Eagle Materials Inc (EXP) 2006 Q2 法說會逐字稿

Welcome to the Eagle Materials Incorporated financial results for second quarter fiscal year 2006 conference call. [OPERATOR INSTRUCTIONS] As a reminder this conference is being recorded Wednesday, November 2, 2005.

I would now like to turn the conference over to Mr. Steven Rowley, President and CEO of Eagle Materials.

Please go ahead, sir.

Thank you and welcome to Eagle Materials conference call for the second quarter of fiscal year 2006.

Joining me today are Larry Hirsch, our Chairman;

Art Zunker, our Senior Vice President and CFO;

Jim Graass, our Executive Vice President and General Counsel; and Craig Kessler, 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 the call.

These statements are subject to risk 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.

Strong U.S. construction fundamentals allowed Eagle Materials to set record high for second quarter earnings and revenues.

Our increase is driven by record sales volumes in wallboard and cement combined with the record high cement prices and a 21% year-over-year increase in wallboard pricing.

Demand for our products remains strong and supply extremely tight requiring hard allocation policies in the marketplace.

During the first six months of fiscal 2006, we have generated nearly $91 million of cash flow.

The cash has been utilized to fund 40 million in capital expenditures which includes spending on the Illinois cement expansion project, on a new dredge for western aggregates, exercising a purchase option on leased rail cars, and a normal level of sustaining capital expenditures.

We have also repurchased nearly 520,000 shares of our stock.

Our debt to capitalization ratio has remained unchanged since the beginning of our fiscal year, and Eagle remains focused on improving and enhancing our existing assets on our new growth projects and on share repurchases.

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

And we remain confident that demand will remain high and supply tight in our markets for the remainder of the fiscal year.

Wallboard.

Eagle's wallboard revenues increased in the second quarter because of both price and volume increases.

This year's second quarter sales volumes set a new record high of nearly 712 million square feet, 7% greater than last year's second quarter.

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

With the U.S. wallboard industry currently operating very close to weighted capacity, wallboard pricing continues to improve and combined with our outstanding operational performance Eagle's second quarter competitive operating earnings increased by 62%.

The current tight supply of gypsum wallboard has steadily driven pricing significantly higher and our late September price increase is holding firm.

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

Cement.

Eagle's second quarter cement consumption was very strong in all of our markets, and even with a 60% increase in low margin purchase product, our customers remain on hard allocations.

Our second quarter revenue increase was associated with both price and volume improvements of 18 and 20% respectively.

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

Our $82.55 per ton mill net is a record high quarterly price for Eagle materials.

Paperboard.

The paper industry continues to struggle and with public sales prices outside of gypsum liner are falling, however, record wallboard industry shipments have increased gypsum paperboard demand allowing our lot and paper mills to predominantly product gypsum paperboard.

Concrete and aggregates.

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

Although we saw a slight reduction in our aggregate volumes, construction activity remains strong in both of our aggregate markets.

Our 30% increase in operating earnings was predominantly driven by improved pricing in the marketplace.

Art.

Thank you, Steve.

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

In summary for the third quarter of fiscal year 2006 we anticipate our dilutive earnings per share to range between $1.80 and $2 even per share driven primarily by the full impact of already implemented wallboard and cement pricing.

For our fiscal 2006 we estimate that our dilutive earnings per share to range between $7.60 and $7.90 per share reflecting continued strong demand for wallboard and cement.

Steve.

Okay.

We're now ready for questions and answers.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from the line of David McGregor from Longbow Research.

Please proceed with your question.

Congratulations on a great quarter.

Thank you.

What are the prospects -- within the wallboard business right now, can you talk about the prospects for additional price increases going forward?

Obviously it's a very tight market.

But is there any possibility of a mid quarter price increase before us?

Well, we just implemented a price increase at the very end of September.

I think it was September 21.

That looks like it's holding firm.

There's -- another price increase was announced by one of our competitors for a December 5, I believe, 12% price increase, but you're absolutely correct, the supply/demand ratio is extremely tight right now, and it's to the point where I believe right now we are -- demand is higher than capacity, so lead times are stretching out greater and greater on deliveries.

Now, your wallboard sales, 712, how does that compare with production?

Were you selling out of inventory at all?

Just slightly, but I think we really are on pace to produce -- depending on the seasonality come the winter, really close to 2.8 billion, so that's 700, and 2.8 billion, that's really almost in balance.

