Eagle Materials Inc (EXP) 0 Q0 法說會逐字稿

Welcome to the Eagle Materials Inc. fourth quarter and fiscal year 2005 financial results 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, May 4th, 2005. I would now like to turn the conference over to Mr. Steve Rowley, President and Chief Executive Officer of Eagle Materials, Inc. Please go ahead, sir.

Thank you, and welcome to Eagle Materials conference call for the fourth quarter and fiscal year 2005. Joining me today are Art Zunker, our Senior Vice President and CFO; Jim Graass, our Executive Vice President and General Counsel; and Craig Kesler, our Vice President, Investor Relations and Corporate Development. 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.

Very strong U.S. construction fundamentals allowed Eagle Materials to set record high fourth quarter and annual revenues in fiscal year 2005. The increase is driven by record sales volume in wallboard and cement, combined with record high cement prices and a 25% year-over-year increase in wallboard pricing. This year's fourth quarter was also positively impacted by the acquisition of our partners 50% ownership in Illinois Cement Company, which closed on January 11th.

Eagle's operating earnings for this year's fourth quarter were up 50% from the prior year's fourth quarter, and Eagle's operating earnings for fiscal 2005 were up 52% from the prior year. Primarily because of our much improved wallboard pricing that's been associated with current tight supply and high industry capacity utilization. Improved wallboard profitability combined with continued strong cement earnings, allowed Eagle's fourth quarter and fiscal year diluted earnings per share to reach the highest level in our Company's history.

During fiscal 2005, we generated over $157 million of cash flow from our operation, an increase of $44 million over the same period a year ago. The cash was utilized to fund $93 million in capital expenditures, including $72 million for the Illinois Cement acquisition, and to repurchase over 660,000 shares of our stock. As of March 31, our debt to cap ratio was 15%, compared to 16% a year ago. Eagle remains focused on improving and enhancing our existing assets, share repurchases, and new growth opportunities. The Illinois Cement acquisition was financed with our existing bank credit line.

Our first full year since gaining independence has been very rewarding for Eagle, including the record high stock price, the highest annual EPS in Company's history, our highest annual sales volume in cement, wallboard, and aggregates. In addition, we have taken positive steps for creating prosperity in future years by purchasing our partners' 50% ownership in Illinois Cement, starting construction that will also increase Illinois Cement's capacity by 65%, and announced a new greenfield wallboard plant to be built in South Carolina, with start-up schedule for early calendar year 2007. With this strategically located wallboard plant, Eagle will dramatically improve it's logistics in customer service, and combined with existing operations, become a dependable, national supplier of wallboard.

Total construction spending is up over 9% through March, with both cement and wallboard industry shipments at record levels, up approximately 13% and 3% over last year; creating upward pricing momentum in both of these industries. And we are very confident that the demand will remain high and supply tight in our wallboard cement markets during the current fiscal year.

Eagle's wallboard revenues in the fourth quarter increased because of price increases achieved throughout the year. This year's fourth quarter sales volumes were negatively impacted by rail transportation availability issues. However, our wallboard business set a record high for annual shipments of over 2.5 billion square feet in fiscal 2005. These transportation issues have been resolved, and last month, despite having only 21 shipping days, was the highest shipping month in our Company's history. The industry currently operates at 95% of rated capacity, and another 10% price increase was implemented in late April.

Strong residential construction and strong repair remodel have been the primary drivers of the current tight wallboard market. Resulting in Eagle's annual comparative operating earnings increasing by over 100%. This graph illustrates wallboard's return to solid profitability over the past year. A portion of the January 10th price increase held, which lifted our fourth quarter net sales price by 5% above the third quarter. The reference, a $10 per MSF increase in price equates to about 90% annual increase in Eagle's EPF.

Fourth quarter cement consumption remained strong in all of our markets, and we remain sold out, requiring increased low margin purchase product to supplement our manufactured product. The revenue increase was associated with both price and volume improvements. Eagle cement earnings have improved because price increases have outpaced the impact of the higher cost of purchase cement and higher energy cost. Our 73 plus per ton mill met -- dollar per ton mill met is a record high quarterly price for Eagle Materials. The very strong domestic demand coupled with the current high import costs continue to support cement price increases. A $5 to $8 per ton price increase was implemented on April 1, in substantially all of our markets.

In paperboard, record wallboard industry shipments have increased Gypsum Paperboard demand, allowing lot and paper mill to almost exclusively produce Gypsum Pacing Paper. Because our paper business is vertically integrated with our wallboard businesses, changes in volumes in our wallboard business can affected our paper volumes. This happened in this year's fourth quarter. Additionally, maintenance outages at some of our external customers -- by some of our external customers negatively impacted our fourth quarter paper volumes.

