Eagle Materials Inc (EXP) 2004 Q3 法說會逐字稿

Welcome to the Centex Construction Products Financial Results for Third Quarter Fiscal Year 2004 conference call. During the presentation all participants will be in a listen-only mode. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, Tuesday, January 20th, 2004.

I would like now to turn the conference over to Steven Rowley, President and Chief Executive Officer.

Thank you and welcome to the Centex Construction Products earnings conference call for the third quarter fiscal 2004. Joining me today are Art Zunker, our Senior Vice President and CFO, and Jim Graass, our Executive Vice President and General Counsel. There will be a slide presentation in connection with this call; to access it, please go to www.Centex-CXP.com and click on the webcast icon. While you are accessing the slides, please note the first slide covers our cautionary statement regarding projections, which is also included at the end of our press release.

Let's start off with an update of the spinoff transaction. On January 8, our shareholders overwhelmingly approved a reclassification proposal that split the Company stock into two classes, paving the way for the completion of the spinoff. The record date for the $6 per share special dividend is January 13, with payment made on January 29. The distribution of CXP to Centex's shareholders occurs January 30th, and Eagle Materials' first day of trading as EXP and EXP.B starts February 2, 2004.

As you can see in this chart, CXP is currently debt free, and after paying the $113 million special dividend, we will have very modest debt of approximately $85 million, resulting in a debt to cap of 17 percent.

Strong residential construction and mild weather helped to increase CXP's third quarter comparative revenues by 19 percent to approximately $121 million. Our third quarter net earnings increased 17 percent, an EPS increase to 95 cents per share, primarily because of improved gypsum wallboard and concrete aggregate earnings coupled with decreased interest expense. Operating cash flow for the quarter was very strong, approaching $45 million.

For the nine months, revenues have increased 16 percent primarily because of increased gypsum wallboard sales. In the nine months, 5 percent comparative increase in earnings resulted from increases in paperboard and concrete and aggregate earnings, coupled with reduced interest expense exceeding decreases in cement and wallboard earnings, coupled with spinoff expenses. Operating cash flow for the nine months was approximately $100 million.

Third quarter highlights. Our year-over-year sales volume has increased in all 4 of CXP business segments. How wallboard earnings have increased 44 percent compared to last year because of lower production costs and higher sales volumes, and we completed (indiscernible) major (indiscernible) rebuild, reducing energy consumption by 20 percent. And the $300 million of debt that CXP incurred with the November 2000 purchase of Republic Gypsum and Paperboard was paid off during the quarter.

Current industry trends. Total construction remain strong, primarily because of residential construction. Commercial construction remains weak but is forecasted to turn around in 2005. Cement consumption is up over prior year and tending toward record highs. Cement import costs are rising because of increased ocean freight, the declining dollar and a rising Asian cement consumption. Because of the continued high level of domestic demand and the rising cost of imports, we are optimistic about the price increases from 3 to $5 announced in all of CXP's markets.

In wallboard, there was record highs for calendar 2003 consumption of 31.7 billion square feet, an increase of over 6 percent from last year. Industry capacity utilization rate was 90 percent for the current quarter. Very high third quarter housing starts will positively impact fourth quarter wallboard demand and support the price increase implemented during the first week of January.

Our cement revenues for the quarter were level at about $24 million, and for the nine months they increased 3 percent, from 81.6 to $84 million. Cement operating earnings declined 7 percent from $14.4 million to $13.5 million for the quarter, while for the nine months, operating earnings declined 11 percent from $46.7 million to $41.3 million, primarily because of increased cost.

Cement sales volumes have increased, with all plants sold out requiring purchased product to meet demand. Our cement sales prices dropped about $1 per ton on average because of reduced pricing in the mountain region associated with (indiscernible) new capacity entering the market. Power, fuel, rail, and maintenance costs have increased generally at all plants. Most of the increased maintenance costs, however, are nonrecurring associated with long-term fixes.

In wallboard, revenues have increased because of growing demand and expanded market share. Our third quarter wallboard operating earnings increased because of higher sales volume and lower production costs associated with the higher sales, overcame lower sales prices and higher natural gas costs.