So how do you drive volume growth from here?

We need to, of course, increase capacity, and we have announced and we'll start construction very soon on a new wallboard plant in South Carolina.

But until than plant is up and ready to good and fully commissioned, are you constrained?

Pretty much constrained, although we incrementally improve our plants every year.

So last year we produced a little less, 2.6, in that range and this year we'll produce a little more and I believe that we'll be able to get a little bit additional capacity next year as well.

Last question.

In a tight market do you continue to ship the same types of volumes into the southeast as you seed that market, or are you inclined to pull back a little bit on those volumes?

You really need to maintain a certain base, but at the same time, you do try to get closer to home, especially with logistics going up with the cost of transportation these days.

Thanks very much and congratulations.

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

Please proceed with your question.

Thanks.

Good afternoon.

I'm sorry, I just missed a little bit of the call.

Did you tell us how much stock you guys bought back in the quarter?

This is Art, Jack.

Yes, we bought back around 104,000 shares for the quarter, giving us something a little over 500,000 for the six months.

Okay.

And can you tell us the cement imports in the quarter versus last year?

Are you talking about purchased cement?

Yes.

I believe we had something like 260,000 tons of that -- some 800,000 tons sales versus 160 for last year.

Okay.

We had a dramatic increase from the year last year to this quarter.

Last year we were about 19% purchased product in the same quarter this year it was about 30% was purchased product that we sold.

Has there been any -- with regard to purchased cement, has there been any change in the availability of that on the market, or -- I mean it's been tight and that's I guess in part why pricing's been -- one reason why pricing's been strong.

Any change there?

I think the availability is still there but it's much more expensive than it was two or three years ago.

I think that's really what's created the rising pressure on pricing in the U.S., is the fact that cheap imports really are no longer available.

The imports are very expensive because of both transportation as well as the price of cement at the origin.

Right.

Okay.

And on cement pricing, are we still just looking at a $10 a ton price increase for January?

Is that -- that's been out, is that just still the case?

That's correct.

There's a $10 price increase in all of our markets that have been announced.

Some people are talking, although I don't know a lot of support, I think Cemek is out with a $5 later on in the summer as well but beyond that I don't think that hurt a lot of support for the summer price increase.

Probably a little too early to--.

A little too early.

The wallboard plant, any change on timing there, Steve, with regard to when that is supposed to come on line?

No.

Our timing is still -- is still on schedule, yes.

Very good.

Congratulations on a great quarter.

Thanks.

Thanks, Jack.

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

Please proceed with your question.

Thank you.

Welcome to Larry.

I guess you're out of school now?

Yes.

Well, I'm hoping that you'll join the foreign policy establishment and help us all out here.

Done.

I had a question on the impact of natural gas costs on your -- particularly on cement, but did it also affect wallboard?

Natural gas had an impact on wallboard primarily.

Very little impact on cement.

On wallboard, I think it was about a $3.50 per msf impact in our wallboard pricing costs.

Wow.

And that's on top of, I think, a couple dollars last year.

That's correct.

And it's going to go up a little -- probably another 5 or $6 over the winter.

Are you guys doing any hedging, or have you done any?

A little.

Not a lot.

And with the pricing where it is today and as volatile as it is, I think we're going to just kind of roll with it for the next six months or so.

Okay.

And I should remember what the product is that you use for heating in a cement plant, and I swear, I can't remember it.

I's a culmination of coal and petroleum coke.

Pet coke.

So that's going to be going up, too.

Well, the coal has gone up a little bit, primarily because of the freight increases with the railroad.

Okay.

Any other cost pressures that we should be aware of?

No.

I think other than logistics, which plays a big role, especially in the wallboard, the price of diesel has a huge impact on the logistics and delivering the product to the customer.

Okay.

And it doesn't sound like any regional markets are much different from one another.

Is that fair?

As far as the tightness of demand?

Yes.

I believe so, although I think the Midwest is still not exactly the strongest market, so we have not been shipping much -- as much wallboard as we did a year ago up into that market, but from the cement side, we haven't seen any problems at all in the Chicago-Wisconsin markets.

In other words, demand is still quite strong?

Very strong.

Very strong.

And I know you've probably been asked, but a competitor a couple of weeks ago mentioned weakness in the northeast.

Has that -- what's your assessment of that, and is there any way that could ricochet into any of your markets?