Our concrete volumes were up 19% from the prior year's fourth quarter, and our operating earnings are improving. Eagle continues to enjoy record high aggregate sales volume in Northern California where construction activity remains exceptionally strong. Art?

Thank you, Steve. Guidance for the forth-coming fiscal year of 2006 -- for the first quarter fiscal year 2006, range from a $1.70 to $1.90 per share EPS for the quarter, and for $6.40 to $6.90 per share for the fiscal year. Presented in the slide below are the assumptions that we used in preparing this guidance. And basically, wallboard pricing is at the current level of $115 for an average throughout the fiscal year, and cement pricing of $75 per ton average throughout the fiscal year. Steve?

I think we're now ready for questions and answers.

Thank you.[OPERATOR INSTRUCTIONS] Our first question comes from the line of John Lynch with Lynch Research. Please proceed with your question.

Good afternoon.

Good afternoon, John.

I'm kind of -- I don't really trust what I read, but E&R this last week showed, for the first time in a long time, a significant decline in cement prices. Now, that would have been in the April period, which is beyond the period we're talking about here. But you've indicated that you expect the price increases of 5% to 8% to pretty much hold. How could I adjust that in my head? Why would E&R come out with this meaningful -- of over a one, one point something percent increase in pricing -- decrease in pricing?

I'm not sure, but we have not seen that. In fact, the price increases that all of our market, we've had little or no resistance to the price increase.

Well, I can't interpret it any -- they don't give me enough information as to why. But anyway, it's something to think about. Second thing is that, what in the world causes rail service to be interrupted? I mean reduced rail transportation availability sounds like the forest products industry when all the rail cars had to get out of California at year-end to avoid being taxed. Is it something odd like that?

I believe for us, we were in some rate negotiations for next year. They definitely got our attention.

So it definitely is behind, whatever it is, certainly, until next year the same time?

Yes. In fact, we had record wallboard shipments in April for the Company. And so, yes, we've resolved that issue.

Thanks a lot.

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

Thanks. Good afternoon, everyone. The tax rate in the quarter was -- the effective rate was around 29%.

Why was it below what's been the ongoing rate? And what do you think the tax rate will be in fiscal '06?

Art?

Jack, let me take a minute to address that. We got in and finalized and trued up our tax rate for the year. As you recall, last year, the tax rate went up about 1.5%, what had historically been running around 33%, and that was due to the nondeductibility of costs related to the spinoff. Obviously, this year we didn't have that. And also, during the last two years we've been working on improving our state tax position. So when all that stuff added together, that got -- said we should be around 32.5% for effective tax rate for the fiscal year. That obviously adjusted down to the 32.5% from the prior nine months period. Squeezed some of the additional reduction into the quarter to drop it down to 29%. So going forward, used the 32.5%. That should be an ongoing good tax rate, and that's consistent to what we were at for the prior two years -- prior to the spinoff last year.

Okay. And, Art, can can you update us on the CapEx plan for 2006?

Yes. Jack, if you're working on your models -- we kind of throw these numbers out, realizing that they could vary a little bit. But we're looking at spending approximately $60 to $65 million for CapEx during the forth-coming year; approximately $30 million for ongoing CapEx, and we have a one-time things that will be in that number. Plus about $35 million split between the South Carolina wallboard plant, and the Illinois planned expansion. And then for depreciation we use something in $41 million -- $41, $42 million range for the year for depreciation.

Okay. Great. And the -- Steve, you mentioned in your comments, I think you mentioned, a little bit of the wallboard price increase in January held. I guess that means less than half. So was the price -- ? Two part question -- . Was the price of wallboard at the end of March pretty similar to what it was for the quarter average - $115.24? And how's the April 10% price increase looking?

The April is -- just a little too early to tell on the April. But in March, we're a couple -- couple dollars above the quarter average.

Okay.

And so a good bit, at least about half of that January price increase held. And again, these things are national price increase. And some markets were -- that weren't impacted by whether it held very strong, and others there was some, whether you have little or no price increase. So it ends up being an average.

Okay. The -- with regard to the guidance, I mean the guidance of $6.40 to $6.90, that's been pretty -- that's where it's been for a couple of quarters now, at least. I guess I'm a little surprised it didn't -- you didn't take this chance to bump it up. I mean your practice has been, I understand, to issue guidance without regard to prospective to price increases. But given what's happening with wallboard and cement prices, isn't there a chance that you raise that guidance fairly significantly as we progress through our fiscal '06?

