Eagle Materials Inc (EXP) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Centex Construction Products Financial Results for the second quarter 2004 conference call.

During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the one followed by the four on your telephone.

As a reminder, this conference is being recorded Tuesday, October 21, 2003.

I would now like to turn the conference over to Steve Rowley, President, and CEO of Centex Construction Products. Please go ahead, sir.

Thank you, and welcome to the Centex Construction Products Earnings Conference Call for the second quarter of fiscal 2004.

Joining me today are Art Zunker, our Senior VP and CFO, and Jim Cross, our Executive VP and General Counsel. There will be a slide presentation made in connection with this call. To access it, please go to www.centex-cxp.com, and click on the web cast icon. While you’re accessing the slides, please note that the first slide covers our cautionary statement regarding projections, which is also included at the end of our press release.

Centex Construction Products second quarter fiscal ’04 summary: Our revenues increased 14% to $154.8m due to increased sales volume in all of our business segments. And CXP’s second quarter net earnings increased 15%, to $18.6m, or $1.00 per share due to higher paperboard and aggregate earnings. The debt continues to decline with the debt to cap of 6% at September 30, 2003. And our fiscal year 2004 earnings guidance of $2.08 to $3.23 per diluted share includes $2.8m related to spin-off expenses.

CXP’s debt continues to be reduced at a pace of over $100m per year. And while our debt net stands at $31m, it will be increased by $111m when the special one-time $6 per share dividend is paid in conjunction with the proposed spin-off transaction.

Centex Construction Products revenues in the second quarter increased 14%, from $136m to $154.8m. While revenues have increased in all business segments, the majority, 90% of the 14% increase, can be attributed to wallboard.

Our second quarter net earnings increased by 15%, from $16.1m to $18.6m because of earnings improvements in concrete and aggregates related to improved pricing and lower costs and an improved earnings in paperboard because of lower costs and higher sales volume.

Natural gas costs continued to directly impact wallboard paper costs, and to indirectly impact through increased power costs, all of our businesses.

Centex Construction Products second quarter earnings per share increased 15%, from $0.87 to $1.00 per share, while our six-month EPS comparison remained level to the $1.77 per share.

The second quarter earnings breakdown: There are two non-recurring items that affect the quarterly comparison, spin-off expenses this year and Georgetown’s rising expenses last year. Second quarter cement revenues increased 6% from $49.4m to $52.1m, primarily because of increased sales volume, while second quarter cement operating earnings declined 6%, from $17.6m to $16.6m because of lower prices in our Texas and Mountain markets and higher operating costs, primarily power and maintenance.

Our second quarter cement sales volume increased 7%, and our six-month cement sales volume increased 5%, while our sales price dropped off by about $1.50 per ton. The gross margin reduction is a combination of increased power and maintenance costs and reduced pricing.

The U.S. cement consumption through August is level with last year’s consumption, while the U.S. point for production through August is 1% below last year’s production. Also, $3.00 to $4.00 price increases for next year are starting to be announced in most of our markets.

In wallboard, our second quarter revenues increased 23%, from $54.9m to $67.4m, primarily because of increased sales volume, while wallboard operating earnings in the second quarter decreased 17%, from $8.4m to $7.0m because of reduced pricing and higher natural gas costs.

Since the beginning of the current fiscal year, wallboard pricing has increased from $79.00 per MSF to the current September net price of $86.00 per MSF. Another $6.00 per MSF price increase is currently being implemented. That CXP paid $6.00 for MSF price increase equates to an annual operating earnings increase of approximately $15m.

Our wallboard sales volume in the second quarter increased 26%. Also during the quarter, the U.S. wallboard consumption increased to over 8.2 billion square feet, implying an industry capacity utilization near 95%. And while our sales prices lowered in the quarterly comparison, the sales price has slowly but steadily increased during the fiscal year.

Also, in the gross margin comparison, increased natural gas costs have reduced our margin by over $5.50 per MSF.

CXP’s paperboard revenues increased 11% in the second quarter, from $14.6m to $16.2m because of higher sales volume and prices. And our second quarter paperboard earnings increased 82%, from $2.8m to $5.0m, primarily because of reduced production costs.

