Eagle Materials Inc (EXP) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Eagle Materials Inc. financial results for third quarter fiscal year 2005 conference call.

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

Afterwards we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS).

As a reminder this conference is being recorded Wednesday, January 26, 2005.

Now I would like to turn the conference over to Mr. Steve Rowley, President and Chief Executive Officer with Eagle Materials.

Please go ahead, sir.

Thank you.

Welcome to Eagle Materials' conference call for the third quarter of fiscal year 2005.

Joining me today are Art Zunker, our Senior Vice President and CFO;

Jim Graass, our Executive Vice President and General Council; 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.

As you can see, the quarterly comparative shows a 23 percent growth in revenue, a 37 percent growth in operating earnings and a 47 percent increase in our EPS.

Our strong third quarter results were driven by a continued strong construction market.

That is why Eagle had record third-quarter sales volumes in both wallboard and cement.

With U.S. demand at record levels for both wallboard and cement and supply limited by U.S. production capabilities, and in the case of cement a dependence on higher-cost foreign imports, pricing for these commodities continue to rise.

Collectively, cement and wallboard continue to make up nearly 80 percent of Eagle's revenues and operating earnings.

These two core businesses remain the focus of Eagle's future growth and on January 11th, Eagle finalized the purchase of our partner's 50 percent ownership in Illinois Cement Company.

During the nine months ended December 31, 2004, we generated approximately 129 million of cash flow from our operations, an increase of 26 million over the same period a year-ago.

We utilized those funds to repay approximately 53 million in debt, fund 15 million in capital expenditures and repurchased over 500,000 shares of our stock.

As of December 31, 2004, our debt to capitalization ratio was 6 percent compared to 16 percent as of March 31, 2004.

We continue to focus on improving and enhancing our existing assets, share repurchases, and we continue to pursue various growth opportunities.

We used our bank revolver to borrow $65 million to finance the Illinois Cement Company acquisition.

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 November on a calendar year basis.

Both cement and wallboard U.S. industry shipments year-to-date are at record levels, up approximately 6 percent and 8 percent over last year, respectively, creating upward pricing momentum in both of these industries.

We believe demand will remain high in both the wallboard and cement markets, with supply tight.

Wallboard demand drivers; while some projections depict a slight slowdown in residential construction, we believe that increases in nonresidential, repair/remodel, and manufactured housing will mitigate any decline in residential construction.

Further, the thicker 5/8 commercial board product effectively reduces board line speed, thereby decreasing wheel industry capacity.

In summary, we expect tight supply conditions to remain during calendar 2005.

Eagle's wallboard revenues have increased because of both price and volume increases.

The industry is currently operating near approximately 95 percent of rated capacity and a price increase has just been implemented on January 10th.

Strong residential construction has been the primary driver of the current tight wallboard market with quarterly comparative operating earnings up over 100 percent.

Seasonal weather resulted in a volume shift to slightly more distant markets, increasing freight and slightly reducing our third quarter wallboard net price versus our second quarter net price.

Cement.

Third quarter cement consumption remained strong in all of our markets and we remain sold out requiring increased low margin purchased product to supplement our manufactured product.

The revenue increase was primarily associated with price improvement.

Eagle Cement earnings have improved because price increases have outpaced the impact of higher cost purchased cement and higher fuel costs.

Our mill net of $71.75 per ton is a record high quarterly price for Eagle materials.

Current strong domestic demand coupled with improving worldwide demand and high ocean freight rates will support further cement price increases scheduled to take effect during the next six months.

In paperboard, record wallboard industry shipments have increased gypsum paperboard demand, thus our Lawton paper mill is almost exclusively producing gypsum paperboard.

Continued improvements in our operating efficiencies are also reflected in the 26 percent increase in the third quarter operating earnings comparison.

In Concrete and Aggregate, our concrete volumes were basically flat year-over-year with margins impacted by the higher price of cement.

Eagle continues to enjoy record high aggregate sales volume in Northern California where construction activity remains very strong.

Art.

Thank you, Steve.

We have issued guidance for the fourth quarter of fiscal 2005 and for fiscal 2006 based on our internally reforecasted number of volumes and pricing.

In summary for the fourth quarter of fiscal 2005, we anticipate our diluted EPS to range between $1.15 and $1.40 per share, driven primarily by the full impact of already implemented wallboard and cement pricing increases.

