Eagle Materials Inc (EXP) 2004 Q1 法說會逐字稿

Welcome to the Eagle Materials first quarter fiscal year 2005 earnings conference call.

During the presentation all participants will be in a listen-only mode.

Afterwards we'll 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 Monday, July 26, 2004.

I'd now like to turn the conference over to Steve Rowley, President and Chief Executive Officer.

Please go ahead, sir.

Thank you.

And welcome to the Eagle Materials conference call for the first quarter fiscal year 2005.

Joining me today are Art Zunker, our Senior Vice President, 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.eaglesmaterials.com, and click on the link to the Web cast.

While you are accessing these slides, please note has 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.

Thank you for attending today's Web cast of Eagle Materials.

Our first quarter results were driven by a vibrant residential construction market and an improving commercial construction market.

That is why Eagle had record sales volumes in our Cement, Wallboard, and Paperboard divisions and our highest average mill nets for the last trailing nine quarters in each of those divisions.

Our strategy of well maintained and well operated plants continues to benefit Eagle through internal capacity growth and low-cost production.

Presently, strong demand for our products, particularly in the East and West coast, has us operating near full capacity.

Our constant commitment to operational excellence will benefit our customers and our shareholders during these tight market conditions.

As you can see, the quarterly comparative shows a 21% growth in revenue, a 57% growth in operating earnings, and a 60% increase in our diluted earnings per share.

During the quarter we generated approximately $35 million of cash flow from operations, an increase of 14 million over the same quarter a year ago.

Driven principally by increased profitability, we utilized those funds to repay approximately $7 million in debt, fund $5 million in capital expenditures and repurchased approximately 256,000 shares of our stock.

Our revenue mix and operating earnings has shifted and reflects the dramatic improvement in our Wallboard division's profitability.

Collectively, Cement and Wallboard continue to make up approximately 80% of Eagle's revenue and operating earnings.

Additionally, operating earnings were slightly impacted by a one-time charge of relocating American Gypsum's office to Dallas.

As of June 30th, our debt to capitalization ratio was 14%, compared to 16% as of March 31, 2004.

We continue to focus on improving and enhancing our existing assets, share repurchases, and we remain opportunistically alert for growth opportunities.

Year-to-date construction activity has remained strong in all of the markets we serve.

In fact, total construction spending is up almost 9% through May on a calendar year basis.

Both cement and wallboard shipments year-to-date are at record levels, up approximately 10% over last year, creating upward pricing momentum in both of these industries.

While some economic indicators show a possible slowdown in residential construction later this year, we believe that growth in commercial construction, and an improving overall U.S. economy, will offset some, if not all, of the impact to Eagle.

Cement revenues increased because sales volume increased by 14%.

First quarter cement consumption was strong in all of our markets, requiring increased low margin purchase product to supplement our manufactured product.

Cement costs increased $1.41 per ton, primarily due to the impact of higher cost purchased cement.

Price increases have been implemented in all of our markets this year, and they are holding in Texas in California.

Our $68.34 per ton mill net is the highest quarterly price since September of 2001.

We believe that the current, strong, domestic demand, coupled with international demand and international freight rates, will support further cement price increases scheduled to be implemented later this summer.

Wallboard revenues have increased primarily because of price and volume increases.

Continued high levels of residential construction activity, when combined with the growth in commercial construction, have fueled record calendar to date U.S. shipments of wallboard.

All indications show that the market is in tight supply and we believe that the industry is currently operating approximately at 95% of rated capacity.

This high level of capacity utilization has supported price increases in January, March, and May.

Another 10% price increase has just been implemented mid-July and looks very promising.

The dramatic Wallboard earnings turn around has been primarily a function of tight supplies supporting these price increases.

As previously discussed, the wallboard industry is nearing full capacity utilization with strong demand causing East coast and West coast shortages.

For reference, a $10 per MSF price increase equates to approximately a 90-cent increase in Eagle's annual earnings per share.

Paperboard sales to the wallboard industry have increased dramatically to the point where the mill is almost exclusively producing gypsum paperboard.

Our continued improvements and operating efficiencies are also reflected in the 18% increase in earnings.

Our Concrete volumes declined primarily due to unseasonably rainy weather in the Austin, Texas, market.

In fact, June was almost a complete month of rain.

Our Aggregates results continue to improve because of strong demand in Northern California, where we have a very strong competitive position, and sufficient production capacity to allow us to meet the demand.

