Eagle Materials Inc (EXP) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Eagle Materials Incorporated Fourth Quarter and Fiscal Year 2004 Earnings Release Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards, we will conduct the 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 Wednesday April 28, 2004. I would now like to turn the conference over to Steve Rowly, President and Chief Executive Officer. Please go ahead sir.

Thank you, joining me today are Arth Zunker our Senior Vice President and CFO, Jim Graass our Executive Vice President and General Counsel, and Bill Boor our Senior Vice President Strategic Planning and Investor Relations. There will be a slide presentation made in connection with this call. To access it please go to www.eaglematerials.com and click on the webcast icon. While you are accessing the slides, please note that the first slide covers our cautionary disclosure regarding forward-looking statements made during this call. These statements are subject to risks and uncertainties that could cause results to differ from those discussed during the call. For further information, please refer to this disclosure which is also included at the end of our press release.

Continuing strong residential construction and a mild winter weather in Eagle's markets, helped to improve our fourth quarter sales volumes, which helped to increase revenues by 20% compared with last year's fourth quarter. This quarter Eagle Material's earnings increased $6.8m or 72% to $16.1m because of increased wallboard sales volume of 15% and increased wallboard sales price of 20%. Earnings per share also increased to $0.85, 67% greater than last year's fourth quarter. For the fiscal year, Eagle Material's revenues increased 17% to $503m primarily because of increase gypsum wallboard sales. Net earnings for the year increased 16% to $66.9m because of improved earnings from wallboard, concrete and aggregates, and paperboard. And our operating cash flow decreased 12% to $112.7m primarily because of increased working capital associated with higher sales volume. These pie charts show that the majority of our revenue and earnings come from Eagle Material's wallboard and cement companies with their natural companions paperboard and concrete and aggregate adding significant contributions.

Our balance sheet is solid and we remain opportunistically alert for acquisitions while continuing to focus on improving and enhancing our existing assets. During fiscal '04, we became debt free prior to the $113m special dividend paid in January. In FY04, Eagle had a record high stock price of $61.10. This is prior to $6 per share special dividend. We have fully recovered that $6 and yesterday closed at $63.45. We should also note that on March 31 of '03, the stock price was $36 per share.

Our spin-off from Centex was also completed this year, January 30. We also implemented a regular annual dividend increase of a $1 per share to $1.20 from fiscal year '05 because of our confidence in the sustainability of our strong cash flow. We also completed our eighteenth consecutive sold-out year for cement and wallboard sales volume improved 26% compared to last fiscal year.

Industry trends, total construction put in place was up last year, as well as cement wallboard consumption. US cement consumptions for calendar year 2003 was at near record levels of 3.7%. Delivered cost of imported cement, which is 20% of the US consumption is also up because of both shipping cost and increased

cement consumption. Subsequently, our 2004 cement price increases are substantially holding in all of our markets, with additional price increases announced for later this summer. US wallboard shipments of 32.5b square feet for the last 12 months is at a record level. As price increases had been successfully implemented in January and April with another increase announced for late May.

Looking at our segments, in cement for the quarter, our revenues were up 9% because our volume was up 9% and our price was up 2%. For the year, the revenues have increased 5% because volume was up 7%, somewhat offset by 1% reduction in price.

Operating earnings, in the quarter we are up $1m or 13%, that is because of the price improvement in taxes and volume increases in Nevada, Illinois and Mountain Cements. For the year, earnings were down $4m or 8%, half of that was because of a price reduction and half of it was because of increased cost primarily fuel, energy, and repair costs, also we had increased purchase cement costs which are higher than our manufacturing costs.

In wallboard, for the quarter our volume was up 15% or 83m square feet and our price was up 20% or $15 per MSF versus last year's quarter. And for the year, our volume was up 26% or 500m square feet and for the year Eagle averaged over 90% capacity utilization at 2.44b square feet of sales. Wallboard earnings in the quarter were up 352% primarily due to price increase and volume increase. And for the year, our operating earnings were up 31% and this was because primarily because of the volume. Pricing was flat and cost was flat because increased natural gas costs were offset by lower production cost associated with higher production and sales volumes.

As you can see on this chart, prices have risen dramatically since the beginning of the year, because of the current high demand and tight supply in the wallboard industry. We have announced a 12% price increase for late May and for reference a $10 per MSF price increase with approximately 90% increase in Eagle's EPS at full wallboard capacity.