If it's weakness.

I did hear about that but it certainly has not -- and it certainly has to be east of Michigan where that's occurring, because in the market that we are involved in in the Midwest, demand is still very strong.

And would they be able to ship any product into your areas and compete with you?

Well, they currently do.

They ship it throughout the great lakes region and up and down the lakes, so it would be easier to come in, but we have not seen any of that kind of pressure to where there's been some downward pricing pressure in that marketplace.

Okay.

And the last question is, I know of one other plant that's been announced.

What's the next wallboard plant that -- and when is it likely to come on line?

Is yours the first, do you think?

We believe ours will be, if not the first, the second, right about that same time, but we should be up and running within a couple of years time.

So that would be -- are we getting into -- '07, right?

That's right.

Kind of the spring -- late spring, early summer of '07.

Okay.

Well, thanks very much.

And as usual, another terrific job.

Thank you.

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

Please proceed with your question.

Good afternoon, everyone.

Good afternoon.

Can you comment, in terms of the prices that you report in the press release, those are average prices throughout the quarter, correct?

That's correct.

Can you give quarter end prices for wallboard and cement?

Sure.

The quarter end price for wallboard was 135.50, and about $83 for cement.

Now does the $83 for cement does, that include the October price increase?

No, that is just the average cost for September.

Those are the average costs for the month of September for both of those.

Okay.

And in terms of, can you comment on activity in the Texas and Louisiana region?

I know you had a terminal, cement terminal shut down for a little while.

Can you talk about how that's affected the business, if at all?

It really hasn't affected us.

Business is -- still remains strong in these markets.

We have seen a fair amount of demand for wallboard to be shipped down into those areas that weren't as drastically hit as the New Orleans area.

On the outer fringes where there's some early repair and remodel taking place there's a huge demand for wallboard so we're shipping some wallboard to help out in that area.

And on the cement side in terms of the terminal that was shut down?

That was just for a very short period of time, it's back up and running, was not a problem at all.

Okay.

Great.

Thanks very much everyone.

[OPERATOR INSTRUCTIONS] Our next question comes from the line of John Lynch from Lynch Research.

Please proceed with your question.

Thanks.

Welcome, Larry.

Thanks.

By the way, I'm just here because Steve is out of the city, and just in case we had a phone problem, I was ready to fill in.

So that's the only reason I'm on the phone.

Welcome.

I guess a lot of my questions have been touched on.

Barbara, in particular, spent time on the volume and cost and demand levels, and referred to the two new plants coming on.

In the back of my mind, I keep wondering the time on commercial contracting.

Last year is the first healthy move in sometime, and if you take out the -- it was about an 8% move, take out say 3%, 2.5, 3 in price that looks like a potentially good volume move, but I'm wondering about when in a commercial contract on average do you start using first cement, I would think the foundation?

Second, drywall?

Usually -- well, certainly, as commercial picks up, it's a fairly small piece of both the cement industry and the wallboard industry, in the 20 to 25% of the demand for our products, and you're absolutely right, once it starts picking up, concrete goes down into the ground first, and it comes up out of the ground as well.

Wallboard usually takes in commercial quite awhile before we start to see the wallboard usage increase in commercial construction.

I guess -- maybe I'm off here, depending on where you're building these things, but if you're building where you have to take down existing buildings and dig holes, that should be four months out from a contract before you start seeing significant cement?

I think that's really on a job by job basis.

It's pretty hard to -- it just really depends especially if you're in a tear-down mode, the availability both of equipment and permitting.

I think that is on a job by job basis.

Volume you said is no more than 25%, but do you not sell higher priced product, fire resistant, 5/8ths inch as opposed to 1/2 inch, things that actually produce higher returns?

Yes, we do.

And in addition to the fact that it's a little higher priced, it's also a little more costly to produce because of the thickness and also the additives that are put in, and it also reduces the production capacity of the operations.

It slows the line speeds down by about 20 to 25% while you're producing the commercial wallboard.

So it actually tightens the supply/demand constraints when that occurs.

Two last little things.

First one relates directly to that, do some of your competitors stay out of this market for that reason?

I believe all the wallboard producers produce a -- both the 1/2 inch as well as the 5/8ths inch products.

A question that's going to require speculation.

I guess it ought to be addressed to Larry with his international point of view.