This tight regional supply has driven our average Aggregate prices up by 6%, helping to improve our quarterly Concrete and Aggregates earnings by approximately 50%.

Art?

Thank you, Steve.

Before we get into guidance for the second quarter for the fiscal year, a couple of housekeeping matters.

Depreciation for the quarter was 8.1 million.

Cap Ex, as previously disclosed, was $5.1 million.

As Steve previously mentioned, we bought 256,000 shares of stock and that was at a cost of $15.4 million, or $60.52 per share.

With the projections going forward, we're looking to give guidance for the second quarter in the range of $1.55 low to $1.65, and for the fiscal year $5 to $5.50.

The fiscal year guidance assumes an average wallboard price of $105 which assumes a slight tailing off in the end of the fiscal year particularly the fourth quarter.

Cement prices are plugged in at $69 per ton, slightly higher than where we were in the first quarter.

Steve.

Okay, Lee, it's time for questions.

Thank you.

Ladies and gentlemen, if you'd 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'd like to withdraw your registration, please press the one followed by three.

If you're using a speaker-phone, please lift your handset before entering your request.

One moment for the first question.

Our first question comes from the line of John Lynch from Lynch Research.

Please proceed with your question.

Good afternoon.

I guess I'm really more interested not, you used the average prices for gypsum and cement for the quarter.

But I'm more interested in the quarter end or even today's levels from which new increases will be based, on which they'll be based.

Can you fill me in with those?

Yes.

Our price, our wallboard price in June was $106.5, that is the total price, the average price for the month of June.

And we have just implemented another price really a couple weeks ago.

And cement?

Approximately $68, I mean, excuse me, yeah, $68, I believe.

The average is pretty well equal throughout the quarter, I believe, Steve, so I would say $68, John.

All right.

Now, this price increase that's working out there now, how many years has it been since you had two increases in one year?

In cement?

Yeah.

It's been, oh, shoot, it was right around the turn of the century the last time that occurred.

Well, maybe a decade ago.

I guess my point is that this is being driven more by the freight costs and worldwide moves in cement pricing, and I don't think, on the basis of what I've heard, that we're going to see that much of a rise in total volume this year, as you noted, if residential slips while commercial rises.

But I was quite interested in your comment on commercial.

I have not had a fix on commercial that I felt comfortable with.

What are you seeing?

We are seeing increases both in our wallboard consumption, especially because we can see it in the amount of 5/8's that we ship and we're also seeing it somewhat in again, projects that are not necessarily meant to be office building but more the strip mall-type of construction that really goes hand in hand with strong residential construction.

Great.

Thank you.

Our next question comes from the line of Jack Kasprzak from BB&T.

Please go ahead with your question.

Thanks.

Good afternoon, guys.

My first question is, with regard to the cement price, the second cement price that's announced, can you, I guess the press release said in effect July/August.

Will that, is that just the amount of time you think it might be necessary for it to take effect?

It takes effect for different customers at different times.

And what is the, how much is the second price increase?

The price increase, actually the letter is, you know, it goes into effect in late July or early August in most of our markets, and it's for about $5 per ton.

And as you know, it takes awhile for those prices to be fully realized, because you do have some long-term commitments that you've made, so it usually takes two to three months to fully realize a price increase if it completely helps.

Okay.

And on the wallboard side, similar question.

How long does it take, how long does it take to put in, to fully put in or implement a new price increase?

What sort of supply agreements do you have with some of your larger customers?

If you could just talk about that dynamic.

Yes.

And generally it takes two to three months, although with some of our larger customers we may have commitments up to a year in advance but in general, two to three months and, of course, it gets somewhat confusing when you have so many successive price increases, one right after the other.

It's hard to tell whether you're getting some of an earlier one or some of a new one.

And with regard to purchased cement, can you give us some guidance as to how much purchase cement you think you might have for the year, or is it a little too early to tell?

I think, Steve, Jack, we're still looking at some orders in excess of 200,000 tons.

Somewhere's between 200 to 250,000 tons.

That's just really going to depend on availability, getting it in, getting in through our system in this fiscal year.

I think the sales would indicate that they're strong enough that we could probably have something larger, but I think logistics and the timing that we're in during the fiscal year, that somewhere's between 200 and 250,000 tons is the right number.

Is it still, from where you guys sit, what, has the price to land a ton of cement from somewhere outside the U.S. changed very much recently, or has it loosened up at all as far as imports or is it still much as we've seen over the past three months or so?

