Texas Industries Executive INSIGHTS: Cement Costs, Energy Industry Update
On Thursday, Texas Industries Inc (NYSE:TXI) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Take a look.
Trey Grooms – Stephens Inc.: This might be for Ken, but could you guys dive deeper into understanding the drivers behind the lower cement costs? I mean, you obviously pointed out maintenance and the lower energy costs, but can you quantify a little bit on the energy costs? I guess the obvious question is how much of this big improvement is sustainable going forward as we kind of think about cost per ton?
Kenneth R. Allen – VP, Finance, Treasurer and CFO: Trey, this is Ken. Good question. Let me see if I can provide some context for you. It’s clear as we improve our production, we’re going to spread our fixed cost over more units, so if out of the $20 a ton roughly a third to half of the total amount was due to increased production, frankly that’s sustainable if our markets continue to stay where they are or even improve. The remainder – probably a little more than a third of the remaining amount is due to the decline or the more efficient production that we had just outside of increased production and that primarily impacted our energy costs. That, together with substituting gas for coal at two of our plants in Texas had the biggest impact there, and then the other piece would be just a lot of blocking and tackling and reducing cost. So, we did get a little bit of help just from the fact that gas costs are down, but Trey that is by no means the biggest contributor to the overall cost reduction.
Trey Grooms – Stephens Inc.: So, I guess the key takeaway there is that, if demand or your shipments continue to be at current levels or improve, the lion’s share of these cost improvements should continue?
Kenneth R. Allen – VP, Finance, Treasurer and CFO: That’s correct. That’s correct. Now, remember, we didn’t have any real major maintenance expense in the fourth quarter.
Trey Grooms – Stephens Inc.: Right. But I mean you’re talking about maybe a couple dollars per ton if I remember correctly coming out of last year’s 4Q?
Kenneth R. Allen – VP, Finance, Treasurer and CFO: Yes, compared to last year that’s true. But that was a fairly low amount of major maintenance in the quarter. We’re going to have larger amounts from time to time as well as we have larger shutdowns.
Trey Grooms – Stephens Inc.: And then I guess my last question before I jump into queue – back into queue, Ken, you guys have taken a pretty aggressive approach to non-performing assets; divestitures, that kind of thing – or non-core asset, I guess, I should say. Kind of looking at liquidity where it stands today, the need for future asset sales, Ken – and might be this is for Mel, can you update us on where your head is on that? We’ve already seen a decent amount of divestitures, so should we expect more of that kind of asset sales, and if so, can you provide us any kind of color on what kind of assets you’d be looking at and geographies, that sort of thing?
Mel G. Brekhus – President and CEO: Yeah, Trey, this is Mel. The answer to your question is that we routinely review our portfolio and look at our assets from two perspectives that are very important. One perspective is their performance. Another perspective is, are they core to our long-term strategy. And if they are not core to our long-term strategy, we look at redeploying that capital. It may be redeployed with an asset sale or it may be redeployed by something like a swap of assets with someone that enhances our position, if they’re not performing and they’re non-core. That’s when we look very seriously or more seriously at divestiture once again so that we can redeploy that capital. We’ve done that over the years for the entire history of the Company. We happen to have a couple of substantial transactions this year, and it happened to fall in the fourth quarter, but this is not new. We’ve done it in the past we’ll continue to do it in the future. We don’t have anything specific to talk about, but do know that this is the process we go through.
Kathryn Thompson – Thompson Research Group LLC: In digging a little bit further, I know you – thanks for the clarification on the cement margins in the quarter, understanding that a little bit higher utilization drove a third or half of the increase in margins, but of that remaining a little more of the third, that is lower energy cost, how should we think about that because you’ve talked in the past about substituting natural gas for coal in your plants if that would imply that this might be a little bit more sustainable, and is more tied to movements in natural gas versus coal. Could you help us maybe think how should we think about modeling that energy portion of your cost in cement plants, because it is a significant – you know, it’s a meaningful portion of your overall cost running in cement plants?
Mel G. Brekhus – President and CEO: You are absolutely correct, Kathryn. I am going to try to answer your question, but it may not help you as much as you would like, but the important thing that we have done and continue to do in the field of energy, particularly fuel sources of our kiln systems is try to expand the menu of choices, because you are right, you know the price of gas today is less than $3 a million, but in the near future something could happen where it spikes up and we lose that margin enhancement that we had in the recent months. But by having an expanded menu, we can assure ourselves that we have the opportunity to use the lowest fuel source, the lowest cost fuel source. So, that’s why we have been doing the things that we talked about in previous calls and Jamie mentioned in this call, like putting the tire system at our Midlothian cement plant, expanding our infrastructure, so that we can use as much gas as possible when the price of gas is lower, and looking at other alternative non-hazardous, but other alternative fuels that we can use at all of our plants and making sure that we’re permitted to do that. So, that all says in answer to your basic question, we can’t control the price of the fuel, but if we can have the most expanded menu, we should be able to use the lowest cost fuel at any moment.
Kathryn Thompson – Thompson Research Group LLC: How much of your aggregate and cement volumes were driven by energy demand of Texas?
Kenneth R. Allen – VP, Finance, Treasurer and CFO: Kathryn, you are asking how much of our…
Kathryn Thompson – Thompson Research Group LLC: Of your Texas specifically aggregate volume and cement volumes are driven by increases from energy or energy demand, energy industry.
Mel G. Brekhus – President and CEO: Kathryn, less today than a year ago and the reason for that is that we participated significantly in the Barnett Shale with aggregates and with cement, but the Barnett Shale with the price of gas being where it is, has decreased significantly in drilling activity. The Barnett Shale also doesn’t have the liquids quantity that attracts the exploration and production company. The Eagle Ford Shale, the south of San Antonio does have higher liquids content. The price of oil is where it is, so West Texas is seeing a lot of activities, but our competitors are benefiting from that more than we are, so we’re back to our normal percentage that runs anywhere from 5% to 10%.
Kathryn Thompson – Thompson Research Group LLC: What was driving aggregate demand in the quarter then?
James B. (Jamie) Rogers – VP and COO: Hi, Kathryn, it’s Jamie. I think there is a lot of things, but I think a lot of that tied to the large public works project that we alluded to earlier around Dallas and I think we will see more of that going forward.
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