Coal is the goal

Coal is the goal

Vic Patrick and Walter Industries want to take advantage of the

demand for coal in steelmaking to meet a soaring international demand.

Once a sprawling industrial conglomerate, Walter Industries Inc. in Tampa is ready to be a one-product company.

By year's end, Walter hopes to sell or split off its homebuilding operation - which Jim Walter used in 1946 as the foundation for the company - and focus only on coal mining.

The metallurgical coal operation is booming because steel demand from China, India and Brazil has tripled prices.

The company, with revenues of $1.2 billion, has already shed its aluminum, pipe and fiberboard businesses. Its original trademark two-tower headquarters in Tampa along Interstate 275 has been demolished. So much has changed at Walter that senior executives even thought of changing the company's name.

But the name has brand value. And coal has rising value.

Walter reported a profit of $50.8 million, or 94 cents per diluted share, for the second quarter ended June 30. That compares to $18.1 million, or 34 cents per diluted share, in the second quarter 2007.

The main reason for this improvement was its metallurgical coal business.

"It is performing well," says Victor Patrick, who is the principle executive as vice chairman, Chief Financial Officer and general counsel at Walter Industries. "Prices are high. Production is good and getting better. There is applause on Wall Street, a congratulations for the surprise. The expectations on earnings were around 56 cents. We produced 94 cents."

The Gulf Coast Business Review spoke with Patrick recently about Walter's performance and his vision for its future.

With the economy and energy markets in their current state, is Walter Industries poised to take advantage of this by offering more affordable housing and coal?

Yes. That's that short answer. The longer answer is the metallurgical coal business. It is specific and unique. It has a particular use. You can't put petroleum products in a furnace. Gas won't do that. So not only does the energy situation help us, the steel boom helps us.

What does the downturn in homebuilding mean for your homebuilding unit?

Homebuilding can't get much worse. We've announced we want to separate our businesses. Investors could invest in one. Coal is the greatest value driver. It makes sense. For the homebuilding unit, we're considering many things. Selling to a private party. A spin-off to the public. Whatever we think works best.

What is the timetable on that transaction?

It will be complete by end of the year. We've already narrowed our possibilities. But there's no outcome. We've made a lot of progress.

What are the main trends in the coal industry that are affecting Walter Industries?

The big global trend would be the infrastructure demand of very rapidly developing China, India and Brazil. There's a demand for resources and a building out of their infrastructure, mainly with steel. The demand is just enormous. Once coal is on the water, it can go anywhere. We sell a lot into Brazil and Europe. In China and India, the demand is so high. People want high-quality coal and want the lowest delivered cost.

Has the cost of fuel affected how customers buy?

It is more expensive to ship to China, but blast furnaces need to be up 24/7. If they need coal, they are going to pay to have it shipped.

Where do you see the company in the next year?

We'll use our cash flows and very strong price on coal to develop a slot-in acquisition. With the coal companies, we're going to develop our own reserves. This, as well as finding ways to return capital to our shareholders.

In the next five years?

We'll be looking for broader kinds of metal. Coal acquisitions. We see the production and price in the next three years as very strong. We will focus on mining operations and expand the core. We have spent $175 million in capital to double production of our mine No. 7. It's the highest quality coal the world. Our No. 4 mine is almost the same quality. The No. 7 coal mine is doubling production.

What's the biggest lesson you've learned at Walter and how have you adjusted?

We've faced a lot of challenges at Walter. We were a mini conglomerate with no defined business strategy. We refined that to be a natural recourses company, particularly metallurgical coal.

Any other lessons?

Listening is more important than what you know. You can be the smartest guy, but if you're not listening to various constituencies, where pricing is going, an awareness of the circumstances, if you lose touch with that, you are out of touch with an aspect of leadership. What I find, if you listen, you get better results from people you work with, who will continue to contribute. The people will give you bad news as well as good news. You get the information you need to process. I think how you listen is more important than how you say it.

Walter has evolved over the years. Is the structure of the company where executives want it now? Would you make other acquisitions or sell some businesses?

We announced we're separating housing from natural resources. Water Industries' individual investor likes the strong metallurgical coal results. He finds the home business to be a distraction. I think we'll study related natural resource businesses, and some of the different techniques for mining.

The company closed 36 branches of Jim Walter Homes. Was that a cost move?

We were getting the cost position more in line with profit making. Half of the branches were delivering 80% of the profit. We're got 44 left, roughly.

How has your tenure at Walter been for you?