Our Lawton Paper Mill performance continues to improve by increasing production and reducing costs. Subsequently, our sales volume has increased by over 20%, and our margins have increased by over 30%.

CXP’s concrete revenues increased 11% this quarter from $10.3m to $11.4m because of increased sales volume. And our second quarter concrete operating earnings increased from $400,000 to $800,000 because of reduced costs associated with increased concrete yardage, and from lower cement prices.

Concrete pricing in Austin, Texas market remained difficult, while our pricing in Northern California continues to improve.

CXP’s aggregate revenues increased this quarter 25%, from $5.5m to $6.9m, primarily because of higher sales volume with higher pricing in Northern California. While the second quarter aggregate operating earnings increased 175%, from a $2.4m loss to a $1.8m gain because of increased pricing and the impact of closing the Georgetown quarry last year. With these sales in Austin because of the Georgetown quarry shutdown last year has been offset by increased sales in Northern California. Subsequently, our sales prices increased by over $1.00 per ton, while our operating costs have been reduced, thereby dramatically improving our aggregate margins.

Now I’d like to turn over the presentation to Art.

Thank you, Steve. But before I get into the Fiscal 2004 Guidance, let me point out something on your Earnings Release statement for this quarter. You will not that we eliminated the Intersegment sales number in the revenue column up above the income statement. And that’s a result of a long period of evaluating our accounting policies, and what we’ve shown are our revenues net of the Inter-company segment and our revenues that were shown in total down at the bottom of the income statement there.

Fiscal 2004 Guidance on this, the company is giving us guidance of $3.08 to $3.23 per share, and as Steve mentioned earlier in his presentation, that this includes a total of $2.8m of spin-off- related expenses and interest, going forward, or 10 cents per share net after tax. The guidance for the second quarter of 87 cents is pretty well in line, and the company is comfortable with the $3.08 to the $3.23 range for the fiscal year.

A couple of other statistics, depreciation for the quarter of $9.1m, or $18.5m for the year, and cap-ex of $4.7 to $8.2 for the year. Debt payment, we paid down approximately $31m of debt during the quarter, and approximately $50m during the six months. We are at $31.2m in total debt at the end of the quarter, and prior to the anticipated spin cost of $111m at the end of calendar 2003, we should be approximately $5m to $10m in debt, or debt free.

That’s it. Jim.

Yeah. Go to the next slide, please. I can briefly give an update on the spin-off. As you probably know, one of the key conditions to completing this transaction is the receipt by Centex by the of the IRS Private Letter Ruling that the distribution of the shares of CXP are tax-free from a Federal Income Tax point of view to Centex and its shareholders. We are anticipating that that letter will be received in late October. There is some possibility it might slip over into early November. As you also probably know from our public filings, we are in the SEC review process, and we expect to complete that very soon as well, and anticipate a mailing the first week of November. Putting that timing all together, we would anticipate completion of the transaction on or about December 31.

Thank you, Jim and Art. Now we will be happy to answer any questions. Amy.

Thank you. Ladies and gentlemen, if you would like to register a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered, and you would like to withdraw your registration, please press the one followed by the three. If you are using a speakerphone, please lift your handset before entering your request. One moment please for the first question.

Our first question comes from the line of Trip Rodgers with UBS. Please proceed with your question.

Good morning.

Good morning, Trip.

Nice job on this quarter.

Thank you.

You talked a little bit on the wallboard side. I mean, given the impact you’re taking on natural gas, the plants are running pretty well at pretty low costs. Going forward it seems that you’ve cranked up the volume somewhat, and you may be sacrificing price a little bit on that. Is that going to be kind of the change the runner at the rate and so you want to get as much as the September price increases as has been the case in the past couple of quarters?

The price increase from August and September there’s been a little delay because of some commitments we’ve made earlier in the year, trying to meet industry capacity utilization standards. And then, as the summer rolled around, business got very hot, and we had to run harder just to keep up with the commitments we’d made earlier. So our plant is still run at industry capacity utilization. And as some of these commitments we’ve made earlier start to go away, then we should see a further increase in our pricing.

So you would expect maybe of the $8.00, you may end of getting a little more of that than you did the last price increase.

