re going to run it at the highest run rate that we can.

Katherine Thompson - Avondale Partners

On California, they finally passed their budget. What’s your thought on the transportation portion of the budget and does this give you any visibility for infrastructure projects over the next 12 to 18 months? And just your general take on California budget which relates to Cal Tran would be helpful.

Kenneth R. Allen

As Mel alluded to earlier, we’re beginning to see an increased amount of highway contracts let in California and that’s very encouraging. In terms of the state budget and things like that, we have seen other building projects and education create some demand as well. In terms of when do things actually get spent as a result of a new budget, it’s hard to time. But the real key thing for us is that we have begun to see the highway contract awards begin to pick up in the summer time here. As Mel talked about earlier, we don’t know whether that’s going to continue or not but it’s a good first sign. We’ve been waiting for a while.

Katherine Thompson - Avondale Partners

Do you have any comments about [inaudible] filings from your top shareholder?

Melvin G. Brekhus

Not that you can’t read in our most recent 8K.

Operator

Our next question comes from Analyst for Nitin Dahiya – Lehman Brothers.

Analyst for Nitin Dahiya – Lehman Brothers

Ken, first question for you. With the market trends and the numbers that you’re seeing now, and obviously you were able to do a bigger bond issue than previously thought, do you think that you need to increase the size of the revolver to complete the Texas expansion?

Kenneth R. Allen

We think with the financing we put in place in August and the $200 million credit line we have in place we’re in good shape for completing the Central Texas plant.

Analyst for Nitin Dahiya – Lehman Brothers

Even when you factor in the weaker market submissions that you’re seeing right now?

Kenneth R. Allen

We think so. You can always develop a scenario of much weaker markets or something like that. What we see right now and why we put it in place, the financing in August, was to give us a real good clear avenue towards completing that project.

Analyst for Nitin Dahiya – Lehman Brothers

And that’s my view as well but I just wanted to confirm. Second, on the coal contracts you mentioned that when they come up for renewal you could see like a 40% increase. How does that translate into a per unit cement cost in terms of dollars per ton maybe?

Melvin G. Brekhus

The way to look at that is that if the price of coal goes up 40%, remember that the cost to produce a ton of cement has 20% resulting from the coal. So if the price of coal goes up 40%, then the cost to produce is going to go up 40% of the 20% or 8%.

Analyst for Nitin Dahiya – Lehman Brothers

Perfect. And obviously as the contracts roll in and what the final contracts look like I suppose is still uncertain to date?

Melvin G. Brekhus

Yes, it is uncertain. And of course we’re negotiating and we like to negotiate hard.

Analyst for Nitin Dahiya – Lehman Brothers

In terms of the ready-mix price increase I think you mentioned that you announced a 25% increase. Is that enough to fully offset all the input cost increases you are seeing or rather the amount that you expect to stick, is that expected to be enough to offset the cost increases?

Melvin G. Brekhus

That’s why we picked the number. Yes. And if we did get the 25% across the board in our ready-mix operations, then we would be able to offset the costs that we’ve incurred over the last several years. And then we could be earning a reasonable return for the assets that we have deployed in that segment of our business.

Analyst for Nitin Dahiya – Lehman Brothers

Based on the early read, how much of that do you think sticks?

Melvin G. Brekhus

We’re going to go for it all. We’re going to start October 1 and we’ll see where it goes from there, but we think we need all of it. We think anyone who thinks they need less than that probably should be in a different business.

Operator

Our next question comes from Meryl Witmer - Eagle Capital.

Meryl Witmer - Eagle Capital

Are there any high cost plants in California in the geographic areas you serve that should not be running?

Melvin G. Brekhus

There’s only one plant that has older technology. And I’m not going to say that it shouldn’t be running because that’s not my job, but California Portland has a cement plant in Colton that is older technology and that’s the only plant in the area that isn’t state-of-the-art equipment, and correct me if I’m wrong Ken.

Kenneth R. Allen

No.

Meryl Witmer - Eagle Capital

What is its capacity?

Melvin G. Brekhus

It’s about 800,000 to 900,000 tons a year I think.

Meryl Witmer - Eagle Capital

On the request by a 15% shareholder for a Board seat and also his request to increase his share holdings, you can argue on the increasing of the share holdings. I can see that could be an argument either way although I would let him go up to 19%. But in terms of the Board seat, this is a very intelligent person with experience in the cement industry, it’s a fresh set of eyes on your business. I guess you certainly have more of a stake in the business than you do. I’m just curious about your rationale for not offering him a Board seat. I think you owe us more of an explanation than a one sentence in an 8K.

Melvin G. Brekhus

No Meryl, I disagree. Our statement in our 8K speaks for itself.

Meryl Witmer - Eagle Capital

What do you disagree with? That you owe us more of a statement?

Melvin G. Brekhus

That’s correct.

Meryl Witmer - Eagle Capital

That’s just not in the interest of shareholders but no rational logical explanation about that?

Melvin G. Brekhus

You have the explanation in front of you maybe. If you don’t, we can send you the 8K. But that’s the only comment I’m going to make about that on this teleconference call.

