Texas Industries Q1
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Texas Industries Q1
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(FOOL CONFERENCE CALL SYNOPSIS)* By Debora Tidwell (MF Debit)
TEXAS INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TXI)") else Response.Write("(NYSE: TXI)") end if %> CHAPARRAL STEEL SEGMENT
As an overall comment, they are achieving their goal of mid-to-upper-teen return on equity (ROE) on average. They will continue to focus on and expand with products that play to their strengths, namely lightweight beam and special bar-quality steel. In the last 12 months they have achieved an average ROE of 15.3%.
In the first fiscal quarter, construction activity remains relatively strong in their market, although it is still below the previous peaks of 1988 and 1989. They don't call this a construction boom, but demand remains steady. The supply and demand for wide flange beams is essentially in balance. Earlier this week they reduced some prices on selected sizes of wide flange beams.
The manufactured housing market remains very strong. Bantam beams are a product used by the manufactured housing industry, and they account for about 10% of Chaparral's shipments.
In the bar products, there are signs of increased demand for specialty steel. Bar mill prices have improved as product mix shifts back toward specialty steel, and the company is committed to upgrading the product mix in the bar mill to higher quality, special quality steels. Rebar remains their lowest margin product in spite of a $10 increase last month. Demand for rebar is strong, but there is oversupply in the product.
Upgrades in the melt shop during the summer shutdown went well, and later in the year these upgrades will increase capacity by approximately 100,000 tons per year.
Scrap costs during the last few months have been flat and should remain that way through the next few months.
Last quarter the company's comments during the teleconference indicated that they expected that this summer's shutdown would be less disruptive to their production than it had been in the previous year. That turned out to be the case, as both melt shop production and rolling mill production was up significantly in the August quarter of 1996 compared to results for the 1995 August quarter. This is particularly important to Chaparral because they operate as a stocking mill or "the service center's service center," so it is important that Chaparral maintain a well-balanced level of inventories at all times if they are going to be able to meet their customers' performance expectations. Chaparral has been able to do that this summer, and they have ended the summer with a much better balanced inventory than they had this time last year. This should bode well for the shipments that should occur during the November quarter.
Looking at shipments for the quarter, shipments of 388,000 tons were up 7% over last year's level. This was primarily because of higher levels of rebar shipments. The conditions that drive the structural market remain favorable and the feedback from their customers continues to be very positive in this area. Order rates for structural steel were down during the summer as imports increased, but the recent price adjustment announcements that were made last week by the domestic producers, Chaparral included, have changed that situation, and Chaparral's order rates have begun to improve over the past week.
Average selling prices of $382 per ton were up slightly over those of the May quarter. Bar mill prices were up about $2 per ton, and structural mill prices were up about $5 per ton. As the company looks to the near term, prices in the bar mill of the individual products are expected to remain fairly steady, but they do see their product mix shifting during the November quarter and upcoming quarters to a higher percentage of SBQ versus rebar. During the last six months, rebar shipments have been slightly more than 50% of the total shipments in the bar unit. So they would expect this percentage to decline and the SBQ percentage to increase, which should have the affect of raising the average selling prices in the bar mill.
Structural mill prices were reduced last week for wide flange beams. As they look on average at all products in the structural business unit, they would expect that the average prices would decline somewhere in the range of 3% from where they were in the August quarter.
They always expect that their cost of sales in the summer quarter will be up as a result of the summer shutdown that they have each year. This always occurs in either June, July, or August, and this year it was in July. But when they compare their cost of sales this year to their performance last year in the August quarter, their average cost of sales for 1996 were down $3 per ton, and that is in spite of the fact that scrap costs in the current August quarter were about $5-6 per ton higher than they were this time last year.
Looking at scrap costs for the August quarter, they were about level with where they were in the May quarter and their expectations are that in the current quarter (November), that scrap prices will remain level again. They might change $1 or $2 one way or the other, but are expected to remain relatively flat during this current period.