Our sales volumes have increased because we have expanded market share to industry average capacity utilization. Wallboard's third quarter margin improved, primarily because of lower production costs associated what this increased capacity utilization, and while the nine month comparative sales prices declined, our year-to-date sale price has increased.

This chart shows the gradual increase in price over the course of the year. During this timeframe there were three price increase announcements that in aggregate totaled approximately 30 percent. Parts of (indiscernible) increases have held for a total year-to-date increase of about 10 percent. For reference, a $10 (indiscernible) increase in wallboard pricing equates to an approximate 90 cent increase in CXP's EPS.

In paperboard, revenues for the third quarter are down primarily because of lower pricing to gypsum and wallboard. Operating earnings for the quarter are down, primarily because of reduced wallboard sales price and a quarter-to-quarter shift in maintenance. For the nine months, earnings have improved because of increased production sold internally to our gypsum wallboard company. CXP's paper mill is currently producing at 270,000 tons per year capacity versus 220,000 tons per year design capacity. Gross margin variances for the quarter and for the nine months are primarily associated with the sales price.

Concrete and aggregate. Increased concrete sales in the Austin market and increased aggregate sales in Northern California are the main drivers for the third quarter, as well as the nine months revenue increases. Lower costs at all operations and higher pricing in Northern California raised earnings in the quarter, as well as for the nine month period. Last year's earnings were negatively impacted by the closure of our Georgetown quarry. Art?

Thank you, Steve. I'm going to take a few minutes to go through guidance for the quarter, for the current fiscal year, and of course, announcement for our expectations for fiscal year 2005.

For the fourth quarter we are looking for earnings per share somewhere between 63 and 73 cents per share, and this is up (indiscernible) from prior year's fourth quarter of 51 cents per share. Low end that's a 24 percent increase. On the high end that's a 43 percent increase.

For the fiscal year we are looking for earnings per share in the (indiscernible) range to $3.45. That's a (indiscernible) percent increase over fiscal year 2003 earnings per share. Fiscal year 2005, we are coming out with early guidance of $3.70 a share to $3.90 a share. And that's from 10 to 16 percent above the lower range for fiscal year 2004. Also for your models, not included in here, (indiscernible) for the quarter was 8.4 million. (indiscernible) for the nine months it's 25.0 million. Capital expenditures at 2.4 million, and year-to-date 8.2 million.

The next slide is a slide showing our dividends that will be paid after the spinoff is completed. Our previous dividend of nickel per quarter, 20 cents per share annually. (indiscernible) to a yield of 4/10 of a percent. With the increased dividend (indiscernible) a $53 stock price, the increased dividend (indiscernible) 2.3 percent. Payout on our previous dividend based on $60 million of income is 6 percent previously, and the increased dividend is 37 percent.

Steve?

Thank you. And now we will turn it over for questions and answers.

(OPERATOR INSTRUCTIONS). Trip Rogers, UBS.

Could you tell us what wallboard prices -- your average wallboard price was at the end of the quarter?

It's around $87.

Any comments to the initial successes of the January price increase?

It is a little early to tell, Trip.

I guess the key question is what you are factoring into your guidance. Are you looking at further price increases in wallboard or cement? (indiscernible) holding, or what kind of prices are built into your forecast for your guidance?

For the quarter or for next year?

Both, but more next year.

Next year, we are pretty well -- being on the conservative side, we are -- it's pretty well (indiscernible) along the lines of where we are at (indiscernible) a slight increase, Trip. Cement, basically holding level.

Slight increase in wallboard and cement holding steady?

Right.

And then for -- can you also give us an update where you stand as far as hedging for natural gas?

Really we are pretty well covered through the end of this fiscal year and just partially covered from there out.

Partially being --?

20 percent.

Any figures for how much gas cost you in the quarter?

We are in about the mid $5 -- 5, 5.50.

Right. But on an earnings basis, any idea would that would end up hurting you in the quarter?

(indiscernible) when you look at it from where we were last year for both wallboard and for paperboard, something between 2.5 and $3 million.

Jack Kasprzak, BB&T.

