Eagle Materials Inc (EXP) 2005 Q2 法說會逐字稿

Welcome to the financial results for the second quarter fiscal 2005 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 1, followed by the 4, on your telephone. As a reminder this conference is being recorded Thursday, October 28th, 2004. I would now like to turn the conference over to Mr. Steve Rowley, President and Chief Executive Officer at Eagle Materials. Please proceed.

Thank you, and welcome to Eagle Materials conference call for the second quarter of fiscal year 2005. Joining me today are Art Zunker, our Senior Vice President and CFO, Jim Graas, 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 link to the webcast. While you're 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. Thank you for attending today's webcast of Eagle Materials.

Our strong second quarter results were driven by vibrant residential construction market, and an improving commercial construction market. That is why Eagle had record quarterly sales volume in both wallboard and cement. In fact, Eagle cement sales exceeded 740,000 tons in consecutive quarters for the first time in Company history. 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 coast to coast, has us operating at near full capacity. Our constant commitment to quality and operational excellence will benefit our customers and our shareholders during these tight market conditions. As you can see, the quarterly comparative shows a 21 percent growth in revenue, a 54 percent growth in operating earnings, and a 62 percent increase in our EPS. These increases are directly related to our increased wallboard prices. Our revenue and operating earnings mix reflects the dramatic improvement in our wallboard division's profitability. Collectively, cement and wallboard continue to make up nearly 80 percent of Eagle's revenues and operating earnings. During the 6 months ended September 30th, 2004, we generated approximately 86 million of cash flow from our operations, an increase of $29 million over the same period a year ago, driven principally by increased profitability, we utilized those funds to repay approximately $33 million in debt, fund $10 million in capital expenditures, and repurchase over 500,000 shares of our stock.

As of September 30th, 2004, our debt-to-cap ratio was 10 percent, compared to 16 percent as of March 31st. We continue to focus on improving and enhancing our existing assets, share repurchases, and we continue to pursue growth opportunities. Year to date, construction activity has remained strong in all of the markets we serve. In fact, total construction spending is up over 9 percent through August on a calendar year basis. Both cement and wallboard U.S. industry shipments year to date are at record levels, up approximately 8 percent over last year, creating upward pricing momentum in both of these industries. We believe demand will remain high in both the wallboard and cement market, with supply tight as a result of favorable levels of activity in residential construction, repair and remodel construction, and increasing commercial construction activity. Additionally, we believe cement prices will increase over the next several months, as imported cement continues to be impacted by higher freight rates and increasing consumption in world markets. Eagle's wallboard revenues have increased because of both price and volume increases, and all indications show that the market will remain in tight supply next year. We believe that the industry is currently operating near approximately 95 percent of rated capacity, and another price increase is anticipated early next year.

A dramatic wallboard earnings turnaround has been primarily a function of the current tight market, with quarterly comparative operating earnings up over 200 percent . Strong demand has cuffed east coast and west coast shortages, driving up pricing 31 percent in the past 12 months. For reference, a $25 per MSF price increase, equates to approximately a $2.30 increase in Eagle's annual EPS at current capacity. Cement revenues are up 6 percent . Second quarter cement consumption was strong in all of our markets requiring an increased low margin purchase product to supplement our manufactured product. Eagle's cement costs have increased primarily due to the impact of higher cost of purchased cement and higher fuel costs. These higher costs have mostly offset price increases that have been implemented in all of our cement markets this year. Our $70 per ton mill net is the highest quarterly price since before 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 take effect over the next several months.

Paperboard sales to wallboard industry have increased dramatically, to the point where our mill is almost exclusively producing gypsum paperboard. Our continued improvements in operating efficiencies are another reason for the 44 percent increase in the second quarter earnings comparison. Our concrete volumes were basically flat year-over-year, with margins impacted by the higher price of cement. However, Eagle had record high aggregate sales volume for the quarter in northern California, where construction activity is currently very strong. Art?

Thank you, Steve. Guidance for the forthcoming year and quarter, if you go to the slide on page 15, for the quarter we're projecting EPS between $1.30 and $1.50. And also we're raising our guidance for the fiscal year from a low last quarter of $5 to $5.25 to the upper end of the range of $5.65 from $5.50. These guidance numbers are predicated on existing pricing that is in place, and assumes a nominal winter this year. When I say nominal winter, that we will see some seasonality affecting shipments during the forthcoming shipping season. Basically that's it. Steve?