BPB and Saint-Gobain -- is there anything that you've thought about that could develop that would be hazardous to your health?

You're talking about in terms of that deal in particular?

That's the biggest acquisition out there now.

Well, obviously I think what it does is confirms the values in the wallboard business in general that when you look at the premium, that Saint-Gobain is paying for BPB, basically 40% above the market price before it's -- before they make their next offer, it, again, indicates that there's a lot of confidence as to what's going to be happening on a worldwide basis in the business, and I think some of what they put in their statement indicates they also have a lot of confidence in the U.S. portion of the industry.

So seeing acquisitions made in the industry is to me always a good confirmation of the underlying values.

I agree with that.

I hope you're not going to outbid them.

No, I think the footprint we have is very comfortable for us right now.

Thank you.

Our next question comes from the line of Joel Locker from Carlin Financial.

Please proceed with your question.

Hi, guys.

Solid quarter.

I was just wondering if you could give me a current breakdown of just overall revenues, that gets taken by the residential area versus government and commercial, just of everything across the board from paperboard to cement.

Well, the paperboard is really predominantly just, goes into the wallboard, the two facing sheets that go into the wallboard.

On the cement side, the residential is about 25% of the demand, the commercial construction or public construction is about 50% of demand with commercial 20% and some other specialties making up the rest, whereas in wallboard about 50% of the demand is for residential.

Again, about 20% for commercial and the rest, the 30% would be for repair and remodel.

Right.

So about 25% of the cement is currently residential and about 50% of the wallboard is currently residential?

That's approximately correct.

All right.

And just on cement prices in general, I guess you said it was $83 at the end of the quarter on average, company wide?

That's correct.

And, I mean, do you have -- are there -- do you have a break down say for each region, or -- I mean are they all similar, or is there a variance between the regions?

No, no, there's a variance.

Probably Texas is the lowest priced cement in our group.

I think the Midwest or the Illinois and the mountain cement plant, they're very near that average with Nevada cement being higher.

And Nevada, is that closer to $90?

Or that high or?

That's closer to the 90 range.

Right.

And so with the $10 increase planned on January 1, you expect the Company, and is that in all regions, where you might see $93 a ton by February or March once all the price increases take effect?

Once they take effect, that's correct.

And hitting at the beginning of the year, which is usually when you lock in volumes for next year, the pricing should not have to have any tail to where it will take a while to get them to take full effect.

I know it's awhile away but do you have anything planned for -- that's tentative for mid-year 2006 for cement or you just kind of see where the $10 rise goes?

I think it the's very unusual to get a cement price increase, especially in the markets where seasonality has a big role.

Except for the last three years.

Midwest.

Right, except for the last three years, I guess.

Except poor the last three years.

But generally it's difficult to get that.

Again, because there's plenty of availability because the demand is so slow in the winter months, but it looks like we're going to do it again this year, give a good shot at it, anyway.

Thanks a lot.

Yes.

Our next question comes from the line of David Lo from Van Buren Advisors.

Please proceed with your question.

Hi.

My question for you is for the third quarter, do you anticipate the volume for wallboard to be similar to what you experienced the second quarter?

Normally, especially around the holiday time, things slow down a little bit.

That would be typical that late December, early January, things slow down a little and start to pick up in the spring time, but demand, again, right now is outpacing supply, so it's hard to, with the extra long lead times, volumes could very well be higher than conventional third quarter volumes for us.

So it looks like maybe you could be around the 700 level just like this quarter?

If -- again, it really just depends on construction activity around the holidays.

If construction slows down around the holidays then it could -- the volumes could be slightly less.

Now, with regard to pricing for wallboard, given that you instituted the $10 price increase in September, it would seem to me that the December quarter should have probably 6, $7 higher price or interest average price for that quarter right?

Versus the second quarter.

Yes.

About -- it takes about that long for the price to hold in, then as of January 1, a lot of -- we have some customers that are on annual pricing.

Normally that will kick in on January 1, so we should see quite an increase on January 1, from all the people that were locked in a year ago at this time.

Okay.

Also in terms of costs, in addition to -- are there any other costs you think could drive increases in addition to natural gas?

No, I believe -- the other major cost in wallboard is paper, and those costs seem to be fairly stable right now so I don't see any cost pressures there, and on the cement side, it continues to be really maybe electrical power, which is related somewhat to natural gas because so much electricity is produced with natural gas, and usually there will be fuel surcharges that are passed through.