Most of the stuff that we had done for this year we had done in advance, so we really didn't see the impact.

As far as stuff that we're looking at or trying to purchase now, the price has gone up, you know, 10 to $15 per ton versus what we had already committed to a year ago.

Okay.

So, I'm sorry for all the questions.

So you would you think, Steve, that that would give the cement industry in general still good impetus to raise prices even beyond this second price increase this year?

Yeah, I believe, and especially in the areas where things are very tight, which, again, things are very tight in Texas, the East coast as well as the West coast.

There just isn't any cement available, and everybody in those markets are on or near complete allocation.

So, you know, that and the fact that business is, has been very good this year.

Cement consumption through the first five months is up 10% over last year, and last year was at near record levels, just short of a record levels.

So there is very strong demand and in addition to strong demand, it is more expensive to, and more expensive and harder to bring imports into the U.S. this year.

Okay.

Thanks a lot.

Congratulations on your quarter.

Thank you.

Our next question comes from the line of Cliff Walsh from Sidoti and Company.

Please proceed with your question.

Thank you.

Good afternoon.

Can you talk about, give us your thoughts on the housing market given some of the recent disappointing June data?

You know, the housing market really is a function of where you believe interest rates are ultimately going to go.

If they don't increase dramatically over the next year, if they stay somewhere between 6 or 7%, I believe the housing market's going to remain fairly vibrant, and they are at very, very high levels right now.

And again, we believe that even if the housing market went down approximately 10%, it would not have a major impact to Eagle Materials because of the fact that we do believe that commercial construction's improving and the overall, you know, construction industry's improving.

So we feel pretty confident that we'll remain in a very tight supply situation for at least the next six months to a year for both cement and wallboard.

Great.

That sounds good to me.

In terms of plans for cash, you don't have much debt left, you've already increased the dividend back in February.

Can you talk about priorities as to acquisitions, maybe further increased dividend payments, share repurchases, et cetera?

We continue to look at growth opportunities, both internal expansions as well as some acquisitions, and we're also reviewing our share repurchase program.

I know that we purchased about 256,000 shares last quarter.

Our plan is to continue with that, if the pricing is right, and we believe that it adds value, we'll continue to look at that.

At the present we are not looking at increasing our regular dividend above where it is right now.

Okay.

Art, I have a question for you about deferred income taxes.

Would you expect that number to trend down unless an acquisition is made?

True.

I think we talked about earlier that this year, that if you want to use rough numbers, has probably it's gone a little bit less than this, but we're looking at something in the 15 to $17 million range for total deferred income tax, no matter what the earnings number ends up being.

And then going forward, next year, I'm going to say it's going to be pretty well a push and it stays a push going all the way through fiscal 2008, then it starts going negative, or the other way, in 2009 unless we get some depreciable tax base in here by then.

Okay.

Great.

Thanks very much, guys.

Ladies and gentlemen, as a reminder, to register for a question press the one followed by the four.

Our next question comes from Barbara Allen from Natexis Bleichroeder.

Please go ahead with your question.

Thanks.

Good afternoon, y'all.

I wondered if you guys are seeing or hearing anything about capacity additions in either of your major businesses?

There has been some.

Ash Grove recently announced a new cement plant that would come on line 2007, 2008 time frame, in the Las Vegas area.

And that's the only recent addition.

Last quarter we talked about two wallboard capacity increases in the North Carolina area that would come on about that same time.

So those are two new plants, right?

Two new wallboard plants.

One, BPB, and one National Gypsum.

What about capacity creep in wallboard?

Are you guys working, I assume you're working seven days a week now.

Yes, we are.

And I, again, I think the industry is near that 95% capacity utilization.

Yeah.

In fact, Barbara, I don't know if you've seen the numbers, but the June shipments are slightly over 3 billion square feet and for the year I believe it's almost 11%.

Wallboard consumption is up for the first six months of this year over the prior six months last year.

Yeah, that squares pretty well with actual housing starts year-to-date are up, I think, 12%, so that seems to be going with that, pretty closely.

But you're also getting commercial increases.

So looks like a good year.

There was one other question which I, of course, has now escaped me.

I'll get back to you with it.

Thanks.

Our next question comes from line of Tony Campbell from Knott Partners.

Please proceed with your question.

Good afternoon, gentlemen.