Again, it would be a combination. We haven’t fully seen the effects of the last price increase. It just kind of bumbled into this next price increase that followed so closely.

Okay. Earnings of nearly $5m in that segment, are you near a run rate, are we still ramping up on that, or what your expectations are, is that going to continue to grow?

We, again anticipate it to grow, probably by about another 10%. Currently, we’re operating at about 270,000 tons per year. We believe that, we’re currently shut down making some improvements, and doing some maintenance, that when this is behind us, we should be closer to the 300,000 tons per year range.

Do you know how much of that paper you’re taking entirely?

We’re taking about, we were running full about 100,000 tons, about a third.

And just one final question. I’ll jump over to cement. The price increases that were announced, kind of what your level of conviction on those price increases and the ability to hold another Texas market has been difficult as far as pricing. Does that continue to be the case?

Yeah, that there was a price increase in July of about $3.00 that did not hold. However, Holson has come out with a $4.00 price increase letter for about the first of the year. Things have been, volumes have been very strong, stronger than anticipated in Texas, and so we’re starting to feel that maybe we’ve reached bottom in Texas. And hopefully, that trend is going to turn around. However, there have been some changes as far as ownership in the concrete marketplace, and we really haven’t felt the effect of that yet.

Okay, thanks a lot.

Our next question comes from the line of Tony Campbell with Knott Partners. Please proceed with your question.

Good morning, gentlemen. I was, actually I have a couple of questions. I was a little new to your story, but getting there via Centex. If you generate $100m sort of excess capital, and you do a very good job of sort of lowering the costs of your production when times are bad. But it now appears that times are pretty good. So on an ongoing basis, and you haven’t had much leverage, and well, you’re not going to have much leverage even with the special build-in. So my question would be what would you, assuming that the environment stays this way, this $100m would you use it to buy back stock, would you use it to increase the dividend on a go-forward basis?

And the second question if I might, could you give us a sense of what you think sort of peak earning power could be in the company, and you could give me a range if you want, when everything is, again you seem to do a very good job of increasing your efficiency, as you get to peak of the cycle.

Well, that first question certainly, you know, especially after the spin-off, we’re going to have to do a good job managing our balance sheet. And we would look certainly for opportunities. However, the high side of the cycle of acquisitions can be pricey, and really are sometimes when they’re as high as the averages have been in the $8.00 plus EBITDA price range, this is very hard for us to make sense of those kinds of deals. However, we do have some expansion possibilities of our existing facilities, as well as some other potential, either import terminals or Greenfield expansion possibilities that we’re looking at. So we do have some other ways to utilize the cash, as well as give it back to the shareholders, either as a dividend or by repurchasing stock.

Yeah, Tony, this is Art. On your second question, on the potential earning power of the company, the most dramatic increase comes out of our wallboard segments, and the magnitude of what that means for every dollar of increased pricing we receive that obviously goes to the bottom line. And then, depending on where we’re running from $2.25m to $2.5m annually for every dollar price increase. And the thing that we always talk about in the company where should the true price of wallboard be. Well, we firmly believe it should be somewhere between $100 and $110 level. Now, this is a fair, representative price of what wallboard pricing should be. So we’re currently in the $83 to $84 per thousand square foot price range right now. You can do the math at two and a half billion feet per year for each dollar, so go from whatever numbers you want to use in your assumptions. Now, this is obviously a pre-tax number.

Okay, thank you very much.

Our next question comes from the line of Barbara Allen with Natexis Bleichroeder. Please proceed with your question.

Art, was that the $2.25m to $2.5m annually, you said it was pre-tax?

Yes.

Okay. I didn’t - another question, Art. Your debt is currently $31m. The end of this calendar year, you’re going to add $111m, and I didn’t quite understand what your comments were about December 31.

No, what I’m saying is that prior to the $111m, we’re going to be pretty close to debt free. If we’re not debt free, we’re going to be somewhere in the $5m to $10m range, plus the $111m, so if you’re doing some Proformas, you can assume that you’re going to be $115m to $120m starting the fourth quarter out in debt if you’re going to do a little interest calculation for the fourth quarter.

Okay. And in that ten cents cost for the spin-off, you’re including that incremental interest expense for the fourth quarter?