So we are seeing some price increases in the price of power, but the majority of it is the natural gas and the wallboard.

Okay.

So if I run these numbers through the model here looks like, based on what you just told me, seems like in terms of earnings power for wallboard, for the third quarter, it should be fairly similar to the second quarter.

It should be.

Okay.

Thanks, guys.

Great quarter.

Thanks.

Our next question comes from the line of Cliff Greenberg from Baron Capital.

Please proceed with your question.

Hi, guys.

Congratulations again on great results.

Could you just remind me on the time frame and the amount of capacity we're bringing on with the increase in the Illinois cement plant, and then also speak more generally about potential opportunities to increase capacities in both your businesses out in the future beyond the two expansions and greenfields that you discussed publicly?

Illinois cement project should be finished and come on the line right about Christmas of next year, so about a little over a year out, and it's going to increase the capacity by about 450,000 tons.

So from about 650 to 1.1 million.

Thank you.

And we are -- we continue to look at modernizing Nevada cement, and we're working on permitting to do that, which would double its capacity.

Right.

And we're looking also at a couple of other new wallboard sites, and we haven't finalized that yet, but we continue to look at ways to expand the wallboard business.

Modernize Nevada cement.

What do we need to do that?

And how much would that cost do you think?

And how long would that take if and when we're able to do so?

The permitting process usually takes about two to three years at a minimum these days to get your permit to construct a cement plant.

Once you have your permit it's 18 to 24 months to construct, and the cost is 200 to $250 million for an economy of scale, about 1 million ton a year cement plant, which would double our current capacity.

Okay.

And in the interim, as we -- because of the success of the business and the cash that we're generating, how do you use your free cash flow beyond just the capital expenditures?

Are you still favorable towards share repurchase and/or ordinary and special dividend, or how do you add some leverage in this in terms of the business, or spend all the money that you're creating?

Again, we continue to stay focused on -- not only the current projects, but developing new projects.

In addition to that, we will certainly continue to look at repurchasing shares, and beyond that we're obviously always alert for the acquisition possibilities.

Okay.

Good luck.

Thanks a lot.

Thanks.

We do have a follow-up question from the line of Barbara Allen from Avondale Partners.

Please proceed with your question.

Thank you.

I was wondering about the paperboard plant and what opportunities you have there to either expand volumes or prices, and how much of the production is now just paperboard?

Generally, the majority, the vast majority of the production is just gypsum liner paperboard, and about a third of that we consume ourselves, a third we have a long-term contract, the other third we sell kind of out into the open market.

As our business improves we take a little bit more than that third and maybe the contract which is three specific plants, they produce a little more wallboard.

They take a little more paperboard as well, but we also continue to upgrade that plant with some, again, fairly small capital to where originally it was designed at 220,000 tons per year.

Now we're currently operating closer to 320 to 325,000.

Now that's as of today.

I think at the end of the year we're going to produce about 280,000.

But we have just recently taken care of and increased the boiler capacity which has dramatically increased the production capability of that lot and paper mill.

And the pressure on profitability there comes from -- is it coming from higher input costs or inability to raise prices?

It's really coming from -- well, certainly natural gas impacts the paper mill as well, and fiber costs, although they are somewhat volatile earlier this year they were higher, they're coming down recently.

But really, what really impacts it is our ability to sell gypsum liners.

So when we have to compete with the other large paper companies in the container board market, it's pricing currently right now is pretty low, and that really impacts our profitability.

So let me understand.

Out of the plant, the majority of it is paperboard, and then the remainder is containers?

Yes, we'll sell into the medium and the container board market.

That's correct.

So is it fair for me to assume that it's container board product that's affecting the profitability the most.

Yes.

Is there a way to shift out of that and do all paperboard?

Well, again, in wallboard, the majority of the industry is vertically integrated, so there are only a few customers that you're able to sell to.

So you really have to expand your own capacity or, as the industry builds capacity, I think there's pretty much a balance right now between all the competitors in the wallboard business with the amount of paperboard that they produce and the wallboard that they produce.

I see.

But as all this additional capacity comes on line in the next couple of years, I think there will start to become more of an imbalance.

Okay.

Thank you very much.

Yes.

There are no further questions at this time.

Okay.

Thank you very much, and we'll look forward to talking to you at the end of the 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.

Have a great day, everyone.