Thank you, Art. And thank you for attending today's call. We will now move to the question-and-answer session. Jennifer?

Thank you. (OPERATOR INSTRUCTIONS) John Lynch, Lynch Research.

Couple of questions about the trend of prices in cement and gypsum during the quarter. What was the quarter exit price in each case?

Our exit price and our September prices, shown on that slide, was $110. And our cement price was about $70.

So it might have been about flat?

Excuse me, cement actually was 71.50.

Yes, that's correct, Jim -- I mean, John.

Question about increases. There are no price increases in cement before January?

That's correct.

And are the bulk of them in January, or out in April where they historically have come?

The bulk of them are actually announced in April -- or, excuse me, in January, with 1 or 2 in April.

Okay. And the last gypsum price increase was August?

Yes. And then there was another recent one, that wasn't a national sales price increase. It was just increased this month in September on the west coast.

And that impacts you?

That's correct.

Jack Kasprzak, BB&T.

Steve, I was wondering if you could -- you mentioned the price increase in wallboard for early next year, I guess. Could you give us a little more color when next year, and how much is being talked?

You know, it's really kind of in the rumor phases, but it's, again, about that 10 percent level, and it's really for mid to late January, is the best I can tell. Really right now, demand is still very strong. Housing starts, although they were down from August a year ago, are as high as they were in September last year, and that created a very tight supply during the winter months. And if you look at the last, you know, average rolling 3 months, we're much higher than we were last year, so therefore -- which will become wallboard 2, 3 months later. The demand is really very strong. So we really feel very good that it will be, unless we have a lot of weather, a very strong winter for us.

Okay. And on the supply side of wallboard, just to get an update. Are there any other capacity announcements that may have been very recent? I know we have the line in Las Vegas that's coming on in January , I believe. And then there 2 other new plants, but those weren't until 2007, and they were on the East Coast. Is that still it for now?

There's one other. GP is talking about starting up a plant they shut down outside of Salt Lake City, Utah, in Sigurd, Utah. But I believe they're going to bring it up on denz (ph) glass, but I know there's talks they're going to restart that operation.

If it were, do you know the capacity, by chance?

I do not, off the top of my head.

Okay. And the -- am I right and from your comments during the slide show, it sounded like in the quarter you bought back about a quarter of a million shares. Would that be about right?

That's correct.

Yes. Jack, it's about 505,000 for the 6 months.

505,000. Art, so while I have you, what does that mean you have left on your current authorization?

We still have a million and three-quarters.

1.75.

Ethan Friedman, Bear Capital.

I have a few questions. On the cement side, I guess, first looking at the wholly owned plants, could you talk about why volume was down 5.8 percent in the recent quarter?

I believe it was at our Nevada plant, where volumes this year were down from what they were last year. And part of that problem has to do with last year was a strong period of time, out particularly on the west coast, and went into this year with low beginning inventories, and we weren't able to purchase very much of purchased product to supplement that sales need out there.

To add to that, yes, it was a very mild winter last year, and so we just, at the beginning of the year, were low on inventory.

And what is your outlook, looking let's say the next couple of quarters, in terms of volumes in the next couple of quarters versus the prior year?

Again, we're getting into that time where seasonality -- if weather is strong, it will be very, very strong. It'll be just -- we'll sell everything that we can make, and purchase as much as we can find, and even though margins are very skinny, because purchased product has gone up dramatically. However, that's one reason that the cement prices have been sustained so far this year.

Yeah, along those lines, could you maybe expand on both the higher fuel costs you're seeing, as well as the purchased cement? Maybe start with the fuel costs. What is, I guess, what are your fuel costs as -- on a per-ton basis, or any other measure, and how much did that hurt you this quarter, and are you expecting the same sort of impact in the next quarter or so?

Yes, I think they started going up about this time last year. A function of both the price of coal, as well as most of the coal that we use is brought in by rail, and rail rates have gone up dramatically as well. So that's what's occurred. It's, you know, $1 to $1.50, combination of both power increases, as well as fuel increases.