For fiscal 2006 we estimate that our diluted EPS to range between $6.40 and $6.90 per share reflecting continued strong demand for our wallboard and cement.

Let me add an additional highlight to that.

Steve mentioned that we borrowed $65 million to fund the Illinois acquisition.

For you all doing your models, that equates to approximately a $95 million total debt starting out in mid-January, for your projection purposes.

Also during the quarter we had approximately $8.5 million of depreciation and $5.5 million of CapEx.

The projections for the fourth quarter are based on wallboard pricing of approximately $110 per MSF and cement pricing in the $70, $71 per ton range.

Thank you.

Craig, now it's time for questions and answers.

(OPERATOR INSTRUCTIONS).

Jack Kasprzak from BB&T.

Good afternoon guys.

First question is, did you say you bought back 500,000 shares in the quarter, in the third quarter?

No, that is year-to-date.

How much did you buy back in the third quarter?

We did not buy any.

Primarily we were kind of -- we had a trading block for a large part of the quarter due to the Illinois Cement transaction.

And then we also had an increase, pretty nice increase in share price, so we have been debating whether we have the right opportunity or whether the market has just gone up a little bit recently.

Okay.

You made a comment, Steve, on the sequential decline in wallboard price that you reported.

Could you -- I just missed the reason you gave for that.

We had -- again, it's really weather-related.

So in this quarter we had to ship a little further distance, so there was a little greater freight involved.

The pricing was down slightly.

I think it was about $1.00, our net pricing quarter-to-quarter.

In all, it was really more of a function of shipping to little further distant markets to adjust to the weather that occurred during the quarter.

So apples-to-apples, there wasn't really any deterioration in wallboard pricing?

Would that be correct?

On average, yes.

I would say they were a few markets where it might have been impacted a little bit.

But we have also been able to shift product mix around and kind of adjust for that.

At the end of the day, our price is really flat throughout the quarter.

And in fact, even though you're still seeing some weather in certain markets, we are seeing a good bit of this current price increase that looks very positive right now.

That was my next question.

So right now, from what you can tell now, if it's early, we know, but it looks like much of it is holding?

In the markets where we are not really being dramatically impacted by weather, that is correct.

Got it.

Just quickly on cement, are you suggesting that there is a second round of cement price increases going into effect over the next 6 months or is the first around just phasing in in different markets over the next 6 months?

In different markets, it phases in and there are some price increases effective in January, some in April.

And even in some markets we will have prices in the same market; a price for say in Texas, for maybe DFW (ph) in Houston as of January 1, and then for the rest of Texas as of April 1.

It is kind of mixing matching.

But all in all, all those prices looks very strong, and we feel very, very confident that cement is going to continue to see increased pricing pressure throughout the year.

Our inventories are very low.

I believe our competitors' inventories are low as well.

So that just adds more credence to the fact that these price increases should hold.

There is talk of a second round of price increases for the summer, I believe, in some of the coastal markets by at least one major producer.

Have you guys been hearing the same thing?

There are, and that is correct.

In some markets we are seeing a second round, and not in all of them.

But again in the $5.00 range which would be kind of the midsummer timing.

Okay.

That's great.

Thanks.

(OPERATOR INSTRUCTIONS).

Barbara Allen from Avondale Partners.

Thank you.

I missed a couple of numbers, Art.

Did you say -- did you give the forecast for 2006 as 660 to 690, or did I mishear that?

640 to 690, Barbara.

Okay.

So I did mishear it. 95 million in debt as of March 31st, or currently right?

Actually that is as of July to January 11th (indiscernible).

Okay. 8.5 in D&A, and how much was the CapEx?

About 5.5 for the quarter.

What are you looking at in CapEx for fiscal '06?

'06 is somewhere in the $20 million range.

What kind of investments do you think those will be?

That is really just primarily sustaining capital.

I'm sorry?

Maintenance you mean?

Maintenance capital.

(indiscernible) the operations, Barbara.

All right.

Thanks very much.

Michael Corelli from Barry Vogel & Associates.

I just wanted to confirm what you said your assumptions were on pricing for the fourth quarter guidance?

Mike, for wallboards what we use in our guidance is in the $110 range and cement is in the $70 to $71 range.

Please keep in mind that the fourth quarter, that is our lowest volume quarter, and also it's our lowest earnings quarter and is really a function, to be a function of the seasonality of the cold weather up north.

So really all that is driven by what the weather conditions are during that period of time.