Operating profit was up 16% in the August 1996 quarter compared to the August 1995 quarter, at $15.5 million. SG&A costs were up, and the primary reasons for that are two. First, the company's compensation programs are all tied to results of operations and as performance goes up so does the cost of these programs; those costs were the major ingredient of the higher costs. Second, the company also had some higher costs for training that took place during the summer shutdown.
Net income of $8.3 million was up 29% over last year's level. That was $0.29 per share compared to $0.22 per share last year. For the 12 months ended August 1996, return on average stockholders' equity amounted to a little more than 15%.
Cash flow from operations was up a couple million dollars over the level of last year as a result of higher net income. Capital expenditures for Q1 were a little more than $10 million, and that was being spent on upgrades in the melt shop and some of work in one of their other business units. The company expects capital expenditures for this year will be in the range of $35-40 million, and they would expect normal capital spending to be in the range of about $15 million per year. So, the other $20 million is being spent on the programs mentioned earlier.
Chaparral also repurchased about 350,000 shares of CSM stock during the summer, which is the other item of note on the cash flow statement.
The only thing to comment on in the Balance Sheet is the fact that their debt-to-total capitalization ratio is now at 18%.
Q&A REGARDING CHAPARRAL STEEL
The company was asked about inventories of $128 million versus $105 million last year, because the company mentioned in the last conference call that they were expecting a decline in the inventory investment for the fiscal year. The company answered that last year they had a substantial reduction in their inventory during the quarter as a result of lower production levels because of summer shutdown. This year they had much better performance in their summer shutdown as far as the amount of time that was lost in production. So their production levels were up significantly over where they were a year ago. Also, Chaparral's scrap inventory levels have been rising over the last 12 months (intentionally) and that is a part of it.
The company tends to build up scrap inventories during the spring and summer months and deplete those inventories during the fall and winter months, so that will go down as they go into the more unfavorable weather as regards scrap collection. Scrap inventories are moderately high, but that was by design because they saw opportunities to increase the levels of inventories there at attractive pricing -- and that will come down in the next 4-5 months.
Also, it is important for the company to have a balance of products in inventory, because their approach to their major customers in the structural business unit (service centers) is to try to be a stocking mill for them and try to have some of everything in inventory. They are at that point right now and are comfortable with their finished goods inventory.
The company was asked why they expect the share of shipments in SBQ products to rise going forward. They responded that one of the reasons is that they are developing their capability in special quality steels moving into higher quality steel -- a market they haven't been in -- and so they will be really looking at new markets for their mill.
They were asked if that was a special marketing effort that they have undertaken. They responded that it isn't special marketing but rather developing new capabilities within the plant to make higher quality steels than they have been capable of producing before and that really gets them into new markets. They were asked if there was any problem finding new customers for that. They responded "not if we do it right."
TEXAS INDUSTRIES SECTION
As the company has stated for some time, their long-term financial objective at Texas Industries is to earn a return on average shareholder equity in the high teens. They are now meeting that objective, and they plan to stay there while they work on growing their core businesses through acquisitions as well as by capitalizing on new product and new market innovations that they create internally within TXI.
The construction markets that they serve in Texas and Louisiana continue to remain steady. They certainly wouldn't describe these as boom markets such as they witnessed in the '70s and '80s in Texas, but the markets remain very resilient and TXI expects them to be at this level for some time in the future. The supply and demand for cement in Texas and Louisiana remains in balance, and prices have continued to move upwards over the last several years. It should also be noted that in the United States, as a country, we are a net importer of cement, with some 13% of the cement that was consumed in the US in 1995 being supplied by non-domestic producers. TXI thinks it is also important to note that the distribution of this cement was done predominantly by domestic producers in the US.
TXI has made some modest expansion in their value-added and aggregate businesses through capital expenditures during the last 12-18 months, and they have done this with returns that are expected and are exceeding their ROE objectives. They continue to work on these growth and expansion opportunities, and they believe they have a management team that can react both quickly and decisively for new opportunities or to changing conditions in their marketplace while still preserving their high standards of return on equity.
They have begun this year with improved earnings for the first quarter and believe that this is the start of what should be another good year of earnings for TXI.