Steve, on our cement, it looks like fuel costs have cost us about 58 cents per ton increase for the 3 months -- excuse me, for the 6 months versus last year. And also, not only on our cost of our product on this thing where it's impacting us, particularly in wallboard, is in Willamette, because of the fuel surcharges on the freight involved with that. Our per unit cost on wallboard for freight has gone up anywhere from 10 to 15 percent, depending upon what period of time you're looking at.

Fuel also impacts power, and power costs are up about 80 cents. So it's about $1.50 between the two that we've been impacted.

So in the quarter, if you just look at your own plants, your volume was 400,000 tons, so it hurt you around $600,000. Just the fuel.

Yes.

And could you sort of expand on the higher purchase cement and -- I guess I don't quite understand how much you purchase, and how much it's hurting you.

Again, what happened there, it's a function of the percentage of total sales, and because we had such a strong winter and we started with inventories very low, the amount of manufactured versus purchased increased dramatically. I think it was up almost 80,000 tons in the quarter.

Yeah, Steve, I believe when you look at the impact on our cost of sales, where the switch between manufactured and purchased because of the higher cost of purchased cement, on our total cost of sales for the quarter was $1.90 impact, and for year-to-date is approximately $1.10 impact.

And you look -- when you look at the December quarter, you're expecting a similar type impact?

It's going to be up. The magnitude would be hard to quantify. As Steve mentioned earlier, it's going to depend on our sales volume. And if we have a normal winter season on this thing, volumes will be down a little bit and we might be able to furnish most of that from manufactured product. But if it continues the way it is, then we'll have to get some additional product and it will have some impact on it, but obviously it will be up something.

And why is it that your JV -- your 2 JV cement plants don't appear to have been hurt, at least nearly as much on the profitability line?

It is really just a function of where the price increases have occurred. And then again it's that relationship between how much was manufactured and how much was purchased. A combination of those two.

Okay. Just another question or two. Where do things look in terms of acquisition opportunities?

You know, we're very actively pursuing a number of opportunities. We're hoping that, you know, we'll be able to catch one of them here in the near future. But we continue to actively pursue a number of opportunities and believe that, you know, the prospects are good for Eagle Materials.

And are the opportunities primarily on the gypsum side, and could you also just comment in terms of the size?

The opportunities are really in both cement and wallboard, and we're going to continue to pursue them both.

And could you give us a sense in terms of how large they could conceivably be?

That's a little difficult, but I would say, you know, a reasonable addition -- we're not talking any major multi-plant, but smaller opportunities.

So maybe 50 to 100 million?

That or -- it's probably a little bit higher than that.

Okay. And with regard to the buyback, I was obviously very happy to see that you guys are, you know, buying back stock. But it seems as if, if you continue at buying back stock at the rate you've been buying it at, your balance sheet is going to get even more inefficient, given just how much free cash flow you'll be generating looking forward over the next 1, 2 plus years. So could you comment in terms of, you know, your thoughts on becoming more aggressive, either buying back stock, or perhaps paying another special dividend?

It's really a balance between growth opportunities and repurchasing shares, and as we get closer, or one of these opportunities becomes a reality, then we'll balance the share repurchase accordingly.

Thanks. And also, just with regards to the acquisitions. Do you expect to, I guess, know within, I guess, the next month or two whether or not these are going to come to fruition, or is it more longer term?

I believe, no, that we should know in the near term. Certainly, sometime during this quarter we'd hope to have something to announce, but, you know, it's never a done deal until it's a done deal.

Cliff Walsh, Sidoti & Company.

I'm assuming that you're still buying back the B shares, rather than the regular EXP shares.

That's correct.

Okay. Can you prioritize your plans for free cash?

Well, obviously, what we've said before on this thing is that, looking down the road on this thing, you know, we're on the acquisition mode on this thing. And in light of that, I would say it would be additional share repurchases, then the other third option available to us is something in the dividend area.

Okay. But you would -- acquisitions would come before share repurchases, which would come before, you know, debt pay down and dividends?

That's correct.

And we're also looking at some other internal expansion opportunities.

Okay. Can you give us a sense of your pricing assumption for wallboard for the new guidance range?