Eagle Material's paper mill operation continues to improve with production and sales up significantly for the year 17%, an earnings increase of 19% to $20.9m. Lightweight paper produced in

also creates savings in our wallboard production by reducing freight and energy costs. And our concrete aggregate earnings rebounded to $6m for the fiscal year because of very strong Northern California market with record sales, volumes, and prices. Arthur?

Thank you Steve, next slide is guidance. Before we get into guidance for the forthcoming quarter and fiscal year, here are couple of numbers for our models. For the quarter, depreciation was $80.0m and for year-to-date depreciation was $33.0m. Capital expenditure for the quarter was $3.0m and year-to-date was $12.4m. As you saw in earlier slide, total debt was $82.9m, given as a debt to capital ratio of 15.9% at the end of the quarter. Guidance for the first quarter of next year, given

'04 quarter, that was a range of about 20 to about 30, and this assumes a medium wallboard tax of $1.05 and cement price was $0.67. For the fiscal year, the range is $4.75 to $5.25 with a median wallboard price of $102 and cement price of $69. With that, we will turn it over for question and answers. Terra?

Thank you. Ladies and gentlemen, if you would like to register for 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 John Lynch with Lynch

. Please proceed with your question.

Hi. Got a couple of points. First, in your outlook in gypsum, is Duke running at its anticipated maximum rate or do you still have potential to add another ship there?

We are near full rate, I think we may have another full ship, but we may have a slight increase there.

Do you have access to qualified people or do have a training period?

Generally, -- we have enough people there. There is a short training period, but we are near full capacity. So, I think we are beyond any of those issues.

Okay. In the concrete sector, is Austin in the Blackcap?

Austin is in the Black, just barely it made about $500,000 last year.

Is that market improving, we are just looking at better pricing?

That market is still very, very weak. The difference this year is the fact that we didn't have the write down from Georgetown that we had last year, but that market is still very soft.

And, I guess the last one I should ask and get off this is the commercial market. Are you sensing anything there? Are you getting any advance contact from would be

to give them quotes? Is that market showing any significant life?

That market is actually starting to try to recover. It's being somewhat hampered though by the high cost of steel right now. I guess that it's a double-edged sword. So, it's slowing down the recovery of commercial. It's kind of helping our implementation of the cement and wallboard prices because most of the people are concerned about the price of steel.

Thanks.

Our next question comes from the line of Jack Kasprzak with BB&T. Please proceed with your question.

Thanks. Good morning everyone. Could you, I missed the numbers that you gave for Wallboard pricing and Cement prices that underlie your guidance. Could you just go over those again, please?

Yes. For the median in our guidance for the quarter, the wallboard pricing was $105 and cement at $67. And for year-to-date, it will tail-off - wallboard for $102 and cement increasing up to $69.

Okay thanks. And the 12% price increase in wallboard, I think you mentioned Steve that you are announcing for late May, what have the other industry participants announced that, can you comment or talk about how you are feeling about getting yet another price increase in wallboard?

Yes. Most, the majority of our competitors have also announced the 10% to 12% price increases. The current March price increase is substantially completely holding. So, if you recall, the January price increase, about half of that held. As far as the May price increase, as the wallboard demand and residential continues to remain very strong, it looks like we are getting the point where we are near allocations. If we are in fact getting the point where we are at our allocations, that means that future price increases will probably hold.

And so it sounds like your guidance doesn't really assume at that price increase holds or that you get a second price increase in cement, is that correct?

That's correct. It won't be upside. It also assumes that potentially after the election that housing may somewhat soften.

Okay. And Capex for fiscal '05, can you give us a number for that?

That will be approximately $25m is what we have in the plan.

$25m and how about D&A for '05?

I think it's $35m.

35, okay. Are you guys, you know, could be debt free very quickly. You are throwing off a lot of cash, can you talk about use of your cash going forward, you mentioned you've raised your dividend, can we expect to see maybe another dividend increase, now the dealings are out, would you consider buying back stock even with the stock having performed so well. Can you just kind of talk about where your priorities might be?

Our priorities. First, it will probably look at continuing to buyback stock. We are also going to continue to try to develop some organic projects that we know simply make sense for us, and we can put our arms around. The opportunistic acquisition still looks pretty slim right now. We do have a number of projects that we can develop, but may not come to fruition in the beginning of this year, but towards the tail end of this year or early next year, we might find some ways to help, improve, and increase the capacity of some of our existing assets.