Operator

Our next question comes from [Mike Detz] - J.P. Morgan.

[Mike Detz] - J.P. Morgan

I know you don’t want to make a forecast of electricity costs, but could you just give us, if natural gas moves by $1 per million BTU, what the impact is on your electricity cost so then we could make our own assumptions please?

Kenneth R. Allen

Just very, very roughly every time natural gas moves $1 per MCF, just roughly our cost of production in cement moves about $1.20 to $1.30 a ton.

[Mike Detz] - J.P. Morgan

Obviously the risk is with Texas slowing you bring new capacity on stream in 12 months or 18 months time. Is the risk that we could have a rerun of what’s happened here in California so I guess I’m really asking a two-part question. How much cement is being imported into Texas at the moment which prospectively maybe could be stopped? And just a follow on, in relation to Texas how much old sort of wet process or very small capacity could potentially be taken out if the industry needed to adjust to any excess in Texas?

Melvin G. Brekhus

The answer is that at current demand levels, Texas is consuming about 17.5 million tons of cement per year. It can produce about 12 million. We’re going to come on line with our 1.4 million and CEMEX is going to come on with another million. So that makes it about 14.5 million which means that if demand is flat, we’re going to need to bring in 3 million tons of cement in the calendar year 2009. It’s going to have to decline below 3 million tons before we’d have to look at any capacity reductions. The older less efficient plants that exist in Texas are either in West Texas or they are like our plant of Midlothian and our competitor across the street at Ash Grove. They are wet process plants but not terribly inefficient.

[Mike Detz] - J.P. Morgan

The volume of imports currently coming into Texas?

Melvin G. Brekhus

Currently there’s roughly 4 million tons plus the adjacent imports from other states like Oklahoma and Arkansas and Florida. So a total in imports required right now is about 5 million tons.

Operator

Our next question comes from Michael Terwilliger - Bank of America Securities.

Michael Terwilliger - Bank of America Securities

Just a quick clarification on an earlier question. The $1 increase in natural gas increasing your cost $1.20 per ton, I thought that was applying to the California plant and was $1.50 in Texas. Does that $1.20 still apply in California when you’re running below optimum capacity?

Melvin G. Brekhus

We don’t get it now. We don’t get it all, you’re right. It’s because we’re not running at capacity. But in California running at 60% to 70% of capacity we’re probably looking at 140 to 145 kwh per ton.

Michael Terwilliger - Bank of America Securities

So we should adjust our models more towards that?

Melvin G. Brekhus

Just for a little bit, yes.

Michael Terwilliger - Bank of America Securities

From a 50,000 foot perspective, I think we’ve sort of danced around it a little bit on the call, but what is the degree of the supply and demand imbalance in California? And just looking at the headlines across the country, it seems as though perhaps there’s some gloom and doom in the US economy in the forecast. If demand isn’t going to be coming up to bring the supply and demand imbalance back into some rational equilibrium where we have some price increases, what’s going to take supply out? Do you think there will be a major player who actually leaves the segment? Will there be plants shut down? Or will everyone just scratch their back a bit? Basically how do you see that being played out?

Melvin G. Brekhus

I think that with the players that are in the California market with the equipment that they have, what you will see is a rational reaction which will be to curb production to fit the market because producing cement does not create demand. All you can do is meet that demand. So making more of it is not going to create the demand. You’re going to have to make the production to fit the demand and make it as efficiently and at as little cost as possible.

Michael Terwilliger - Bank of America Securities

But you don’t see any scenario where people could start flashing price to capture share and sort of creating a vicious cycle downward in sort of a lame grab type of scenario?

Melvin G. Brekhus

I don’t believe that would be a good thing to do and I don’t think it will be done because there’s no one that can capture that market share by cutting their price and maintain it.

Kenneth R. Allen

Chris, we’ve got time for one or two more questions if we still have them.

Operator

Our next question comes from Louis Sarkes - Chesapeake Partners.

Louis Sarkes - Chesapeake Partners

I would like to echo the concerns brought up by Meryl Witmer earlier and I’d really like to get an explanation. When you have a very significant shareholder who has a much bigger stake in the company than anybody in management or any other shareholder who has experience in the industry certainly and certainly knows the landscape, we have a stock that’s down in the last four months about 35% which is about 250% of what the market is down over that same period of time. How can a 15% shareholder with such a big stake and you have other adequate protections in place not have a seat at the table?

Melvin G. Brekhus

Same answer that I gave to Meryl.

Louis Sarkes - Chesapeake Partners

I heard the answer but I think that shareholders deserve a better explanation.

Melvin G. Brekhus

I didn’t interrupt you. You had your opportunity for your commentary. I appreciate it.

Louis Sarkes - Chesapeake Partners

Can I just ask if the shareholder was given more of an explanation than a one sentence?

Melvin G. Brekhus

Same answer.

Kenneth R. Allen

Chris, let’s move along to the next question.

Operator

At this time gentlemen, there are no further questions.

Kenneth R. Allen

Thank you for joining us. We’ll have our next tele3conference in early January. Thank you now.

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Source: Texas Industries, Inc. F1Q09 (Qtr End 08/31/08) Earnings Call Transcript
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