CEMENT, AGGREGATE AND CONCRETE SEGMENT
An overall comment on these operations is that they were affected negatively in Q1 in Texas and Louisiana by the weather. They had an unusual amount of rainfall during the last 6 or 7 weeks of the quarter, and that had a negative impact on shipments during this period of time. In spite of that, net sales for the quarter for the cement, aggregate and concrete segment were up about 3%, but cement shipments were down 90,000 tons over last year's level because of the weather problem and also the fact that last year, when they went into the August quarter, they had much higher levels of inventory of cement than what they did going into the August 1996 quarter. Cement prices during the quarter were up 5% over where they were in the May 1996 quarter, at $64 per ton, and year-over-year these prices are up 13% compared to the August 1995 quarter.
Shipments of ready-mix were off by about the same order of magnitude as cement shipments were, for the same reasons -- because of the rainfall. Aggregate volumes were up modestly because they have expanded their capacity, but these numbers would've been even higher if they had favorable weather. Prices for both the ready-mix and the aggregate groups continued their favorable trend, increasing from August 1995 to May of 1996, and then further improvement occurred during this August quarter compared to May's levels.
CONSOLIDATED FINANCIAL STATEMENTS
Net income for the quarter was up 16% to almost $20 million, or $1.74 per share. For the most recent 12 months, on a consolidated basis ended August 31, the return on average shareholders' equity was 21%, which is above their goal of the high teens. Sales for the quarter were up 6% to almost $250 million. The majority of that increase was in the steel segment of the business, as they were up $11 million. The cement, aggregate and concrete side was up about $3 million in spite of lower volumes. Total SG&A costs for the quarter were up approximately $2 million; most of that came as a result of the higher SG&A costs on the steel side of the business. There are no other major items on the income statement.
Taking a look at the cash flow statement, again cash flow from operations is up about $3.5-4 million, principally because of higher levels of earnings. Their capital spending in Q1 was about $25 million, $15 million of that was on the cement/aggregate/concrete side and $10 million on the steel side. For the year, capital spending is expected to be in the range of $100 million, up from $80 million last year. This presumes that they are going to be successful finding some growth opportunities on the cement, aggregate, and concrete side that will meet their return criteria. If they were to spend $100 million, they would expect approximately $30-35 million of that would be on the cement/aggregate/concrete side for normal replacement and upgrades, and the total in the cement/aggregate/concrete side might be in the range of $60 million. On the steel side, they would expect the spending would be somewhere in the range of $35-40 million. On the steel side, about $15 million of that is normal replacements and upgrades, and the other $20-25 million is for the projects mentioned earlier to increase melt shop capacity and to upgrade SBQ capabilities.
Looking at the balance sheet, the only item there mentioned is that the debt-to-total capitalization in August is 26%.
TXI is working to profitably grow its core business, utilizing their employees' leadership and trying to leverage on the innovation and unique applications of new ideas. Their record profit year of 1996 saw 1/5 to 1/3 of their operating income come from products or processes that are not available to, or that are not being utilized profitably by, others in their industry. Nothing they are doing in this arena more characterizes this differentiation between TXI and its competitors than the patented process CemStar which they announced this week.
CEMSTAR
CemStar process is a patented and proprietary process that was developed through a collaboration between TXI's cement group and Chaparral Steel. This process uses slag, a byproduct from steel making. By adding the slag into a cement kiln with other feedstock materials, total production capacity of the kiln is increased by 5-15%. The cement produced is the same quality Portland cement as that currently being produced in cement factories throughout the world with standard raw materials. The incremental cost to produce additional tonnage used in this process, as well as the capital for additional processing equipment, is nominal. Incremental costs, exclusive of CemStar's royalty fee will vary between $0-5 per ton of additional production. The capital cost for equipment will range from $0 to several hundred thousand dollars to implement this process.
After nearly two years of R&D, they began using the process at their two cement plants in Texas. During FY 1996, they employed this technology and produced 150,000 tons of cement over and above their normal capacity.