It's based on the current price.

Okay. And I'm assuming with, you know, mortgage rates below 6 percent at this point, you're still feeling pretty good about the housing market?

Yes, we are, and especially with housing starts continuing to remain at high levels.

Any concerns at this point?

Not at all. We're very optimistic.

Have you seen any -- can you give us a sense of what you're seeing on the commercial construction side? I guess mostly from the cement side.

Again, are you talking about public works, or just regular commercial construction?

Regular commercial construction. If you could break down both, that would be great.

Really, public works is very strong. There's a lot of work that really had kind of been somewhat delayed that seems to have picked up very strong in the last 3 to 6 months. In commercial construction, again, we're starting to see more and more activity in that area, so I don't have a breakdown, per se, but we just finished having an internal sales meeting. Everybody was very excited about all the activity in all parts of our businesses.

Okay. Any thoughts on the reauthorization of T-21 at this point?

I believe that's going to be delayed a little bit. Don't think that it's really going to impact us. Again, right now, cement is very, very short in this country, and we're bringing imports into the country to help that. But if T-21 does kick off some further increases, that will just further exacerbate the tight supply situation right now.

Barbara Allen, Natexis Bleichroeder.

On the corporate G&A, Art, when I exclude the just under a $1 million in spin-off expenses last year, get a pretty hefty increase. Anything in particular there, and is that the run rate I should use?

Exclude that and use that run rate. We just -- we increased our staff here, we got the 404 expenditures that are still not flowing through, and related types of items.

Insurance costs.

Insurance costs are up. So we're up in costs in various areas.

So the 2.7 is pretty good for a run rate?

Per quarter?

Yeah.

It may be a little high.

Tony Campbell, Knott Partners.

Couple of things. What was the average share price that you paid for the repurchased shares? I got on the call a little late.

I think for the quarter, the September quarter it was a little over $62, and I think when you look at it for the 6 months, it's something in the $61 range.

Where do you reckon you'll -- how much cash do you reckon you'll have at year end?

How much cash?

Yep.

At the rate we're going, here right now, it's all contingent on what we have for share repurchases. But basically, if we didn't do any more share repurchases we'd probably be debt-free at year end.

Okay. You guys have always been very good at kind of expanding at the bottom of market cycles, and you've had, I think, a real good sense of timing there. Where do you think the cycle is today?

You know, in cement we've really had a good run for 10 years, and things are actually picking up a little bit, but don't see that changing. Again, there's a different dynamic than we had 10 years ago, and that dynamic is the fact that we have over 20 percent imports into the U.S. We still see that as a very steady business and stable business for us. And wallboard, we really believe demand is continuing to grow in that industry. It's grown really at a much higher rate than cement over time, and believe that that will continue. And we really think that wallboard is at -- even though it's at record levels, unless we have some major collapse in residential construction, that that looks very good going forward as well. So I wouldn't say we were at the top of the cycle in either business.

Would you say that you're sort of half-way up the cycle, half-way through the cycle, or --?

That would be reasonable.

Okay. I just want to, I guess, make a statement, if I might. I appreciate, I think you guys are very capable managers, et cetera. If you don't make this acquisition, it seems to me that as a shareholder, that we'd sure love you to just tender for a whole bunch of shares and just keep buying back the stock.

Well, I appreciate that. Thank you.

Because, you know, the devil you know is better than the one you don't necessarily.

We understand that as well.

Okay. I mean, and I presume that this will all be resolved by the end of the fourth quarter, one way or another?

Yes.

Fantastic. Good luck.

Ladies and gentlemen, as a reminder, to place a question, simply press the 1, followed by the 4, on your telephone keypad. Chris Greenberg, Barron Capital.

Congratulations, again, on great business. Couple of questions. You gave the exit pricing in both your market segments. Could you just remind us what the pricing was going into the quarter, and what the average realized price in cement and gypsum were during this period. And you did mention that gypsum prices are up somewhat in one of your plants, so what's the average gypsum price now?