And can you remind us what buyback authorization you have in place, what might be left?

Yes, Jack. We purchased approximately 58,000 shares in the fourth quarter, that leaves us with approximately 450,000 remaining under the current authorization.

Okay, great. Thank you very much.

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

Hi, good morning.

Good morning.

I think Jack asked a couple of questions there but, just looking at the guidance and the underlying assumptions for next year with surprises pulling back a little bit and what originally seems to be a conservative approach, is there anything that your competitors are doing that makes us put some more caution in the wind and why should you think that, any reason behind it, in your thinking that prices would fall back any?

I don't believe there's any capacity coming online except for, maybe at the very tail end of this year, out in the west. I believe that there is a plant in Las Vegas that there would be some capacity coming online. Certainly, GP has talked about adding some new capacity as well, but I believe that is in the dense glass sector, not necessarily the wallboard market that we participate in.

It just seems that things remain this tight. We're in the kind of period, we're getting a price increase over couple of months or you can even see another one additionally late in summer, or do you?

That's the way it looked, it happened, and then if housing tails off towards the end and maybe opposite occurs.

Right. Could you talk about utilization? If you look at your shipments in the quarter, looks like you had utilization in the mid-90s. Is that kind of, how that trended throughout the quarters, was that average of the quarter? Is utilization higher than that at the end of the quarter?

It's higher. We are really operating with full capacity right now.

Okay, great. And I'm jumping around here, I apologize, but the cement price increase, that's been announced for late of the summer. Can you talk about what the size of that was and when the effective date of that is?

It's about $5, and it's in July. In most places, that may vary from market to market, but July to August and it's about $5.

And that is in all your markets, Texas included?

That's in most of the markets, not everybody is out. I would say that 50% of the competitors are out in certain markets, and in some markets we may not have. I don't believe there I've seen a price increase for the mountain market yet.

Okay, that's great. And just finally, can you talk about the impact in natural gas there in the quarter and what effect of that was on unit cost?

Natural gas for the quarter versus the third quarter in wallboard had an impact of about $0.50 per MSF in cost, and paper cost were also up for about $1.50 if you compared third quarter to fourth quarter for wallboard.

Okay, and can you run us where you stand as far as the hedging on natural gas at this point?

We have, we're about 20% hedged. It stood at 4.25 for the whole fiscal year.

Excellent. Very good, congratulations on great results.

Thank you.

Our next question comes from the line of Jason

with Miller Asset Management. Please proceed with your question.

Good morning. I just had a question about the stock trading, I was a little confused as to why the B shares, which have the voting rights traded a discount to the regular sort of the A shares that have much lower volume rights. I was wondering if you had an insight to that?

We're a little bit confused by as well, this is Bill Boor. We've been looking at that, and it's really started right out of the

and maintained the differential. I think it should be said donor will state the difference between the B shares and the A shares, the voting rights of the board is really the only difference. So we would have expected the shares to trade even more closely than they have as well and we can't explain why the Bs are at a discount.

And with that impact, how you would buyback shares?

Yes, absolutely, we're going to buy back the lowest that we can buy, whichever stocks the lowest.

Great, thank you very much.

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

Good morning and congratulations. It looks like the outlook is fabulous. I have a couple of things, first of all, it would be nice if you give us the cash flow statement, although I can obviously create it. Secondly, it's not so easy to get the slides, I still can't get them, and maybe it's just me. And finally to my question if I might, can you remind us what your criterion for acquisitions are in terms of financial criteria?

It's up, generally we look at 15% cash on cash.

Okay, I would just make an observation because you're obviously a cash machine and you're going to be out of debt, it would be helpful to both, not only buyback stock but to increase the dividend as well.

Thank you.

And good luck.

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

Thank you guys. I was wondering, Art, the corporate expense ratio jumped up rather sharply this quarter, was that you pay increase?

I wish it was though. Much of things has got an impact, and as we moved during the quarter, our headquarters, and also we had a lot of the expenses that, you know, we're trying to segregate while we kind of spin off expenses. Those are really basically outside proportional type costs, we had some internal administrative costs with the road shows and things like that, and a lot of that stuff just fell in the quarter, I think if you are doing a new model going forward for the forthcoming years, use something around $7.5m for the year, pretty well divided by the quarter is a pretty good number.

I'm sorry, you said $0.5m?

$7.5m.

$7m, okay.