Yes, for the fourth quarter, we have approximately $800,000, just a rough number in there for interest. It may be a little high, but that’s the magnitude of it.

Okay.

Approximately what we’re looking at is $2m of administrative costs if you want to use that for legal accounting and whatever else, and approximately $800,000 additional interest and debt-financing costs.

Okay. And you said there had been a change in concrete ownership recently in Texas. Could you expand upon that comment a bit?

Yes, that was Hanson selling their concrete and aggregate assets, excuse me, just their concrete assets in both the Houston and the DFW markets.

Did they sell them to anybody we know?

They sold to, I think the company’s name is Southern Star, and Gary Bullock is running that company.

And that’s privately held, I take it, a small company?

I believe so.

Okay, so we haven’t seen any impact in terms of pricing or approach to the business yet.

Not yet.

The cement business seems to be just kind of chugging along somewhat erratically with difficulty in getting price increases. Does it look like calendar 2004 has any different dynamics?

The different dynamics on the positive side would be it looks like worldwide, the prices are starting to firm up, and the transportation costs are also going up. So therefore, we anticipate that the value of imports landed in the U.S. to be up by about $3 or $4 a ton. That should have some waterfall effect, as well as we’re starting to see price increase letters from the major players in most of our markets in the $3 and $4 per ton price increase range for next year.

But that’s not unusual. Don’t they try every year?

Sometimes they do, and sometimes they don’t. It depends on the market, and it depends on their feeling as to whether that market can stand the price increase.

Does it appear to be fairly unanimous in terms of those letters? That’s why you’re feeling more positive about it?

That’s correct.

Okay. Thank you very much.

Our next question comes from the line of John Lynch from Lynch Research. Please proceed with your question.

Good morning. Couple of things. First, in your working on the price of gypsum and the assumption that you’re at 95% utilization rate, are you considering the absence of higher priced fire-resistant gypsum going to commercial jobs that aren’t being built? And were they to be built at the level they were three years ago, what impact would that have on the average price, the utilization rate?

I believe that fire-resistant boards that are going into commercial are somewhat the moisture-resistant board as well. That is included in the Gypsum Association numbers, and so it’s hard to break that out. But if we look at the total Gypsum Association numbers, which the last quarter was at about 8.2 billion square feet, and you annualize that to over 33, with a capacity of approximately 35 billion square feet, that gets you to the 95%.

John, our consumption of wallboard for September - the numbers just came in yesterday, it was 2.8 billion square feet, by consumption, but when you annualize that, you will come up to the numbers. It was 33 on the annual basis. And the prior two months, in July and in August, the consumption was in excess of 2.7 billion square feet for each of those months on that. So the level of consumption has remained high for the last three to four months.

But I think your assumption is correct. If commercial construction increases and more of this glass-type product gets sold, then yes, we will see a greater demand and chew up that excess capacity that’s existing today.

And you might have a better margin on 5/8” or fire-resistant, or some specialty board.

We do not make the glass board, but we do make a fire-resistant 5/8” board.

Right. Second question deals with the geographic differences. Are you sensing that there’s any part of the country that has been slower to react favorably to the gypsum price increases and any part where the weakness has become evident more quickly?

The only areas that we’ve noticed have been in the Colorado market. The rest of the markets have been pretty strong. Southern California has been especially strong.

Okay. A lot of the market has gotten better?

The Colorado volume is better, but the pricing is not.

I meant North Carolina, it’s not weak any more.

North Carolina, we just are not in that market, so I couldn’t answer.

And the last thing is the two plants that (unintelligible) brought on have been unable to meet their expected output, partly at least because of not getting sufficient input. Do we use them at the rated capacity in this next, they carried at present levels of output?

Our assumptions were at rated capacities. I am not sure, you know, I think, I know they’ve overcome it in one of their plants. I’m not sure about the Florida plant, whether they’ve overcome the issue regarding synthetic gypsum supply to that plant.

Thank you very much. It did look like a pretty decent quarter, all things considered.

I am showing no further questions at this time. Please continue with your presentation or any closing remarks.

That’s it. Thank you, everybody.

Ladies and gentlemen, that does conclude your conference call for today, and we thank you for your participation and ask that you please disconnect your lines.