Eagle Materials Inc (EXP) 2006 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the Eagle Materials financial results for first quarter fiscal year 2006 conference call. [OPERATOR INSTRUCTIONS].

I would now like to turn the conference over to Mr. Steve Rowley, President and CEO.

Please go ahead, sir.

Thank you.

And welcome to Eagle Materials conference call for the first quarter of fiscal year 2006.

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 slight 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 this live, please note that the first slide covers our cautionary disclosure regarding forward-looking statements made during the 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.

Continued strong U.S. construction fundamentals allowed Eagle Materials to set record-high revenues and net earnings for this year's first quarter.

The increase was driven by record sales volume in both wallboard and cement, combined with record-high cement prices and an 18% year-over-year increase in wallboard pricing.

Demand for our products is very strong and supply extremely tight requiring hard allocation policies in the market place.

Additionally, this year's first quarter comparative was positively impacted by acquisition of our partners 50% ownership in Illinois Cement Company, which closed during the fourth quarter of last year.

During the first quarter of fiscal 2006 we generated nearly $55 million of cash flow from our operations, a 55% increase from the same period a year ago.

The cash was utilized to fund $16 million in capital expenditures, which includes spending on the Illinois Cement expansion project and on a new dredge for Western Aggregates.

Exercising a purchase option on lease rail cars, a normal level of sustaining capital expenditures, we also repurchased nearly 415,000 shares of our stock this past quarter.

As of June 30th, our debt-to-cap ratio was 16%, compared to 15% as of March 31st.

Eagle remains focused on improving and enhancing our existing assets, new growth opportunities, and share repurchases.

Total construction spending is up over 7% through may, with both cement and wallboard industry shipments at record levels, up approximately 6% and 4% over last year, creating strong support for pricing in both of these industries.

Eagle and Eagle's customers believe that the demand will remain high and supply tight in our wallboard and cement markets for the remainder of the year.

Wallboard -- Eagle's Wallboard revenues increased in the first quarter because of price and volume increases.

This year's first quarter sales volumes were at a record high of nearly 700 million sq. ft., 9% greater than last year's first quarter.

Our plants are running at peak operating efficiencies with minimal waste and delay.

With the U.S. wallboard industry currently operating very close to weighted capacity, pricing continues to improve resulting in Eagle's quarterly comparative operating earnings increasing by 64%.

Because of the current extremely tight supply of gypsum wallboard, pricing has risen significantly.

Our latest June 27th price increase is holding firm and Eagle's current mill net estimate is $130 per MSF.

And for reference now, a $10 margin improvement in wallboard equates to approximately $1 increase in Eagle's annual EPS.

Cement -- First quarter cement consumption was very strong in all of our markets and even with a 78% increase in purchase products our customers remain on hard allocations.

Eagle's revenue increase was associated with both price and volume improvements, 15% and 18% respectively.

Eagle Cement earnings had improved because price increases have outpaced the impact of higher cost purchase cement and higher maintenance costs.

Our $78.55 per ton mill net is a record-high quarterly price for Eagle Materials.

Very strong demand continues to support the current amount summer cement price increases.

The Paper Industry, however, is struggling and where public sales prices outside of gypsum liner are falling.

However, record wallboard industry shipments has increased gypsum paperboard demand, allowing our lot and paper mill to almost exclusively produce gypsum paperboard.

Our concrete volumes, prices, and earnings are improving primarily because of improved market conditions in Austin, Texas.

Record-high aggregate sales volume and price also contributed to our increased operating earnings in this segment.

Art?

Thank you, Steve.

We have issued guidance for the second quarter of fiscal 2006 and for fiscal year 2006.

In summary, for the second quarter of fiscal 2006, we anticipate our diluted earnings per share to range between $2 and $2.30 per share driven primarily by the full impact of already implemented wallboard and cement price increases.

For fiscal 2006, we estimate that our diluted EPS to range between $7.30 and $7.60 per share, reflecting continued strong demand for wallboard and cement.

Thank you, Art.

George, we're now ready for the question-and-answer session.

Sure.

Ladies and gentlemen, [OPERATOR INSTRUCTIONS].

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

Please proceed with your question.

Hi.

I have a couple of things that relate to the same thing.

You're well on the way in expanding your operations in Illinois and you're obviously still examining what your intentions are in the bottom market.

I'm curious as to your cash flow needs.

Would you start the plant in the West, if you were permitted and ready while the plant in the Midwest is still under construction?

Some idea of how you plan to handle your needs for more capacity.

The permitting process is really just started out West.

And, clearly, Illinois Cement will be completed long before we would have the permit in hand and we'd be able to start construction out West.

So we still believe we are a couple of years from finalizing everything regarding the permit.

Maybe if we're lucky, a little bit earlier.