A couple, just, the rate of return on internal expansion what would you view that is?

Sort of a minimum hurdle.

15%.

I guess I'd sort of urge you to be buying back stock here.

So I'd make that statement and wish you all the best.

Thank you.

Thank you, Tony.

Our next question comes from the line of John Lynch from Lynch Research.

Please go ahead.

I had a thought, and I've had it before, Art will recognize it.

You're kind of locked in, in your Nevada plant in terms of being able to expand.

And that market has shown excellent grown.

As you've indicated, there is a new facility coming on over in Las Vegas.

But the Reno, Northern California market, is there any possibility that you could build another small plant, acquire a plant that services that market?

Is there any potential for growth outside of the immediate Reno plant?

You know, we are looking at replacing the Reno plant within the next five to ten years.

We have a little over ten years worth of reserve, 10 to 15 years of reserves, but it is an older plant and we do realize that the market's growing.

Don't believe it makes sense to run two small plants so we do have a plant site, we do have reserves, and we're in the middle of starting a permitting process to look at a feasibility study to bring a larger, new plant on line in that marketplace.

That would cost you 150, 175 million?

That's correct.

Thank you.

Our next question comes from the line of Barbara Allen from Natexis Bleichroeder.

Please go ahead with your question.

I remembered my question.

Could you refresh my memory, Art, on the purchased cement, how that flows through?

Do you, through the revenue stream, does the total sales price flow through or just your kind of brokerage, or your, what you get from it?

No, in the revenue stream, Barbara, that includes both manufacture and purchase and the same way with the tons and also in the cost it includes both manufacture and purchase.

Basically, as Steve mentioned earlier that margin on this thing considerably less and the manufacture is something $10 or less versus the $20 plus or around that range for manufactured.

So whenever we report our total sales for the year, Barbara, if you're looking at it, just use round numbers of 2,500,000 tons of cement sales, let's just use 200,000 for purchase cement, that's 2.3 million of manufactured and 200,000 of purchase and that all shows up in the total revenue and in the total volumes and the average sales price, also, too.

Okay.

Thanks a lot.

The impact, Barbara, was nearly 85 cents impact to the mill net, or impact to the cost, excuse me.

The sales price is pretty close to being the same as manufacture, just on a cost area where it's considerably higher.

Of course.

And with the tightness of supply out there, how are you able to, who are you getting this from?

A lot of this we had purchased a year ago, so we had everything put in place so the majority of the purchased product was stuff that we had committed to well in advance of the shortage.

Okay.

All right, thanks very much.

Ladies and gentlemen, just to remind you again, to register for a question press the one followed by the four.

Our next question comes from Daniel Beltman with Huron Capital Investments.

Please go ahead with your question.

Thanks.

I have two questions just to follow-up on the question about cement.

Does that imply that moving forward to meet your purchase cement obligations that you will have to basically hedge that out into the future at today's rate?

No, you know, we looked at that really on a case by case basis.

If there is the ability to have some profitability looking forward as we did last year, and we know that we have a strong market position, we'll go ahead and commit to it.

If we look at it today and it depends on which market we're looking at, and there is not any profitability, we'll probably back off on the amount of purchases.

And the second question has to do with your balance sheet.

Could you just walk through your debt repurchasing?

Because I thought you said 7 million, and I'm not following that from the balance sheet that you presented.

Oh, he's talking about 7 million.

I think the total debt on this thing, is that we have, we totaled both notes payable and long-term debt, we had approximately $82 million at March 31st and at June 30th it's 74 million, in round numbers.

And what's the cost of your notes payable?

Cost of it?

Yeah.

Basically we're paying LIBOR plus 125 basis points.

Great.

Thank you.

Our next question comes from the line of David Wilson from Wilson Partners.

Please go ahead with your question.

Good afternoon, gentlemen.

I had a couple of questions.

First of all, I think you indicated in your guidance for the current fiscal year 5 to 550, a wallboard price of 105 and cement at 69.

Neither of these prices take into effect the increases you suggested will be coming in the near term of something like 3 to $5 in cement and 10%, or a little over $10, in wallboard.

Did I understand that correctly?

Yes, you did.

And in a general, when we give guidance, because things change rapidly in this industry we usually give guidance based on current pricing and where we believe volumes will be for the remainder of the year.

Okay.

So that's maybe icing on the cake for us.

Second question I wanted to ask about is, you repurchased 256,000 shares of stock, and yet the share count I have versus the comparable period a year ago is actually up a little over 200,000 shares.