Yes, approximately by $1.8m per quarter going forward. The other thing that is impacting that number also is we got here by

stuff and we're going to incur some expenses involved with that, that's really that one year now and it hopefully is not as far as the front end cost is concerned.

Also, insurance both DNO and Umbrella insurance have gone up dramatically.

Okay. Do you expect those to keep rising? It sounds like probably you were anniversarying those?

All of them are rising, but they are not going to go down much more. That's kind of factored into that 7.5m I gave you.

What wall your wallboard price at the end of the quarter, and what is it now?

The price at the beginning of the quarter was basically maybe about $102.

Well, $102, yes.

And does it pertain now?

Yes, that's correct.

I'm sorry.

Yes.

Okay. And if you - are you running six and seven days in wallboard than everybody else?

Yes, we are.

So, what is, assuming the demand remains perfectly the same for the next four quarters, what could you produce? What's the maximum?

2.6 to 2.7, in that range. It kind of depends on the mix. We had more commercial pickup, but 2.6 to 2.7.

Okay, but commercial side of your stuff run slower?

Yes.

Okay. That's what I wanted to know. Thank you so much.

Welcome.

Our next question comes again from the line of Jack Kasprzak with BB&T. Please proceed with your question.

Thanks, alright. Can you just give me the spin-off expense in the March quarter, the dollar amount, I know you said it's $0.03 a share?

Yes. It's right under $1m, $972,000, I believe, and approximately $2.5m for the fiscal year, and these are pretax numbers.

Yes, okay. And that's it. Thanks.

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

Thanks. One other pesky question. What kind of tax rates you are going to have this year?

Same as this year, Barbara, 34.5%.

Okay, thanks a lot.

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

Hi. Couple of odd things. Anything at all developing on those bedrock on the air force space in California?

We continue to work that property, and in fact the increase in concrete and aggregates this year that we saw were largely due to improved volume and pricing at western aggregates. We still have not gone across the air force base, doubt that that's going to happen in this day and age, but we still continue to pursue

to the Bay area and continue to pursue expanding and adding new mining equipment to reduce our cost at western aggregates.

Thanks. And the second question is in the same sector. What's the outlook for acquiring small aggregate deposits through your territory? Is it becoming pricey?

It not only is it becoming, it has been very pricey for a long period of time, and you are dealing with very large companies that keep betting that up against each other. We've kind of backed away from that strategy, we looked at that about three or four years ago, and had a reasonably sized team out investigating the possibilities. But the prices just - we just couldn't make sense of the numbers.

Thank you.

Our next question comes from the line of Chris Greenberg with Baring Capital. Please proceed with your question.

Hi. If I may, what was the actual cash taxes that you paid last year, and what would be expected cash taxes for fiscal '05?

Cash taxes. I don't have our tax related for this year, and actually we've clarified

.

Thank you.

We paid approximately, it looks like it's about $15m in cash taxes this year.

This year, was the year that just ended?

Yes, this fiscal year.

Okay, and then -?

And for the forthcoming year, probably we really want to defer about $17m above that, whatever the tax provision is.

So if the tax provision is fortyish or so, you are going to defer 17 of that?

Yes.

Second question, if I may, is what was the ending cement price dollar at March and what is the present cement pricing?

The ending cement price was above let's say $67, I believe, $66.5 to $67. And you know the current price increase; there is a $3 price increase that was effective April 1. So, still a little early, but we are not getting any push back from that $3 price increase.

So, that would take it to close to $70, and then off that base to - and then off the 70 point, there is $5 that you are hoping to get in this summer additionally?

There are announcements for an additional $5 price increase this summer.

Okay, and just to clarify on the wallboard side. You were saying that your present pricing is 104, and it's off that base that you re contemplating or talking about a 12% increase?

102.

102 now.

102 now, but it's a 12% increase off that 102 pricing?

That's correct.

Okay, I understand now, thanks so much, and congratulations.

Thank you.

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

USG is out today with numbers, I just wonder if you have any comments on, looking at their pricing and volumes, I like their sequential pricing growth, it's significantly less than yours, and the volume growth is, you know, significantly less than you guys. Is that just a regional or else do you think, you think there is anything else going on there?

I really couldn't answer that.

Okay, it's better than it looks, and I assume that it will have look a little different, but nice to see you guys outperforming. Thanks.

Thank you.

Sir, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Thank you everyone, and this concludes today's call.

Ladies and gentlemen, that concludes the conference for today. We thank you for your participation, and as such you may now disconnect.