I joined the company in August 2002. I've been surprised by everything that's happened. I joined as general counsel. I didn't expect to be CFO. For a guy who went to law school, it's been a learning experience. It has been pretty fun for my personal satisfaction.

Are the days of conglomerates in America gone?

It's hard to do it well. Look around America, most conglomerates, over the past 20 years, have taken a de-conglomerate strategy. Tyco, Rockwell, companies with multi-sector businesses, have turned into smaller, more focused businesses. We had five segments at Walter when I joined. There was an aluminum business. All of these had very, very different characteristics, different customers and different suppliers. They were very different industries than coal mining. The cost of production was different.

Isn't mining a very costly business?

The mines are a cost. They go 2,000 feet down, which is two Empire State Buildings. Employees go down an elevator. There are thousands of tons of production. It's enormous. And you can't compromise on miner safety. That is always taken care of. It is costly business. But there is limited supply.

What is driving or motivating you in this business now?

If you can look at Walter Industries, we will continue to what we do well for shareholders. We want to do things that make sense. Value things appropriately. Continue to deliver on promises. Continue to go on with a marketing strategy. Be savvy in dealing with customers, so they like dealing with us. They know the price is high, but that's the market.

Since the business has changed so much, will the name change too?

That has not escaped our attention. There is considerable investor brand equity in it. If you invested at 20, now you have 100, that's brand equity, so we wouldn't want to have to re-introduce a new name. Anything we would do, we'd be careful to not stray from Mr. (Jim) Walter's heritage. It would be nothing dramatic. You could call our coal 'toothpaste' and they would buy it.

Walter Industries

Headquarters: Tampa

Market capitalization: $5.54 billion

Stock symbol: WLT (NYSE)

Recent stock price: $104.65

52-week stock price range: $20.53 to $111.99

Price-earnings ratio (trailing 12 months): 47.87

Source: Walter Industries and Yahoo! Finance

WALTER INDUSTRIES

BALANCE SHEET ($ in thousands)

ASSETS 6/30/07 6/30/08 % chg.

Current assets:

Cash and cash equivalents 39,491 17,653 -55.2

Short-term investments, restricted 83,517 61,822 -25.9

Installment notes receivable 1,829,486 1,821,745 -0.4

Receivables net 77,921 148,475 90.5

Inventories 110,770 119,937 8.2

Prepaid expenses 44,714 42,720 4.4

Property, plant and equipment, net 349,151 460,984 32.0

Other assets 170,490 153,566 -9.9

Goodwill 10,895 10,895 0

Total current assets 2,716,435 2,837,797 4.4

LIABILITIES & STOCKHOLDERS EQUITY

Accounts payable 59.937 81,113 35.0

Accrued expenses 71,210 82,618 16.0

Accrued interest on debt 14,855 12,503 -15.8

Debt:

Mortgage-backed/asset-backed notes 1,731,519 1,437,387 -16.9

Other debt 232,936 206,852 -11.1

Postretirement benefits obligation 347,846 342,796 -1.4

Other liabilities 214,535 223,361 4.1

Total liabilities 2,672,838 2,386,603 -10.7

Stockholders equity 43,597 451,194 934

INCOME STATEMENT 6/30/07 6/30/08 % Change

Net sales and revenues:

Net sales: 239,146 315,686 32.0

Interest income on installment notes 50,662 48,022 -5.2

Miscellaneous 296,524 370,036 24.7

Costs and Expenses:

Cost of sales 174,457 200,893 15.1

Depreciation 11,591 13,633 17.6

Selling, general and administrative expenses 38,125 37,400 -1.9

Provision for losses on installment notes 2,493 3,002 20.4

Post-retirement benefits 6,687 6,596 -1.3

Interest expense, mortgage-backed/asset-backed notes 29,745 25,846 -13.1

Interest expense, other debt 7,218 11,184 54.9

Amortization of intangibles 442 340 -23.0

Total cost and expenses 270,758 298,894 10.3

Income from continuing operations before income tax expense 25,766 71,142 176

Income tax expense 7,996 20,366 154

Income from continuing operations 17,770 50,776 185

Discontinued operations 281 0 0

Net income 18,051 50,776 181

Basic income per share:

Income from continuing operations 0.34 0.96 182

Discontinued operations .01 - 0

Net income 0.35 0.96 174

Weighted average number of shares outstanding 52,081,436 52,982,775 1.7

Source: Edgar Online

REVIEW SUMMARY

Company: Walter Industries Inc.

Industry: Coal mining and home building

Key: Focus on its main revenue producer - coal mining for the global steel industry.