First on CapEx for fiscal '05, could you guys give us any guidance there yet?

Traditionally we end up somewheres, Jack, come out of the year at a (indiscernible) plan somewheres in the realm of $20 million, give or take. But for your model that would probably be a decent number to start out with.

Is that sort of the maintenance level, Art?

Yeah, pretty well. (indiscernible) it's maybe a little bit less, and we'll have some small, onetime projects in there. But if you go back historically, I think it's been trending around that level; this year will probably be a little bit less. That's all I'm going to say.

And if you said it I missed it; I apologize. What was the wallboard price increase announcement that was out in early January?

About 10 to 12 percent.

And the cement price increases you mentioned, Steve, that you think that might hold; are those effective for April?

Generally they are effective for April. I think in Texas the price increase was at the beginning of this month.

One thing that we are experiencing also that's kind of reflective on our (indiscernible), we are seeing some freight increases on (indiscernible), and that is kind of factored -- some of that is factored into our guidance for the next are also.

And with regard to the wallboard business, what percentage of your demand do you think is derived from the commercial side?

Typically that is in the 20 to 25 percent level, but it is down somewhat slightly because of the depressed commercial construction business.

Commercial is depressed and housing has been weak, so that shifts it a bit. But if commercial comes back, 20 to 25 percent is enough to be, obviously, meaningful, all else being equal?

That's correct. And really, you get -- there's two things that happen. When you produce commercial wallboard, the speed at which you operate your plants is about 75 percent. So your capacity utilization rates go up as you produce more commercial wallboard.

The thicker product which slows down the production line.

Barbara Allen, Natexis Bleichroeder.

You mentioned in your -- some of the opening comments that there are forecasters who are expecting an improvement in commercial construction this year. Are you seeing any signs of it in your order books?

We mentioned, really, for calendar year 2005 -- most people are projecting maybe around the end of this year, but commercial construction really, from everybody that we've talked to, looks to really be improving in about a year's time.

So you don't expect to see anything in that until later in calendar '04?

That's correct.

Could you -- I'm sorry, I missed the amount of, the total amount of the dividend, the $6 dividend? It's just simply the 18 million -- 18.8 million times $6?

Yes, it's approximately $113 million. (indiscernible) a little bit -- a few dollars less than that, Barbara. But rounded (indiscernible) 113 million.

And that would be the only debt you would have, then? Well, you would probably have less than that to get to your 17 percent debt to capital.

Yes, we have some cash right now. We (indiscernible) a little more cash before the dividend is paid. So that $85 million level that Steve quoted is net of cash on hand at the time the dividend is paid.

I was also wondering, just from a conceptual standpoint, raising your ongoing dividend as you are -- and so that will take up some of your strong cash flow -- are you seeing fewer prospects for growth for your various businesses, and that's why you're doing this?

No, we honestly believe the sustainability of the cash flow of our existing business lines is so strong that this increase in dividend really won't impact future growth. We remain opportunistic. Again, the industry -- the major industries that are in are fairly consolidated and a lot of multi-national players competing with us, so the opportunities -- maybe -- when they have come, they have come usually for us during cyclical (indiscernible). And we haven't seen that in a while.

Could you give us up-to-date, just in terms of new capacity or capacity being withdrawn in your -- well, your three major businesses now, starting with cement?

With cement there is a little bit of capacity that is being built really in the Eastern part of the U.S., primarily in the Southeast, as well as one modernization up in the Northeast -- really doesn't impact our cement businesses, those capacity increases. And in wallboard there is one capacity project that is occurring in Las Vegas. I believe that's the only thing that is occurring there. Paperboard, really, we do not -- as far as paperboard for wallboard, we do not know of any new capacity coming online. We do know that there were two mills that were shut down during the course of this year.

You are not seeing any other closings in wallboard?

No.

And the one in Vegas -- is that just an expansion or is that a new plant?

It is an expansion.

(OPERATOR INSTRUCTIONS). Mr. Rowley, I'm not showing any further questions at this time. I will turn the call back to you.

Thank you, and that ends today's conference call.

Ladies and gentlemen, this does conclude the conference call for today.