But Illinois Cement will clearly be finished before we would start that project.

Okay.

And how about on the gypsum side, do you sense any expansion needs that would take capital there?

Well, currently we've announced a new wallboard plant for South Carolina and we will start spending on that.

In the fourth quarter of this fiscal year time frame, maybe the end of the fourth quarter of this fiscal year.

And that will be approximately a 14 to 16-month time frame that we'd be spending the $125 million that we estimate on the new wallboard plant in South Carolina.

And finally, competitive capacity.

What's coming on there or what has come on that could impact the market?

Recently, USG just announced a new plant for kind of the North Central or Eastern Pennsylvania.

That's a 1 billion per annum square foot plant.

That was just announced a couple of days ago.

With that exception I don't think in the last quarter there have been any new announcements in wallboard or cement.

Thanks very much.

By the way, it was a delightful report to read.

Appreciate it.

Thank you.

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

Please proceed with your question, sir.

Thanks.

Good afternoon, Steve.

My first question is the cement operating margin in the quarter was a little over 18%.

And that's much lower than what you've been running in the mid 20s.

I was wondering if you could just talk about why?

Here, we did stub our toe a little bit this quarter.

And at one of our plants, Mountain Cement, we had problems with a raw mill gearbox.

And even though we did have a spare, by the time we put the new gearbox in -- and we just had our major outage -- so a combination of having the major outage and then having a failure on that gearbox, and then taking a little while to get the spare up and running, we lost an additional two weeks of production at Mountain Cement.

So we did stub our toe a little bit.

And that's the reason for the lower margins in cement.

And is there a way to quantify the sort of extraordinary or unusual expense related to that?

Not -- forgetting the loss production, but just any expense?

Yes.

The expense range -- the gearbox itself is about $0.5 million.

And by the time you put the labor in, maybe $0.75 million for just the maintenance expense of changing out that gearbox.

And the rest is really just a shift of low margin purchase products versus manufactured product.

The tax rate in the quarter was down around 30.5%.

What would you say would be a good number for modeling purposes going forward?

Jack, so three-quarters going out [indiscernible] leaves approximately 34%, and then you should have with something around 33% for the year.

Okay.

And the joint venture income was 5 -- just over 5.5 million in the quarter, which was higher than the same quarter last year.

But I'm trying -- the buyout of the Illinois Cement venture was only reflected in this quarter; is that correct?

That's correct.

So the -- that joint venture, what you have left in that line did better last year with less production, if you will.

Is that -- I mean obviously, the whole cement industry is enjoying higher prices.

I assume that's what's happening there.

Should we expect that that's where performance, just on a comparative basis, will continue?

Yes.

Right now we believe that the Texas market is really finally absorbed all that capacity that was added around 2000.

And it is finally really returning to solid profitability in the whole state.

Okay.

It's truly a stellar performance there.

And on cement pricing, I believe Holcim has announced a $10 term price increase for January as has Lafarge.

Have you guys seen that?

Do you think it will affect, positively affect your markets from what you know today?

I believe so.

I think Ashgrove also has another $10 print per ton increase announced for January.

So -- and those are definitely in our markets and we definitely believe that it will have an impact.

Great.

Okay.

Thanks, guys.

Ladies and gentlemen, [OPERATOR INSTRUCTIONS].

Our next question comes from the line of Barbara Allen from Avondale Partners.

Please proceed with your question.

Thank you.

And my congratulations on another good quarter as well.

I wondered, Art, if you could give us the share count by class-type, since you've been repurchasing shares my guess is there is beginning to be a difference?

Yes, that's correct.

Hold on a second, Barbara and let me dig that out.

Okay.

As of June 30th, the "A" shares were approximately 9,560,000 and the "B" shares were 8,279,000 for a total of actual shares outstanding of 17,839,000.

Okay.

I was going to ask you something else, which now, of course, is -- oh, the assumptions underlying your full-year guidance, could you give us at least the pricing assumptions?

And I'm assuming that the volume trends will -- you are assuming continued full capacity utilization?

And we -- currently the assumptions are that cement pricing is status quo.

That doesn't include any of the future price increases.

And the wallboard pricing is current pricing with some reduction in volume and pricing for normal seasonality during the winter.

So the current wallboard price is 130?

That's correct.

And the current cement price is 70 --?

79.50 or almost 80.

Okay.

And I just want to be sure, because I have listened to a bunch of conference calls.

Have we got some more cement price increases that have already been posted prior to next January?

I can't believe they'd go a whole six months without --.

Yes, there are some price increases.

There were some price increases that came in July, I believe, in Texas.

And then we had some more in August and September.

About -- between 3 and $5 in the rest of our markets.

Okay.

So we're waiting to see how those are going to hold up?

That's correct.