TXI continues to refine and improve upon the CemStar process and expect to produce an additional 200,000 tons of cement in FY 1997. During July of this year, the company entered into a license agreement with a cement producer in Texas to provide TXI's know-how, the raw materials to use the process, and the rights to use the process. Negotiations are continuing with other producers in the US and internationally to do the same. TXI's objective is to license CemStar to other cement companies throughout the world. They, therefore, formed a company (CemStar Inc.), a wholly owned subsidiary of Texas Industries, to market and sell this process into a market where a 10% production increase can easily equate to millions of more tons produced by using this unique process.
QUESTIONS ON TXI CEMENT/AGGREGATE/CONCRETE BUSINESS
The company was asked what type of incremental gains they were looking for the licensing of CemStar to provide to the bottom line over the next couple of quarters or so. The company answered that they are in the early stages of marketing this process to other cement companies, and it is too early to determine how successful it is going to be. The incremental costs to use this process are nominal. That, on top of fees they charge for the CemStar process, provides cement to the customer at the lowest possible cost to them. So the returns to TXI are going to be relative to that.
The company was asked what their royalty rate is per ton for the CemStar business, what the start date is for the one CemStar customer they do have, and how many other potential customers have run tests at this point. The company responded that the royalty rate per ton is competitive with the alternatives that this customer and future customers will have to increase the production. These alternatives are plant modifications, import purchase of cement from others, or new construction. They are not going to share the exact numbers, but it is competitive with those alternatives. The start date for this customer was July of this year. They do not have tests in progress with other companies, but they have negotiations in progress that will result in tests in the very near future. They are negotiating with a handful of companies now.
The company was asked if they have been able to make-up anything they lost due to the bad weather. The company responded that they believe there will definitely be a makeup of that volume but that it typically doesn't happen in 3 months. They expect that between now and the end of the fiscal year they will make that volume up, but not necessarily during the next 3 months.
The company was asked if they are comfortable with a Street estimate for the year in excess of $7.50 for Texas Industries. The company responded that most of the analysts are out with estimates that are in the range of $7.50. Despite the weather in Q1, the company is off to a good start for the year. In terms of speculating on whether or not they will beat analyst estimates, that is something they don't do.
The company was asked if they are primarily thinking about acquisitions in the aggregates area, what kind of opportunities are they seeing, and how much money could they conceivably spend on opportunistic acquisitions in that business over the balance of the fiscal year and into the next. The company responded that their principal focus has been in the aggregate area for one primary reason. If you look on the cement side, there just aren't any opportunities out there. The aggregate industry is one that is much more fragmented, and there is little concentration of ownership in the total aggregate production capacity in the US, so that opens up the opportunities for them. The types they are looking for are some that complement their current Texas and Louisiana operations. That is the type they have been most successful with, with the exception of the expansion they made into the California market. The largest acquisition they have made in the last several years amounted to about $15 million. The overall magnitude of how much money they can spend on the acquisition side is really dependent more on what's available that will allow them to still maintain their return criteria. They are not looking outside of their core businesses.
The company was asked to consider a stock split in the mid-$60 range. The company responded that their board looks at those types of decisions and dividend decisions but that they don't have any announcements to make at this time.
The company was asked if buying back shares was still a viable strategy at their current stock price and are there any authorizations to do that. Also, would the company use capital to buy back shares if they can't find acquisition opportunities. The company responded that they continue to look for acquisitions, but if they don't find any they will continue to invest any excess cash flow that they have in the shareholders' best interests.
The company was asked to comment on their real estate operations. The company responded that they expect, year-over-year, to see income produced from their real estate activity with operating profits somewhere in the range of $5 million per year. Last year it was a little above that. The timing of real estate transactions is difficult to predict, but they do have a segment of their business called real estate and have a VP that is responsible for real estate activities. He has an organization and is out marketing the real estate they have. They do consider it to be part of their core business, albeit a smaller part of their core business. But they have been in the real estate business in Texas Industries since the early 1960s, and it is a business that is synergistic to their other businesses.
The company was asked if they had closed the pricing gap in the cement business versus national average pricing. The company responded that although they are approaching pricing levels closer to the national average, there is still room for improvement and they intend to pursue that along with their other tenets of providing the best quality and the best price. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. |
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