I think the average price is that we're basically right at the $110 range. And during the quarter it was pretty well -- pretty flat during the quarter. It didn't really increase that much. On the gypsum area, Steve talked about cement, we exited somewhere-- and this has to do with the mix on this thing between what part of the country it's coming from, obviously our cement plants out on the west coast have a higher (indiscernible) than our 2 joint venture plants. So that interplays into pricing. Basically through the quarter on this thing, I believe we went into the quarter with something around 60 -- almost $69 and came out at 71.5 on these things. We're about at 70 for the average for the quarter.

Okay. And is gypsum prices up now, on a realized basis with the fact that there has been a west coast price increase?

Well, I think because the hurricane slowed down on the east coast. And so it's really a balance. So I would say that really this $110 has been pretty flat here over the last quarter, and that's why the current pricing is maybe up a little bit on the west coast, but somewhat impacted by slower demand on the east coast.

Gotcha. One other question if I can. You've been very clever acquirers of assets in the past. In an environment that we're in right now where the business is improving, as you look to acquisitions, are you looking at plants that are underperforming and you can run better, or joint venture type projects, or ways to in essence buy capacity at a very cheap price? Is that possible now that the business is performing better?

Clearly in the past, and we're very careful, and we understand that these are very large-scale capital investments for, you know, for long term, and you really have to be careful with the investment and careful with your timing. We do not plan to really dramatically differ from anything that we've done in the past. We'll find the right opportunity and make sure that there's a solid return before we commit to it.

Okay. Great. I trust will you, and you have in the past. So that's good. As far as the -- you have talked in previous conference calls about a handful of capital projects of increasing capacity in some plants, or new terminal space. Are you going forward with those now, or is that kind of in abeyance seeing if we are going to put a lot of capital work on a new acquisition?

Actually, there's plenty of capital available for both, and we are continuing to pursue both.

So where do you stand, Steve, if you may -- what projects are you pursuing in your present portfolio to increase capacity or otherwise, and where do those stand?

We have, as we mentioned last time, looking at some opportunities at Illinois Cement to increase the capacity there. Have not finished with getting all the numbers put together, but that should happen this quarter. We'll be able to present something to the Board during this quarter.

Okay.

And we're continuing to pursue a larger facility out west, Nevada Cement. In that regards, we've started coring the property, we're looking at the drill hole samples, we've started setting up some met stations, metallurgical stations, to monitor the ambient conditions right now, the air quality, so you have some baseline readings. So that process has started and we're moving forward and we continue to look at some import terminal operations as well. As well as look at some opportunities for greenfield expansion in the wallboard business.

John Lynch, Lynch Research.

Looks like we're getting to the point where somebody's going to have to examine your future cash flow, not just for what it is now, but what it's going to take to build a plant. What, 1.5 million, 2 million ton plant in Nevada?

It would be smaller than that, probably about the million-ton range.

Okay. Are we talking 150, $180 million?

That could be in that range, absolutely.

Of course, you can use some of that financing, but you should be building something of a treasure chest, should you not, on the equity side?

Yes, and, of course, it takes about -- by the time you go through the permitting process, about 3 to 5 years to have this permitted and constructed. So the construction starts somewhere 3 years out, so we have a little time to put that kitty together.

Take a deep breath. Thank you.

Justin Livengood, Merrill Lynch.

One quick question. You've mentioned hurricane once or twice, or hurricanes, in the call. And I'm just curious if you could elaborate on the impact you see or expect to see on either the cement or wallboard markets as you go into next year, from all that severe weather down south.

For us, it's really just wallboard, and there's a near-term disruption to the market, and a slowing of the market. But long-term actually it really improves, and it takes a fair amount of time. You have to wait for insurance settlements, and it takes awhile to get the rebuild piece put back in place, which is where you get the increase. But once it dries up, really the regular construction that had slowed down, really comes back, and you try to get caught up. So we're approaching that phase right now.

Okay. So by early -- by the point we enter calendar '05, hopefully, you're starting to see an uptick in that activity?

Absolutely.

Ladies and gentlemen, as a reminder, to place a question, please press the 1, followed by the 4, on your telephone. And it seems we have no further questions at this time. I'd now like to turn the conference back to you. Please go ahead.

Thank you. I appreciate everybody calling in, and we'll talk to you next quarter.

That does conclude our conference call for today. We thank you for your participation, and ask that you please disconnect your line.