Those aren't included?

Those are not included.

And then the wallboard that's just been a recent price increase, so we're going see how that holds?

But it certainly looks like there's every indication that it will hold pretty well?

Yes.

Okay.

What's been the negative impact of rising energy costs?

In wallboard, it's about, I think, the impact to us on a cost basis is about $2.50 per MSF.

And I think -- we had another slight increase in paper, so, of about another $0.75.

So those were the increases in the wallboard side.

And the cement side there was not a lot of impact.

And the other major issue that we had in wallboard had to do with freight prices.

Our rail freight rates went up 31%.

Our truck rates went up 14%.

However, we did flip the volume around a little bit, we had a 10% increase in the volume shipped by truck and a 9 to 10% decrease in the volume shipped by rail.

Okay.

So you're trying to switch between the two to get the better deal?

Yes.

And with the market as strong as it is, trying to bring the -- our sales in closer to the plants to minimize the distance.

Yes.

Okay.

And you said that one of the uses of your cash this quarter was that you bought some rail cars that had been on lease; is that correct?

Yes.

We entered into I think it was a 10-year lease purchase agreement in '94 over '95 and just exercised the purchase option.

Okay.

Was this a couple of million dollars or --?

About 3, 3.5, I believe.

Yes, 3.5 million, Barbara.

Okay.

Those are your special rail cars that you use for your wallboard.

For cement.

These were for cement.

Those were for cement.

Okay.

All right.

Thanks very much.

Our next question comes from the line of Justin Livengood from Merrill Lynch.

Please proceed with your question.

Hi, guys, great quarter.

Two questions for you.

First just to follow-up on an earlier question regarding that issue in the cement business that nicked the margin this quarter.

Was that resolved as of July 1st?

Yes, that was a one-time occurrence.

Okay.

So everything was contained in the first fiscal quarter?

Yes, it was.

Okay.

Second question, how should we think about your business in light of the recent passage of the Federal Highway Bill?

Is there any notable impact of that?

Just demand will continue to get strong.

Allocation is tougher as that comes online.

But what we've seen is currently right now the public infrastructure works is so strong in the states.

The states are having a hard time finding the engineers that are needed to actually get those projects up and running, which would require the cement demand.

And, in fact, I think some states, California is actually starting to contract out a lot of the engineering work for the -- that Caltrans has currently on the books.

So that Federal spending is likely not going to play out anytime soon?

It's going to take years to kind of work its way through the system and through the individual states?

Yes, so it's really good news long-term for us -- continued increase cement demand.

Gotcha.

Okay, great.

Thanks.

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

Please proceed with your question.

Good afternoon, gentlemen.

I apologize, I have been on a couple of calls and I got on your call a little late.

I wanted to congratulate you on buying this 415,000 shares of stock back.

I'm wondering if you've answered this I'll listen to the replay, but your CapEx for this year, and I guess where I'm sort of going with this is your ability and desire to keep repurchasing common shares?

We're -- our CapEx for this year is between 75 and $80 million total, we believe.

And in addition to the shares that we purchased in the first quarter, up to the blackout period we purchased an additional 72,000 shares at about an average price of $94.

So we've continued to repurchase it.

Again, it takes me a little while when the stock price jumps to get over the sticker price shock.

[Laughter].

But anyway, we have continued to repurchase right up to the blackout period.

And can you remind me when you can basically make the "As" and "Bs" together so we can eliminate the discount?

The -- generally, about two years is kind of an unwritten agreement or un -- there was nothing in the works.

But generally it takes at least two years of history before you would contemplate doing that.

Okay.

Well listen, good luck.

You guys are doing a great job.

Thank you.

Our next question is a follow-up question from John Lynch with Lynch Research.

I have a very simple question, but it deals with how you treat freight in your reporting.

Is that 130 after freight charges?

And the same with the 78.55?

And to the extent that it is, what would those freight charges be so we could get to an actual market price?

Yes, that's correct, John.

Those are net of freight.

And I'm trying to recall here -- I don't have it in front of me.

But I think on the wallboard price it's about --.

$22, $23.

It was actually $28 --.

$28.

$28 for wallboard.

And I think it was [indiscernible] it's about -- 5 or $6, I believe.

Thank you.

Our next question comes from Jack Kasprzak from BB&T Capital Markets.

Thanks.

Could you just refresh my memory about when the Illinois Cement expansion will be finished?

It will be finished in December of '06.

So we're a little over a year out.

And when will you guys start the South Carolina wallboard plant?

We believe we'll start construction during the first quarter of '06, our fourth quarter.

Calendar Q1 '06?

Q1 '06, yes.

Okay.

Thank you.

Mr. Rowley, there are no further questions.

Thank you.

And we look forward to talking to you 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 lines.