For fiscal '06, what kind of assumptions are you making?

Mostly about the same range there, $110, $111 for wallboard and the low 70s for cement.

So in wallboard are you assuming that maybe some of the price increases you're getting now will soften later in the year?

Generally when we give forward guidance, it's based on current pricing with what we predict the volumes to be.

Okay.

All right, thank you.

John Lynch (ph) from Lynch Research.

I guess I will focus on cement.

The plant, LaSalle plant where you bought out the Pritzker partners, is that plant -- it's a very old plant.

Does it have any potential (a) for rebuilding or (b) for expansion?

Do you have rock that would support an expansion there?

The answer to that is yes, and we are currently looking at an expansion project.

We believe that we should have finished doing all of our homework and be able to take something to the Board, something during this next quarter.

We do believe that that project is really something that will enhance Illinois Cement in the future.

Even though the plant is somewhat older, when it was built in the early '70s it really was a modern facility.

So it is a preheater kiln with a roller (ph) mill and very solid finish mill system.

In reality we are very proud of that, but we do think that there is some growth opportunity there.

We just have not finished vetting out all of the construction costs.

The second cement thing is the Nevada market, any further movement towards building the new plant there?

Are they showing contracts or anything of that nature?

Again, that is something that takes a while to put in place.

We have a permit in place for the Illinois Cement expansion.

We do not have a new permit, so we are just starting the permitting process out at Nevada Cement.

Typically these things take at least a couple of years if not 3 years to get put in place.

We are in the very, very early stages of looking at Nevada Cement.

Okay.

Finally, in terms of the imported cement you bring in, is there a continued rise in freight costs or have they flattened out?

The freight costs have pretty much flattened out.

However, the cost at origin has actually increased somewhat.

Is that a function of the weakness of the dollar?

Part of it is the dollar and part of it is worldwide demand is rising.

Right.

Thank you.

(OPERATOR INSTRUCTIONS).

Barbara Allen from Avondale Partners.

Art, you had a substantially lower tax rate this quarter.

Any reason for that -- or what is the reason for that and what should we be using for the full year and for '06?

Actually the tax rate for the quarter was right around 32 percent and that is just redefining or relooking at and fine-tuning our estimated tax rate for the year.

If you are going forward for next year, use something in the 33 3/4 or 34 percent range.

That is how '05 will come out to, because it looked like you adjusted this downward because the last one was --.

'05 is going to be somewhere around that 33 3/4 percent range.

Okay, thanks very much.

(OPERATOR INSTRUCTIONS).

Mike Betts from J.P. Morgan.

Maybe I missed it because I joined the call late, but did you quantify the magnitude of the wallboard price increase on January 10th?

I did.

How much is it?

It is 10 percent.

Okay.

My second question, just on the cement business, you talked about the cost pressures in terms of fuel.

Are you able to give any quantification of the magnitude of those cost pressures?

Yes, in general, it was about a couple dollars.

The impact between the combination of power and fuel, it is in about the $2.00 range.

The coal prices and coal may be $1.50, but collectively the energy costs were about $2.00 in the third quarter.

Okay, will that be even higher in the fourth quarter or was that flattened out, that rate of increase?

It appears to have flattened out.

That's great.

Thank you very much.

Joe Kinnison from Kennedy Capital.

Two questions for you.

The first, you talked about industry capacity utilization and wallboard being 95 percent.

And I wondered if you could give us a sense of where you are relative to that, above it, below it or in line?

Secondly, if you could talk a little bit -- you said a little bit about the weather caused a little bit of a dislocation in wallboard and I believe the same is true in concrete, and I wondered if you had a quantification of what weather cost you in the quarter?

We are really right at industry average.

So that 94 to 95 percent capacity utilization, we are running essentially our plants wide-open but we do have a little room.

I think this year, if we continue at the current rate, we will produce and sell about 2.6 billion square feet and really about 2.7 or 2.75 is about the maximum, our rated capacity.

We are right near industry average with our capacity utilization.

As far as weather, with just a little more of a shift because there has been quite a bit of weather out West.

We shipped a lot of product more towards the East.

Where the East had been impacted by weather in the fall, it is rebounding.

And so there is just a little higher freight when we go further to the East than to the West.

The impact was about $1.00.

Okay, thank you.

There are no further questions at this time.

I will now turn the conference back to you, Mr. Rowley.

Thanks everybody for attending, and look forward to talking to you again in another 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 lines.