I think if the price increase for cement that has just been implemented April 1 and the one that -- the wallboard price that was just implemented April 25th; we'll have a very good feeling at the end of this quarter. And certainly, if those price increases substantially hold, there will be a modification in the guidance.

Okay. Very good. Thanks, guys.

Thank you. Our next question will come from the line of Cliff Walsh with Sidoti and Company. Please proceed with your question.

Good afternoon, everyone. In terms of your expansion plans, are you comfortable with the two new projects you're working on, cement and wallboard, or is it possible we could see some additional projects or acquisitions in the next year or two?

We're certainly comfortable with those projects, and think they are very solid projects for our company. But we still remain opportunistically alert. Both for acquisitions, as well as other opportunities to improve our cost structure and our existing asset base.

Okay. Now, can you comment a little bit on what you're seeing in terms of commercial construction in your markets?

Commercial construction is -- when it comes to items associated with the home building, that's been very strong for the last couple years -- remains very strong. We see schools being built, we see hospitals being built, we see strip malls being built. So, in that segment of commercial construction, it looks very strong. As far as office buildings, no, we haven't seen a lot of activity in our markets regarding office buildings. But in other areas, we're seeing very strong demand, and it has really impacted both cement, concrete and aggregates currently.

Okay. Great. Everything else has been asked already, so thanks very much.

Thank you. Our next question comes from the line of Joel Locker (ph) with Carlin Financial. Please proceed with your question.

Hi, guys. Good quarter. I just kind of wanted to talk a little bit about the share buy back. I don't know if I missed it. I kind of jumped online in the middle of the call. But did you purchase any in this March quarter?

Yes, we did. we purchased about 156,000 shares of stock. And --

I'm assuming it was all the B stock.

It was all the B stock, an average price of about $80.

Average $80. Going forward, do you see -- with the projects, do you see you have enough cash flow to continue buying? If you bought some at $80, I guess it looks even better in the mid $70s, low $70s?

We're going to continue. We have plenty of cash flow to continue our rate purchase program.

I don't know if you mentioned it. What is your expected cash flow in the fiscal year 2006?

Looking prior -- not prior, but including dividends, we should be somewhere in the $90 to $110 million range free cash flow.

So that's -- a good portion could be, depending on share price, be attributed to the buy back, though?

Yes. We have a nice war chest there on the --

I got you. Thanks a lot.

Thank you. Our next question comes from the line of Barbara Allen with Avondale Partners. Please proceed with your question.

Thank you. And I'm sorry, I can't see the slides. I'm in an off-site location. But, I'll take a look at them later. I wonder if you could update us on any expansion plans of capacity for your competitors, in either business, that you've seen so far.

Well, above and beyond what we've talked about in the past, I believe in this quarter, BPB announced a new wallboard plant in, I believe it's West Virginia, not too far from the Pittsburgh area. I think that's the only additional wallboard expansion announcement that I know of.

Along with that, did they announce any closing of the high-cost stuff that they bought?

No, they have not.

And did they give a date for when this is likely to be completed or can you guess at it?

They gave a date. And, in fact, they updated one of their other announcements. I think they delayed the Rocksborough, North Carolina, project by about a year, to 2008. And then this plant they have scheduled for sometime in 2007, coming online.

Okay. Anything in cement?

In cement, I don't think there's anything in cement. And the lead times continue to push out because of the amount of time to acquire your permits.

And I wondered how -- can you give us any kind of measure on how much the higher energy costs are affecting your profitability? Or, just any kind of rough estimate of what that's taking away.

I think it is about -- really, for both cement and wallboard, about $2. So $2 a ton, and about $2 in MSF.

So that's about $2 over last year at this time, or since they started rising?

Over last year at this time.

Okay. Thanks very much.

Thank you. Ladies and gentlemen, [OPERATOR INSTRUCTIONS] Our next question comes from the line of Tony Campbell with Knott Partners. Please proceed with your question.

Good morning -- or good afternoon. Good quarter. May I make a suggestion? I think it's great that you bought some stock back. But, why don't we just tender for a bunch of stock?

Well, we'll continue to look at all of those options.

And when is -- can you just remind me when the next board meeting is -- is, with regard to the dividend consideration?

The next board meeting is May 31st.

I mean, I just -- you guys have done a great job. The market doesn't seem to appreciate it. You know, I'd like to see you really get a little more aggressive in stock buy backs.

I understand. We're really not getting a lot of credit for the balance sheet.

No. And you can always leverage -- you've got great assets, and you've done a great job of expanding at the right times. Maybe someone will pay attention someday.