Were there a lot of options exercised during this period?

Could you comment on that?

Over the course of a year, yes, that's the answer.

Predominantly the third and fourth quarter of fiscal 2004 I think we had approximately 400,000 shares, options exercised.

Okay.

Is that pretty much it for the remainder of this fiscal year?

It's hard to tell, but that pretty, well, based on where, who has the options, you could pretty well assume that there's not going to be a dramatic number going forward.

Okay.

And finally, at a recent meeting I attended for CMex, they indicated that they were operating their cement plants in Mexico at about 75% of capacity.

Could you bring us up to date on where the import situation with Mexico and the [inaudible] stand?

Well, there still is an import duty in place.

There is a sunset review that will start next year, and usually it takes about a year for that process to go forward.

So it will be a year and a half or year and a quarter away before we'll have the results of the next sunset review of the dumping duties that are in place.

Okay.

Thank you.

Ladies and gentlemen, as a final reminder, to register for a question press the one followed by the four.

And our next question comes from Barbara Allen from Natexis Bleichroeder.

Please go ahead with your question.

I was wondering about scheduled down time for your cement plants.

Can you let us know which quarters those occur in and if they're all going to be in, just what the plan is for that?

The majority of them have already occurred, Barbara.

We may have a small outage, another outage at Nevada cement in this quarter, but the majority of our major outages have already occurred at all of the plants.

Okay.

So none for the rest of the fiscal year of any size?

Of any magnitude.

Barbara, let's quantify that.

That's plant outages, these things sometimes jump up and bite you.

Oh no.

How are you doing on natural gas costs?

On natural gas costs, we have about 20% of the majority of our gas is used in the wallboard manufacturing business, so about 20% of it's locked in for the rest of this year at 4.25 and then we have another 5% locked in at about 5.75 through about this time next summer.

And we're running where now in the regular market?

The regular market I believe in the high 5's, 5.85, 90, it jumps up over 6.

It just depends on what time of the week you look at it.

Okay.

Well, when you're getting these kinds of price increases per ton it kind of helps the pain doesn't it?

Thanks a lot.

Our next question comes from line of Daniel Beltman from Huron Capital Advisors.

Please go ahead with your question.

Sorry, guys.

What was the amount of the, what's the rate on your long-term debt?

Our rate?

Basically it's, just round numbers it's something in the 2.5% range right now.

It's a floating variable rate.

One of the things I mentioned to you it's LIBOR plus 125 on up depending where you are in the grid.

But we're at 125 right now.

So that's on both your notes and your long-term debt?

Well, the notes on this thing is actually CP paper rate, okay, so it's less than that.

I see.

So you're basically just refinancing to cheaper debt?

That's correct.

And it's done through a receivable securitization program.

I see.

Perfect.

Keep doing that, guys.

Thank you.

Thanks.

Our next question comes from Ethan Friedman from Bear Capital.

Please go ahead with your question.

Hi, guys.

Could you talk about the acquisition pipeline and if you're seeing any interesting opportunities?

And I guess to follow-up on that, could you talk about how long you expect to, I guess, wait to find a potential acquisition before becoming, or before deciding to become more aggressive on the buy back?

As far as acquisition opportunities, you know, there are always a few that are out there that you're in the process of evaluating, so we continue to look at two or three opportunities to see if we can make sense of them.

And as far as buy back, again, depending on where we are with the balance sheet and where the stock price is, we're going to, we'll continue to actively repurchase shares.

What are the sizes of these acquisition opportunities you mentioned?

Some of them are in the 50 to $60 million range, and generally that's the general neighborhood of what we're looking at right now.

So you could easily do one or two or even three of them and still even still be much more aggressive in terms of buying back stock than you're currently, in terms of what, compared to what you're currently doing?

That's correct.

How much is remaining on your current authorization?

I think about 205,000 shares.

And do you intend to request from the board an increase?

We're having a board meeting tomorrow and that will be a topic of discussion.

Okay.

We urge you to be much more aggressive in terms of buying back your stock.

Thank you.

It's highly accretive at these levels.

Ladies and gentlemen, there are no further questions at this time.

I'd like to now turn the call back to you.

Please continue with your presentation or closing remarks.

Thank you everybody, and we'll look forward to talking with you at the end of next quarter.

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

We thank you for your participation and ask that you please disconnect your line.