Thank you.

Thank you. We have a follow-up question from the line of Barbara Allen with Avondale Partners. Please proceed.

Thanks. I wonder if there's any catch-up left in -- regarding the excessive rains that California and Arizona and other areas had. Did you get that all caught up in April, or where do we stand?

I would guess that it still has not completely caught up. Usually what happens with those rains -- it really slows down the initial stages of construction, which is the earth work. And that takes a while for that to get caught up. And then for wallboard, you're two or three months down the road before you start to see the wallboard being used.

Okay. And could you -- if you don't mind, Art, or Steve, go through , again, what's going on in paperboard, and is that now -- or what went on in paperboard in the fourth quarter? And where things are now relative to those kind of slowdowns?

Yes. We had, though, again, we were a little bit lower in our volume this year than last year, as far as wallboard production and shipments. So that slowed -- kind of backed up to the paper mill. And in addition to that, one of our customers had some major outages. That is behind us now, and we are running wide open at the paper mill. And so that all looks very strong.

And that was maintenance, downtime, or --?

It was our customer, so I believe it was maintenance.

Okay. So now you're running flat out. The rails are working fine. Did your contracted prices go up?

Yes, they did.

Okay. Oh, well, what goes around, comes around, right?

That's right.

Anyway, thanks very much.

You're welcome.

Thank you. Our next question is from the line of Tim Adler (ph) with JP Morgan. Please proceed with your question.

Hey, everybody. I'm thrilled to see how great things are going. And, the one thing that gets me a little bit concerned, or at least curious, is the effect that exchange rates have had on cement prices. I was wondering if you could give me your personal view, or read, on the sensitivity of cement prices to a potential increase in the dollar. Or, at least, if not -- if there is no sensitivity, tell us why the -- the markets are relatively protected for other reasons, like geographic reasons.

There are really a couple of things that are happening in the cement industry this year. One is, we're starting the year with the lowest inventory levels that I believe I've seen since the early 1980s. And so, there is a huge need for cement to be imported into the U.S. So, I would expect imports to increase dramatically this year, just to cover the inventories that were depleted last year. So, we have that in our advantage.

Some of the cement that is shipped into the U.S. is shipped from places that are tied to the dollar, so there wouldn't be an impact there. But the other thing that is really happening is, the demand for cement in the foreign markets are dramatically improving. Whereas in the past, cement was imported almost as an incremental movement of tonnage at a very high fixed capitalization plant, now, they're starting to get pretty good pricing in their own markets. So the price at the origin has gone up, as well as the freight rates continue to be remain very high. So the value of the dollar was just a partial piece of the increase of imported cement prices. So it might have some effect, but not a huge effect if that was the only change during the coming year in the cost of imported cement.

I always thought that there were -- that there were limits to the amount of pull foreign demand could have on cement that otherwise would come in here because the -- the economic radius for transporting the cement. I mean, basically, if it's transported to Mexico, maybe you can get 300 miles away, and get over the border of the U.S. But it's not economic -- just because China would like the cement, it's not economic to try to export it to China, for instance.

No. And in fact, rail is much more expensive than putting it in a large vessel. So --

Okay.

Typically, we get -- it will come in vessels as large as Panamex vessels, and the transportation cost from Thailand or China or Taiwan or Indonesia are very inexpensive relative to rail cost.

Okay. Well, thank you very much.

Thank you. Our next question comes from the line of Daniel Veltzman (ph) with Sureon (ph) Capital. Please proceed with your question.

Good afternoon, gentlemen. Once again, I'd like to reiterate what Tony had said about your performance. I think it's very impressive, and unfortunately, the market does not seem to appreciate your relative performance, compared to your peers. I was just hoping you could go into some detail on your assumptions. How many shares do you assume to be outstanding at the end of your '06 guidance?

'06 guidance, I'll tell you, we're basically -- Daniel, we're using 18 million 3. It doesn't bake any share repurchases into it.

Okay. Well, thank you for that. I appreciate it.

Thank you. Our next question is a follow-up from the line of Jack Kasprzak with BB&T Capital Markets. Please proceed with your question.

Thanks. Just one point of clarification, Steve, with regard to the comment on April being the largest shipping month for wallboard. Would that be the best April? Or the best of any month after?

Best of any month ever. I think we shipped about 233 million square feet in the 21 days.

Great. Well, congratulations on that. Thank you.

Thank you. There are no further questions at this time, Mr. Rowley. I will now turn the conference back to you to continue with your presentation or closing remarks.

Thank you, everybody. I look forward to talking to you next quarter. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation.