Eagle Materials Inc (EXP) 2006 Q3 法說會逐字稿

I'm Craig Kessler, vice president of investor relations and corporate development here at Eagle. With me today is Steve Rowley, our president and CEO, Art Zunker our senior vice president and CFO, Jim Graass, our executive vice president and general counsel, Dave Powers, executive vice president of gypsum operations, and Jerry Essl, executive vice president, cement, concrete, and aggregates. For those attending from a remote location, there will be a slide presentation, which can be accessed by going to www.eaglematerials.com and click on the link to the webcast.

To give you a brief indication of the order of events for today's presentation, Steve will be up here first to go through our outlook for the upcoming year, fiscal 2007. Then Art will review the results of our third quarter, then, finally, Steve will come back up here and discuss our outlook on long-term construction fundamentals as well as discuss the corporate actions and growth initiatives we announced yesterday.

There will also be a question-and-answer session following our prepared remarks. For those in the audience, there will be two roving microphones available for you. For those that have dialed in remotely, please tell the operator you have a question, and they will direct you accordingly.

While you are accessing the slides, please note that the first slide covers our cautionary disclosure regarding forward-looking statements made during this conference. These statements are subject to risks and uncertainties that could cause results to differ from those discussed during the conference. For further information please refer to this disclosure, which is also included at the end of our press release.

Certain of the slides in this presentation describing our proposal to eliminate Eagle's dual class structure may be considered soliciting material. Investors should read Eagle's proxy statement when it comes available after filing with the SEC, as it will contain important information about the proposal. At this time, I'll hand it over to Steve.

Eagle Materials manufactures and markets building materials and construction products -- gypsum wallboard, Portland cement, gypsum paperboard, aggregates, and ready-mix concrete. Eagle Materials has a very strong position in the building and construction products industry. We have very good manufacturing plants operated by outstanding engineers and, for many years, we have achieved high margins on minimal capital investment by incrementally increasing the production, which has essentially kept our per-unit costs flat, over time. Rapidly rising energy costs combined with strong construction activity has created high return growth opportunities for Eagle Materials. While we have been able to operate all four of our cement plants quite successfully, three of our four cement plants utilize somewhat vintage, 1960 to 1970 technology. We have previously announced the modernization of Illinois Cement by converting a four-stage a pre-heater into a five-stage preheater flash calciner.

Today we have announced plans to modernize and expand both our Nevada and Mountain cement plants by converting them also into five-stage preheater flash calciner systems. Eagle Materials also operates modern fuel-efficient high-speed wallboard lines and, combined with the most modern gypsum paper mill in the industry, we maintain the enviable position of being the lowest-cost wallboard manufacturer in the industry. We know that success in these basic building products industries requires disciplined investment of substantial capital along with the ability and determination to flawlessly construct and operate these very complex manufacturing plants.

Our growth strategy is simple with a very clear line of sight -- invest in high-return modernization and expansion of our existing plants. These include a 65% increase at Illinois Cement, a 60% increase in capacity at Mountain Cement, and a 100% increase in capacity at Nevada Cement, and low greenfield production capacity in fast-growing markets. The Georgetown, South Carolina, wallboard project will increase Eagle's wallboard capacity by 30% in one of the fastest-growing regions in the country. And, most importantly, stay focused on the continued improvement of the performance of all of our assets. These new projects will also put incremental production capacity opportunities back into Eagle.

When capital investment opportunities do not meet our high rate of return standards, we will return the strong cash flow to our shareholders by paying an attractive dividend and by repurchasing shares when appropriate. Today, in addition to announcing the expansion and modernization of Mountain and Nevada Cement, we also announced a three-for-one stock split, a 75% increase in our annual dividend to $2.10 per share, authorization to repurchase up to 1 million additional shares of stock, and the reclassification of our two-class structure into one class thereby creating greater liquidity for all holders of our stock.

These charts accurately show that Eagle Materials is primarily a wallboard and cement company with paperboard a natural companion to wallboard and concrete and aggregates complementary to cement. Our businesses have high barriers to entry because they are extremely capital-intensive with investments made in large manufacturing plants that are not portable, very large-scale, long-term investments that require a disciplined approach to portfolio management.

Building material and construction products that we have produced are basic low-value commodities, therefore we stay focused on creating differentiation from our competitors by maximizing margins with low-cost operations combined with low overhead and very little R&D. In fact, cement and wallboard products used today are essentially the same products used a century ago.

The key to our success is the broad depth of our organization's understanding of how to optimize the productivity of Eagle's manufacturing plants. Our processes, our single line in complex mechanically, electrically, as well as chemically, requiring a balance of good engineers that have multi-plant experience with engineers that have plant-specific experience that collaboratively and continually improve our operations.

By staying focused on operational execution, Eagle continues to improve cash flow performance, which has increased at a compound annualized growth rate of 15%. Demand for Eagle Materials products is driven by construction. In recent years, the housing market and the public infrastructure sector have been strong with commercial construction markets that's just depressed. We expect the housing market to moderate but commercial construction is rapidly improving while public infrastructure remains strong. We are confident that total construction in the U.S. will remain strong and that our balanced mix of construction products and building materials positions Eagle for a more stable earnings performance than its industry-specific peers.

The residential construction bubble that economists have been predicting for several years appears to have been made of Kevlar. Low interest rates combined with a healthy and flexible mortgage industry has increased home ownership in the U.S. to over 68%. However, as the Federal Reserve continues to raise interest rates, eventually home mortgage rates will also rise. Higher interest rates combined with some areas of frothy real estate values will moderate homebuilding in the near term. But in the long term, the outlook for the U.S. homebuilding remains very attractive.

The current low level of unemployment also supports a soft landing for new residential construction. Commercial construction has finally started to recover and is predicted to continue to improve next year. Public construction remains strong and, in fact, is expected to be bolstered by the new transportation bill and much healthier state budgets. The transportation bill requires matching funds from each state. Approximately 50% of U.S. cement demand is associated with public construction projects. Repair and remodel construction has seen steady and reliable growth for many years irrespective of percent home equity, which has been flat for many years.

Sustained economic growth supported by a flat yield curve continues to create a positive investment atmosphere in the U.S. Both commercial and public construction are predicted to have strong growth over the next couple of years. These factors, combined with the current 100% capacity utilization of the U.S. wallboard industry create a very positive outlook for Eagle Materials next year.

Eagle Materials' primarily wallboard market historically has been the Western half of the U.S. Currently, with U.S. capacity at full utilization, our very low-cost production allows Eagle to be very competitive in most of the 48 states. Additionally, the already-announced Georgetown, South Carolina, greenfield project will geographically expand our presence and improve customer service.

This chart shows that Eagle's wallboard performance has returned to high profitability. This improvement has not been driven strictly by cyclical pricing. Eagle nearly doubled its wallboard capacity with the purchase of Republic Gypsum and Paperboard in the fall of 2000. In fact, Eagle's improved wallboard profits have been driven by growth, improved operations, and improved pricing. As you can see, the per-unit margin line shows margins currently near fiscal 1999 levels.

Twenty years ago, 65% of wallboard demand went into new residential construction. The increased number and age of both commercial buildings and homes has shifted demand to a lower dependence on the new residential sector and a greater dependence on the repair and remodel sector.

Currently, wallboard demand is greater than industry supply and a soft landing for new residential would actually be healthy for the industry by not encouraging too much additional capacity to be built. Regardless, wallboard supply for calendar year 2006 will either be very tight or not enough to meet demand.

As you can see on this graph, the gap between supply and demand has nearly been extinguished. In fact, for the past several months, including the normally slow holiday and winter season, demand has outpaced capacity creating lengthy delivery times. Subsequently, prices have continued to rise.

This chart shows the dramatic increase in price over the course of the last two years associated with this tightening of supply. For reference, a $10-per-msf margin increase equates to an approximate $1.10 per-share increase in Eagle's annual EPS.

This graph illustrates how Eagle has grown its wallboard capacity, a greater than 500% increase over the last decade. Not only has Eagle become the fifth largest producer with 8% market share, but we are also the lowest-cost producer in the industry. While energy costs have risen dramatically over the last two years, our modern, efficient dryers and energy-efficient calciners have actually improved our low-cost competitive advantage.

The rising cost of natural gas has increased our focus on minimizing its impact on our business. We continue to improve our gas purchasing, we continue to lower the basis weight of our facing paper, and we continue to lighten the weight of our wallboard.

Eagle Materials has four regional cement operations representing approximately 2.5% of the U.S. industry. For the past decade, U.S. cement demand has outpaced capacity requiring low-margin imports to fill the gap. The result for Eagle Materials has been sold-out cement plants producing strong earnings and cash flow. With import costs now rising, and cement demand continuing to increase faster than new-capacity additions there is upward pricing pressure in the cement industry.

As you can see in this graph, operating earnings from Eagle's sold-out cement plants hasa been stable and strong for many years. Eagle's earnings improvement this year has been a combination of price improvement and the additional earnings gained from the purchase of our partner's 50% stake in Illinois Cement Company.

During the 1980s, dumping of foreign cement into the U.S. caused injury to the U.S. cement industry. Subsequently, dumping duties were put in place in 1990, which essentially eliminated the dumping of cement. Over time, the U.S. cement industry has returned to solid profitability along with a fundamental change in ownership. Many of the companies injured by the dumping of foreign cement in the 1980s were subsequently purchased by large foreign cement producers. Therefore, companies that previously dumped cement into the U.S. have little or no incentive to repeat the process for fear of injuring their U.S. operations. The settlement that has just been recently finalized restricts exports into the U.S. from Mexico to 3 million metric tons for the next three years -- about a 50% increase above their calendar year 2005 exports.

The impact to Eagle Materials will be minimal because the regional quotas limit the import from Mexico into markets that we serve at about their current level. Our greatest exposure are the minimal profits from our own low-margin imports that we bring in to supply the South Texas market.

Like wallboard, cement prices have also been on the rise for the last two years. The recent cement price increases in our Texas and Mountain markets have held firm while seasonal weather has delayed the price increases in our Northern California and our Midwest markets until later this spring.

This graph illustrates our success at maximizing profitability through incremental productivity improvements at our four cement plants. Not only have we achieved high margins on minimal investments but also the incremental production has, until recently, kept our per-unit costs flat, over time.

The rising cost of energy has increased Eagle's production costs to a point where Eagle has made the strategic decision to modernize our older operations, which will dramatically reduce our energy consumption.

Our Lawton, Oklahoma, paper mill uses leading-edge technology to produce low-cost, high-quality, lightweight gypsum facing paper. In comparison, our wallboard competitors generally have very old, small-scale, inefficient cylinder paper machines that produce heavier basis-weight paper at much higher costs.

Concrete and aggregates is a relatively small portion of Eagle that is complementary to our cement businesses. Both our Austin and Northern California businesses have major low-cost growth opportunities available in aggregates, and we have just completed the construction and startup of a new dredge at Western Aggregates that will both increase capacity and reduce operating costs.

At this time, I would like to hand the presentation over to Art Zunker, senior vice president and CFO, who will review our third quarter results. Art?

Thank you, Steve. I'll take a few minutes and go through the highlights of our third quarter earnings that were released yesterday. Continued strong U.S. construction fundamentals allowed Eagle Materials to set a record high for third quarter revenues and net earnings. Revenues increased 41% and net earnings 51%. The increase was driven by record third quarter sales volumes in wallboard and cement combined with record high cement prices and a 32% year-over-year increase in wallboard pricing.

Demand for our products remains strong and supply extremely tight requiring hard allocation policies in the marketplace. Additionally, this year's third quarter comparative was positively impacted by the acquisition of our partner's 50% ownership in Illinois Cement Company, which closed during the fourth quarter of last year.

Eagle's wallboard revenues increased 40% because of both price and volume increases. The industry is currently operating at approximately 97% of capacity, and price increases were implemented in mid-December.

With the U.S. wallboard industry currently operating close to ready capacity, prices continue to increase resulting in a 93% increase in Eagle's third quarter comparative operating earnings. Because of the current extremely tight supply of gypsum wallboard, pricing has risen significantly. Our mid-December price increase is holding firm. Currently, pricing is approximately at $155 per msf.

Third quarter cement consumption remains strong in all of our markets that would remain sold out requiring a 68% increase in low-margin purchased cement products to supplement our manufactured cement product. The revenue increase you see in the charts above were associated with both price and volume improvement.

Eagle Cement earnings improved 38% because price increases have outpaced the impact of higher cost of purchased products and higher manufacturing costs. Our $83.24 per ton mill net is a record quarterly price high for Eagle Materials.

Operating earnings at our Lawton Paper Mill have been impacted by higher energy costs and increased sales of low-margin container board paper.

Concrete and aggregate revenues increased 37%, and operating earnings increased 41%. Our concrete volumes were 21% year-over-year, and our quarterly concrete and average prices were a record high for Eagle. Eagle continues to enjoy record high aggregate sales volumes in Northern California where construction activity remains very strong. A recently implemented $1 per ton aggregate price increase in Northern California is holding.

During the first nine months of fiscal 2006, we generated nearly $164 million of cash flow from our operations, or a 27% increase from the same period a year ago. The cash was utilized to fund $52 million in capital expenditures, which includes spending on the Illinois Cement expansion project, a new dredge for Western Aggregates, exercising a purchase option on leased rail cars, and a normal low of sustaining capital expenditures. We also repurchased nearly 1 million shares of our stock and issued $200 million in senior notes during the quarter, of which a portion was utilized to pay off existing debt. The notes are unsecured, average 10 years in term, and were issued at less than 5.5%.

The combination of the issuance of $200 million in senior unsecured notes, spending on capital projects, and repurchasing 1 million shares of our stock, increased our net debt to capitalization ratio at December 31 up to approximately 24%. At this point, I'll turn it back to Steve, who will now go through the growth and other initiatives that were announced earlier today.

As I previously mentioned, we believe that total construction spending will remain strong in the short term. In addition, we believe that the long-term outlook for the construction industry is also bright.

An increasing population coupled with high home ownership rates will support a high-level of residential construction in the long run. Long-term fundamentals for repair and remodel construction are also favorable. The average age of the housing stock in the U.S. is 32 years old. As the housing stock ages, not only is more maintenance required but tear-downs and rebuilds will become more commonplace as the time to commute to and from work continues to get stretched.

This past year, safety was approved at levels well above the previously transportation bills. This new transportation bill will support continued high levels of road and bridge construction for the next six years. In addition, states' finances have also improved dramatically, which allows states to refocus spending on infrastructure projects.

U.S. cement consumption has increased steadily since 1991, with over 25% lower-margin foreign imports required to meet demand. Also, while some new U.S. manufacturing capacity has been added during this growth period, the gap between supply and demand were made significant. Currently, new-capacity construction projects are minimal with future project lead times generally requiring three to five years to become operational.

Our targeted growth in cement has a very clear line of sight totally focused on improvement and expansion of our existing four cement plants. We are currently about halfway through the construction phase of our Illinois Cement expansion project, and we have finalized our plans to expand and modernize our Nevada Cement and Mountain Cement plants. The total capital investment for these three projects will be approximately $385 million and emphasizes Eagle's commitment to be a low-cost producer by investing in high-return projects. We also believe that, at no time during these construction projects, that Eagle Materials' debt-to-cap ratio will exceed 40%.

The Illinois Cement project is on time and slightly under budget. We have spent approximately $30 million through December, and the first phase of construction, which includes a cement dome, is now complete and operational. This system includes a modern load-out facility that allows the truck driver to conveniently load himself, thereby reducing our manpower requirement. The expansion project will increase our production capacity at Illinois Cement to approximately 1.1 million tons per year and decrease our production costs by approximately 20%.

The new cement storage dome holds 80,000 tons of cement and will be used to balance plant operations during slower winter seasonal periods. The new preheater flash calciner string will be 255 feet tall and dwarf the existing 175-foot four-stage preheater when complete.

Our Nevada Cement plant was built in the early 1960s when energy costs were much lower and a much smaller percentage of total production costs. The very rapid rise in both power and coal costs with strong Northern California, Northern Nevada market conditions, has allowed Eagle to accelerate the timing of our plants to modernize this facility. The expansion will double our existing capacity and be smart-sized for the market, replacing our current low-margin imported cement with manufactured product. Nevada Cement's total production costs will be dramatically reduced by improving power and fuel efficiencies and by lowering its per-unit manpower and SG&A costs. These increased operating efficiencies will actually result in a net reduction of our current emissions, thereby simplifying the permitting process.

Our Mountain Cement facility also has some inherent operating inefficiencies associated with the age of its technology. Strong market conditions in the Mountain region, including increased oil and gas exploration, which consumes a specialty oil well cement product that Mountain Cement is particularly adept at producing, will allow Mountain Cement to expand by 60% with minimal impact to the marketplace. The construction costs reduction associated with this project ensures a high return and, like Nevada Cement, the increased operating efficiencies will result in a net reduction of emissions streamlining the permitting process.

When these projects come online, Eagle Materials' total cement capacity will have increased by 50%, and our production cost will be dramatically reduced. This will be accomplished with only a minimal increase in manpower primarily associated with our limestone quarry and operations.

In total, Eagle Materials' per-unit fuel consumption will be reduced by approximately 25%. Also in total, Eagle Materials cement plant power consumption will be reduced by 25%. Because there will actually be fewer but much larger and modern pieces of equipment performing the work, our total maintenance cost will be reduced by 30%. The number of total employees at these four cement plants will not change materially, although our production capacity will increase over 50% with a net result of a lower per-unit manpower cost.

Once these projects are completed, Eagle's competitive position will be substantially enhanced, and the cost reductions based upon current capacity will increase our annual EPS by approximately $1.50 per share. Additional earnings coming from the replacement of low-margin cement imports with very low-cost manufactured products and combined with earnings from our Georgetown, South Carolina, wallboard operation will improve Eagle's annual EPS by another $4 to $5 at mid-cycle pricing.

Eagle Materials wallboard operations are geographically located to take advantage of the ongoing population shift to the Sunbelt. Our Georgetown, South Carolina, project further emphasizes this strategy. Other growth opportunities continue to be explored, but we intend to be cautious and disciplined in these pursuits. The Georgetown, South Carolina, construction contract is scheduled to be awarded next month with groundbreaking in early spring. Final completion and startup is now scheduled for the fall of 2007.

Eagle Materials remains committed to disciplined growth through expansion and acquisitions that we thoroughly understand and that strategically make sense -- low-cost production with minimal impact to Eagle's core markets. The Georgetown, South Carolina, project meets these strategic criteria and improves customer services through improves logistics and reduce freight to our customers.

Once these projects are completed, Eagle Materials will have a truly outstanding portfolio of building material and construction product manufacturing plants. This premier operational foundation will further enhance Eagle Materials' ability to generate strong future earnings and cash flow.

While building materials and construction products are generally considered to be valued companies, Eagle Materials is implementing a very easy-to-understand growth strategy. Eagle Materials' board of directors as approved the following actions -- combination of its two classes of stock; a three-for-one stock split in the form of a 200% stock dividend; a 75% increase in Eagle's regular dividend; and increased our share repurchase authorization up to 1 million shares. Eagle's board has approved a proposal to eliminate our dual-class structure. This reclassification, if approved by the shareholders, will result in each class A shareholders and each class B shareholders receiving one share of a new class of common stock with the right to elect all directors. We believe that this reclassification will improve the liquidity of all our stockholders and reduce the complexity of our capital structure.

Eagle's board of directors approved a three-for-one stock split in the form of a 200% stock dividend to be distributed on February 24, 2006, to stockholders of record on February 10, 2006.

Because of confidence in the sustainability of our strong cash flow, Eagle has increased its annual dividend 75% to $2.10 per share. We also believe that our dividend will not materially impact the future growth of the company, as evidenced by our recent share repurchases and increased share repurchase authorization. With this dividend increase, Eagle Materials will have a very attractive yield and payout ratio. Eagle Materials has repurchased over 25% of its stock since our April 1994 IPO and 12% of its stock since our January 2004 spinoff from Centex. During the past quarter, Eagle repurchased nearly 1 million shares, essentially all of its authorization at the time. On Tuesday, Eagle's board of directors authorized the repurchasing of up to another 1 million shares.

This graph favorably compares Eagle Materials' total capital return, including dividend and share repurchases, to other building materials and construction products companies.

In conclusion, Eagle Materials has a straightforward, balanced, and disciplined strategy focused on enhancing and improving our existing assets while pursuing sensible growth prospects in both the cement and wallboard industries. In the long term, success in the building materials and construction products businesses can only be achieved through low-cost production. The initiatives that we have announced today are focused in long-term cost reduction.

Because Eagle Materials is comprised of a solid group of engineers and operators dedicated to maximizing the profit potential of its manufacturing plants, Eagle has the distinction of producing the highest operating margins in the building materials and construction products group, and the improvements and projects announced today will obviously further enhance our earning capabilities.

We expect fiscal 2007 to be another record performance year for Eagle Materials with net earnings ranging from $180 million to $200 million and EPS ranging from $11 to $12 per share.

In summary, we have announced plans to expand and modernize our cement operations with high-return projects that further strengthen Eagle Materials' position as a very low-cost producer of building and construction products. We have announced plans to simplify and improve liquidity of our capital structure. We have recently added very attractive long-term debt to our balance sheet. We have announced a three-for-one stock split and have increased our regular dividend by 75% to $2.10 per share on a pre-split basis. We have recently purchased nearly 1 million shares or approximately 5% of our stock, and we have announced the authorization to repurchase up to another 1 million shares.

Thank you for attending today's investor's conference and Craig will now start the question-and-answer session.

As Steve mentioned, we will go through a question-and-answer session. As I mentioned earlier, for those of you in the audience, we do have two roving microphones. They will be brought to you. Please raise your hand, and they will be brought to you. Please introduce yourself and the firm you represent before asking your question, and for those of you that are dialed in, please let the operator know that you have a question, and she will queue you up as necessary. Just please raise your hand.

Thank you, David MacGregor with Longbow Research. In the appendix to your book, you talk about, roughly, 5 million square feet of additional wallboard capacity coming to market, at least that you've identified. Can you talk a little bit about the rate at which that is expected to come to market; how much in '07, how much in '08, how much in '09; how much of that is a function of the ability to secure synthetic gypsum supply agreements? Also, secondly, Steve, we've been talking a little bit before the meeting today about what the last peak in 2000 in the wallboard market looked like, and I was just wondering if you could expand a little bit on that in terms of how things might look a little bit different this time or what you might see that looks the same? How can we read the benchmarks as they develop? Thanks.

Sure. During the last peak, around 1999 and 2000, there was a lot of additional capacity, almost double the amount that's currently announced, or about 30% new capacity that came online. Much of this new capacity was with natural gypsum and some of it was synthetic gypsum. So there was a lot of capacity that came online within a year to a year-and-a-half period creating a huge over-supply of the wallboard end of the market.

This time around, the majority -- there's very little natural gypsum plants that are being added. The majority of the wallboard is synthetic gypsum, and before synthetic gypsum can become wallboard, the public utilities have to install scrubbers, and the lead time is much longer. So instead of coming on over a one-and-a-half-year period that's really going to be at least a two to three or maybe even a four to five-year period before you see all this added capacity that's been announced come online.

Bob Curran at Fitch Ratings. Just wondering if you could give us some insight as to any considerations you might have about acquisitions in any of your areas and what key criteria would come into play before you go ahead and do that?

Both of the industries that we are in are highly consolidated. In fact, that's another difference between 1999 and 2000. I think we had 12 different manufacturers in wallboard at that time. We're down to eight now, and the cement is also very highly consolidated. So acquisition opportunities are pretty skinny right now. We remain opportunistically available, if we do see an opportunity. But because of the fact that there is so much consolidation, we have decided to focus on things that we know we can control, and that's the modernization of our existing plants as well as this greenfield wallboard expansion in South Carolina.

Just a follow-up -- would you do anything more in terms of aggregates, as I think more regularly individual facilities come into play there?

The aggregates market is highly fragmented, and, again, very attractive for many people. But many of our competitors, much larger aggregate competitors than ourselves, have been trying to consolidate this for many years, and what happens is because of the local, very local, nature of these markets, they are very expensive, often going at eight, nine, 10, or as high as 11 times multiple prices. So it's very pricey, these opportunities, and requires a lot of energy and, in fact, five to six years ago Eagle Materials decided to take a look at this opportunity and realized it was very competitive, and the fact that there were very few opportunities, and the returns were very, very minimal in the near term, you were really just buying a long-term position, we decided to shift back to our key businesses -- wallboard and cement -- as far as our growth strategy.

Harlan Cherniak from Longacre Management. I'm kind of new to this story, and I missed -- it didn't seem like you touched on any of your distribution channels. Could you break down how much is direct to builders via two-step distribution through lumber yards, retail centers, or a professional homebuilder distribution channel?

Sure. The majority of wallboard is distributed through gypsum specialty dealers. It's about 65% of our distribution. Then we have about another 20% that will go to lumber yards. Big boxes, for the industry, is about 15% whereas I think we currently only supply the big boxes about 5% with about 2% of our product going to manufactured housing.

And any one or two particular customer concentration issues at all?

We do supply a large amount of wallboard to L&W Supply.

And with the anticipated consolidation amongst the homebuilders, going forward, do you see that changing towards a direct distribution model or, said another way, "cannibalizing" some of your customers in distribution channels that you currently utilize?

We have not seen the homebuilders decide to get into the distribution business. It's a specialty business, requires special equipment, special lift boom trucks that actually lift the appropriate amount of wallboard into each room, and the appropriate amount of joint compound. So we really haven't seen the homebuilders want to get into this kind of business.

This is Arnie Ursaner with CJS Securities. Can you give us a little feel for your depreciation over the next several years -- the trend of that as you build these facilities? And on the cement modernization, will you be able to operate or have you been able to operate in the past reasonably efficiently while you're going through pretty significant modernizations?

I'll answer that, Steve. Our depreciation for next year should be approximately $40 million, and then as the wallboard facility comes online, that probably should increase about another $8 million, $9 million per year, that as the cement facilities come in line, you're looking at a comparable period, so about three years out we probably should be somewhere close in the $60 million range for depreciation.

The second question?

The question is as you do a modernization of a cement plant, it sounds like it's probably pretty complex, can you give us any feel for how you've operated in the past while you're going through a modernization?

In fact, Illinois Cement, we're operating at completely normally during the construction phase. We will have about a one-month period when we shut down. In the winter period, where sales normally slow, to tie in the new project. In Nevada Cement, the plans call for building almost a complete new pyro processing line, so that will not impact the existing operation at all. Mountain Cement will be very similar to Illinois Cement, to where we'll have a year, year-and-a-half construction followed by about a one-month tie-in generally in the slower seasonal period.

Hi, Dan Shedivy from Basswood Partners. Two questions -- the first is how should we get comfortable with the industry in the long run being more rational? You made one comment about it would be a good thing for there to be somewhat of a slowdown in the housing market because your competitors might behave a little more rationally. We've heard some competitors make comments about protecting market share and such, so how should we think about whether or not we should anticipate seeing another shock in the system with respect to wallboard. That's the first question.

And then the second question is -- historically, economics would tell us that during the downturn that pricing should have a floor of, roughly, marginal cost. In the past, since you've had the superior cost structure, that's protected you in a way. As your competitors add on capacity that's actually the lower cost structure, shouldn't that concern us about how bad your margins could be in the event of a downturn in that segment?

As far as long-term wallboard capacity in the U.S., the demand continues to grow. That's a function of, again, long-term growth in residential construction. We still believe that to be very solid, although there might be a near-term dip. Repair and remodel continues to become a greater and greater percentage of wallboard demand in the U.S. So we feel that really that's not a problem. And capacity additions in the past have been associated with a lot of natural gypsum. Again, I think the majority of natural gypsum deposits have been defined, so it would be a modernization of an existing plant that would have to come online very rapidly to change and impact the supply-and-demand balance.

The synthetic gypsum on the Eastern Seaboard is now a function of coming online over a very long period of time. Between now and 2012 you'll see significant amounts of synthetic gypsum available, but it's spread out over a fairly long period of time, so we'll see the new wallboard capacity on the Eastern Seaboard come online as the synthetic gypsum becomes available.

Currently, the current cost structure in the U.S. is that in the Eastern Seaboard, the majority of the gypsum produced is with natural gypsum that's imported from either Nova Scotia or Spain through a ship system that's very expensive. The cost to bring the gypsum into deep-water ports is expensive. The fact that they're older plants, they're smaller plants with high union labor costs creates a higher cost structure on the Eastern versus the Western U.S. where it's generally natural gypsum deposits with the plant sitting right on top of the deposit, which makes it a natural lower cost.

So as supply gets tight on the East Coast, and generally when people are using wallboard, it's one of the last items that's used in construction unlike cement is one of the first things that go into the ground, wallboard is one of the last items that is used in either a home or a commercial building. So, therefore, when supply gets tight, pricing escalates rapidly, and when it escalates rapidly on the East Coast, prices get to a sufficient level where you can afford to transport low-cost production from West of the Mississippi to the East Coast. That's the current situation.

By 2012, a lot of the people with capacity on the East Coast will have been replaced a lot of that capacity with lower-cost synthetic gypsum. So the timing is 2012 before you see that occur, and there will be a lot of current capacity that will have to be cannibalized between now and then.

Thanks. Jack Kasprzak with BB&T. Two questions -- first, one of clarification, Steve. Could you just go over again the two numbers you gave -- the $1.50 a share and the $4 to $5 a share for earnings power? I just didn't get what was driving those two numbers?

The $1.50 per share is the cost reductions that we will achieve with these modernizations just based on our current cement capacity. The $4.50 per share is based on earnings, then, from the incremental cement production capacity and also the production capacity that's going to come online with the greenfield South Carolina project.

Okay, and then capex for fiscal '07 -- can you give us some idea what that's going to be?

Yes, Jack, that's going -- kind of use around $100 million in your model. That's what we see right now, and, as I mentioned earlier, something around $40 million for depreciation.

Rich Stoneman, Dundee Securities. Energy costs for producing cement, some of your competitors have said that their costs last year were up $3 to $4, and they expect a similar increase this year. Does that hold for you?

Energy costs are up 20% to 25%, which would be in that range, and although we see costs increasing this year, I don't think it will be at the same magnitude that it increased last year. It may be half that at the most.

So around $1.50, $2?

That's correct.

In some of your filings, you've discussed your major aggregate reserves in Northern California, and some thoughts on moving that by rail down into more populous parts of the state. Are you still considering expanding your operations there?

We still remain focused on that project, and this has been a very long-term focus. It's really been 15 to 20 years that we've been working and achieving just that. We continue to look at opportunities to do that. It really requires stringing together numerous real estate transactions to get the link from rail to that deposit. We believe that we're getting close, but we're not there yet.

And, finally, last year we saw two cement price increases. We recently had another price increase. Do you expect there will be another increase this year? Or do you think that we've seen the end of increases for 12 months?

We currently implemented a $10-per-ton price increase in two of our major markets. In April we anticipate another $6 to $8-per-ton increase in our other two markets and, in fact, in one of the markets that we just implemented a $10-per-ton increase, there is a $5-per-ton increase announced for later this summer.

Cliff Greenberg, Baron Capital. First of all, congratulations on terrific operating results -- a string of shareholder-friendly corporate actions and now a very exciting capital growth plan. Also, thank you, as a shareholder.

As we discuss your capital expansion, can you give us a little sense on the return on investment you're hoping for from the three cement expansions or plans and the greenfield plant? And I would include in there not just the earnings on the increased capacity but the savings on the existing facilities? And in the cement business, are the returns area very different between the three plants or are they similar?

All of these projects clearly meet our return standards of 20% return on investment pretax or a 15% cash-on-cash after-tax return, and all achieve at least that; some of them maybe slightly greater than that.

Thank you, John Fox of Fenimore Asset Management. I have three questions on imported cement. The first one is what is the cost of imported cement today?

It varies, depending on where it lands in the U.S. but, in general, the current pricing is in the $60 to $65-per-ton range.

Okay, thank you, and with the cement tariff situation, I know it's limited for three years, what happens after that? Does it open up or is there a new agreement that has to be made?

No, it clearly opens up, and then the impact is -- the question about the impact, then, is what will happen after that? Clearly, we believe that Cemex has a large ownership in the U.S. and that there will not be a very strong incentive to flood the market as happened in the 1980s.

Okay, in the appendix you have large rates and shipping rates. I wonder if you can convert those to a per-ton -- what does it cost to transport cement on a per-ton basis? Thank you.

The costs have gone up dramatically for barging. We barge clinker as we're preparing the market for our expansion at Illinois Cement, and they've almost doubled, going from about $8 per ton from New Orleans up to Lasalle, Illinois, to about $15 per ton.

Steve, I know that you are a person who enjoys the operations, and that you come out of the cement business. For those of us who don't spend a lot of time in cement plants, can you tell us, get into the details, of how the new five-step process is going to change things and how much throughput or efficiency that gets you, and any reductions in employment there?

What happens when you modernize a cement plant with the additional preheat, in a cement process, the modern cement process uses certain vessels arranged in a very tall tower to transfer heat from the gases that come out of the combustion process and calcining process. It transfers that heat in a stage-by-stage step up to the top so, therefore, by the time the gases leave the top of the tower, there is essentially little useful heat -- only enough heat, then, to dry your raw materials in the raw mill. So essentially you've taken all of the heat that you used for combustion, because the temperature at which you produce these products is very high -- 2700 degrees Fahrenheit. So to utilize all that heat, you need to go through numerous stages of heat transfer, which occurs in the preheater and flash calciner process.

The calciner makes it a very simple operation, because when you add heat to limestone, you essentially dissociate the CO2 from the calcium, and this is done just like boiling water in an endotherm. So, therefore, it makes the process very easy to control by putting enough heat to drive off the CO2 that's associated with the calcium carbonate and, by doing that, it takes over 50, almost 60% of the combustion out of that high temperature 2700-degree zone and puts it in a low-temperature calcining zone, which is closer to 1700 or 1800 degrees, which actually reduces your emissions as most of the work is being done at a lower temperature. So the thermal NOX that's formed in the burning zone is dramatically reduced, because you are no longer having to fire the system at that heat.

In addition to the fact that it's much lower temperature, the refractory life, which has a lot of maintenance cost, is dramatically reduced in the process.

Also, one follow-up question on the imported cement. From where are you purchasing that? Is it not subject to some of these quotas?

No. The dumping duties that are currently in place are against Mexico and Japan. We have purchased, over the last four or five years, as we've been establishing this new market for Illinois Cement -- clinker from Thailand as well as from Peru, which are not subject to these duties.

Leslie Feinberg, American Capital. How much of your materials are headed down South are Katrina-related, number one?

The Houston market really is a market that we don't serve. The New Orleans market is a market. The closest market that we really serve is maybe closer to the Beaumont area. So we have a terminal in Orange, Texas. That's as close as we really get to that market. So it's really more of our competitors' market than our market. So very little cement that we produce, simply because the transportation costs are so high would be able to effectively reach the New Orleans area.

How about the wallboard?

Wallboard can ship into that area, and we do ship some into that market. It has not been one of our primary markets, but in order to help out, we have been able to allocate a little extra supply to the big boxes in that region as they are currently trying to rebuild that area.

Because there's so much demand down there for the wallboard -- that's what's increasing the price? What would be your trend? How will you modify it if the housing market slows down?

Can you repeat that?

What adjustments will you make when the housing market slows down?

We believe right now that the housing -- you know -- with capacity utilization really at 100%, demand greater than supply, a slight slowdown in the housing market will actually be a positive for the industry, because we'll be able to get our delivery times back down to where they used to be. So it's really a positive for the industry. And in addition to that, with new residential starting to moderate, we still see commercial construction increasing. And when you produce commercial wallboard, it's thicker than the residential market wallboard. It's 5/8-inch thick versus a 1/2-inch thick. So as more commercial projects become available, you have to reduce the production capacity of the U.S. wallboard industry by operating your plant at about 75% of the speed when you produce that 5/8-inch thick versus the 1/2-inch thick wallboard.

Dan Shedivy from Basswood Partners. You mentioned your shipping costs for clinker up and down the Mississippi -- how about for clinker coming from Thailand? How has that changed versus a year ago? Where do you see that going, given the increase in shipbuilding, the increase in capacity, and is there a threat, from your perspective, of China's addition of -- I think it's 12 million tons of capacity over the next couple of years in cement?

In fact, that's why we have shipped sourcing from Thailand to Peru, because of the increase in the -- again, both the cost of the vessel as well as the higher diesel costs have increased the total freight to bring cement from the Far East to the U.S. dramatically. So we looked for a shorter route, and that's why we went to Peru. So there is still that impact. However, the actual rates have come down for a Panamex vessel, but diesel is still high, and the other thing that has occurred is currently the Asian economy has dramatically recovered from five years ago. So demand for cement is higher there, and so the cost at the point of origin is much higher in the East. When the new capacity comes on in China, if China's economy does slow down, there will be, again, more cement available in the East to come to the U.S. Still, with rising energy costs and diesel costs, it will not be as low as it was five years ago.

[Mike Happel] with Atticus Capital. Just two questions -- the first, I'd like to just understand better your targets for debt or how high you might lever the company if you found the right opportunities to use the capital. And then second question, I just want to clarify it -- I think you said that once these expansions are done, you could add $4 to $5 a share in EPS at mid-cycle pricing. I just want to clarify that, if you could.

We feel very comfortable in these businesses -- the construction product businesses -- and with wallboard, again, having a somewhat cyclical nature of pricing, that a 40$ debt-to-cap is the approximate range that we would take -- the height that we would take our debt-to-cap ratio.

And, yes, in fact, the $4 to $5 plus the $1.50 cost reduction, that includes mid-cycle pricing in both these industries.

Jack Kasprzak, BB&T. Of the major capacity expansion projects, Illinois comes on first, I guess, toward the end of this year. So your fiscal '07 guidance of $11 to $12 a share, maybe you get a little benefit from that, probably not a lot, so that's essentially -- am I right in assuming current pricing, current production levels? And so does that imply, also, then the $1.50 plus the $4 to $5, we could be saying peak earnings power of -- mid-cycle, you're saying, not peak, I guess -- $16 or so a share? Is that the progression if everything remains --

That's accurate based upon all of the modernization and expansion projects including the Georgetown, South Carolina, wallboard.

David MacGregor in Longbow Research. Just a follow-up -- just a couple of questions haven't been asked here -- the mid-cycle pricing question -- can you put some exact numbers on what you define as being mid-cycle pricing?

Mid-cycle pricing for wallboard, we believe, is in the $105 to $110 per msf range in today's dollars. And then cement in the $75 to $80 range.

You talked earlier about the difference between the non-res market, which takes a 5/8-inch sheet versus the residential market, which takes a 1/2-inch sheet. You talked about the difference in throughput rates -- what's the difference in profitability between those two lines?

The profitability is about the same, as you get a premium for the 5/8 product.

The final question has to do with the whole allocation condition that exists today in the wallboard market. At what level of cap utilization would you expect the allocation condition to come off? And what would be your expectation for product pricing immediately following the removal of an allocation condition?

It really comes in stages. At about 90% capacity utilization, you'll start to see the allocations come off, but at 95%, because of the distance involved and the regional nature of some of these markets and the distance to get from plants to that market, you still see regional allocations until you get down to about that 90% level. Generally, the 90% level, it's a very healthy industry with mid-cycle pricing.

Thank you, Richard Stoneman with Dundee again. Cement prices in Mexico are considered to be a lot higher than they are in the States.

Yes, correct.

Yet Mexican cement is exported to the U.S. In the settlement with Mexico, has the Mexican cement market been liberated in any way to allow exports into that market?

The settlement does include certain items in there that would enhance the ability for U.S. producers to export cement to Mexico. We still believe, however, that that market really essentially remains a closed market. We don't believe that there will be a lot of cement exported from the U.S. to Mexico in the near future.

Hi, Lorraine Maikis from Merrill Lynch. You had discussed pricing under the scenario of a slight slowdown in the housing market. Can you talk about another scenario where it's worse than a slight slowdown, and where you think pricing would go in that case?

If we look at wallboard, and we say there's a -- instead of a 5%, a 10% reduction in new residential construction, that would be pretty devastating to the housing industry. If we're talking about those levels, wallboard is 50% of the demand -- or excuse me -- new residential is 50% of the demand for wallboard, so that would have a 5% increase -- or decrease -- in wallboard demand, which would take us from the 100% down to 95%, which is still a very healthy industry. So it would take a very dramatic -- something that would be very, very devastating to the housing industry before we'd see a major impact to the U.S. wallboard industry. Again, it's probably the new capacity two to three to four years online that will have the biggest impact in the wallboard industry.

And cement as well?

Cement -- that just is not an issue. There is currently over 25% imports needed to meet demands. Imports are generally very low-margin, so cement looks to be very stable earnings for many years to come.

With that strong demand with cement, do you expect to get the $25 million in manufacturing cost savings from plant improvements for those three cement plants?

Those are really just a function of cost, not a function of the supply/demand market. That is strictly the fact that we are going to dramatically reduce the amount of coal and the amount of electricity that we use with these modernization projects.

Although your customers will probably see that, I mean, but there is a strong demand. So typically in any industry, when there's cost reductions, the company doesn't usually get to keep 100% of it.

If the whole, entire industry was investing the kind of capital that we're investing in their plants, I believe what you say would be true. Currently, we don't see the industry modernizing all of their capacity as Eagle Materials is. So I don't believe that will occur. If it does, it will be over many years.

Kristin Resnansky from Chilton Investment Company. Could you explain the mechanism in the consolidation of the two share classes of how the place of the new class of stock will be determined?

I don't think price is an issue. It will be a one-for-one exchange, so when the two classes are combined, the A shareholder and the B shareholder will each receive one share of a new class that has the right to elect all directors.

That's where I'm a little confused, because as a B shareholder, I am then exchanging -- because there's a difference in the price of the A shares and the B shares, but each shareholder is getting one share of the new stock. It seems like there is a differential there that isn't being compensated for.

When we went ahead and proposed the stepup spinoff from Centex, we put everything we could in place to try to realize, hopefully realize, that both classes would have equal liquidity and that they would trade nearly at the same price. We were very surprised then, when especially the high class B shareholders were actually trading at a discount -- actually very confused. So therefore one of the reasons for us to try to go ahead and get rid of the complexity is to go ahead and take the action to now have just one class of stock. So the high class, in fact, has less liquidity. We do believe that when we combine these, one of the major advantages, particularly for the B shareholders, will be the increased liquidity of the new shares that they receive.

As a B shareholders, you're giving me a little bit more liquidity, but I have to give up -- it seems like the A shareholders are advantaged, because they are getting to vote for the board, and as a B shareholder I am not being compensated for now sharing that vote with the A shareholders.

Generally, there have been numerous or at least a dozen or so of these collapses of two classes of stock. Generally, we have seen that the lower-priced stock rises closer to the higher -- I can't guarantee that -- but, generally, that's what has occurred in the past when two classes have been combined similar to ours.

Scott Leventhal with Emerald Advisors. Can you talk about your knowledge of any expansion, cement expansions, by any of your competitors and how much will you still need to import once you have all of these expansions in place?

Currently, I believe that the Illinois Cement project is the only expansion project that has currently broken ground and is underway. I do believe that TXI is very close. If they have not started breaking ground in Southern California. With that exception, I believe that everybody else is waiting for permits to construct. So in the near term there is not a lot of activity as far as new construction in the U.S. cement industry.

And purchased cement would generally be very minimal after that. We've tried to, again, kind of seed all of our markets with purchased product. We'll still have a need for some purchased product but not a lot.

Would you see opportunity for additional markets feeding another market?

Currently, no. We plan to stay focused on the forward existing operations. We are talking very long term timeframe where we would look at another market, but that would, more than likely, be a greenfield opportunity that we're talking well beyond this conference to a five-year time horizon.

Are there any other questions from the audience? There is one more down here. We'll take one more after this, if there are any, and then we'll turn to the operator.

David MacGregor, Longbow Research. The synthetic gypsum supply agreements that people are negotiating right now and that you've concluded -- are they perpetual agreements, or can you give us some sense of how long they last, and do you have an exclusivity arrangement with that utility -- or is exclusivity typically a provision of these agreements?

It's hard for me to understand our competitors' agreements, but our agreement is very long term -- it's 60 years in nature.

Michael Corelli, Barry Vogel & Associates. Two questions -- one on your guidance for next year -- what are you assuming as far as pricing on both the wallboard and the cement and assuming you get any additional cement capacity in that guidance.

Very little cement capacity, as Illinois Cement will just be starting up in the fourth quarter of next year. Pricing is really at current levels in this guidance, and there is the potential to have some additional price increase later in the year in both wallboard and cement.

Okay, and then as far as wallboard expansion projects, could you talk about what's on the table for competitors at this point?

This year I believe there is one project that's scheduled to come online, I think it's in November or December this year, just outside of here in Buchanan, New York. I think that is the only capacity, and it's about 300,000 msf capacity that will be --

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After that, there is another project that is scheduled to come online mid-2007, and that's in Norfolk, Virginia, and then after that our capacity will come online towards the end of 2007 in South Carolina.

Thanks, Jack Kasprzak again. Could you talk a little bit about your last - your remaining joint venture, Steve, the Texas cement plant -- any chance of consolidating that one day, as you did in Illinois? What's the situation there?

Obviously, those are great opportunities. You thoroughly know the business inside and out. That's been a very, very happy joint venture for many years, and currently do not see any change in the way that that company is run.

All right, at this time, we'll turn to the operator. Operator, do we have any questions from the people dialed in remotely.

[Brian Corvel] from Mentor.

Just some procedural programs relating to the stock class combination -- when do you see filing the proxy when the vote takes place and when it will ultimately be completed and also what is the vote required by the respective classes to approve?

The timing depends on the SEC review and how lengthy that takes, so we really don't have that locked down as of yet. And the vote will be a vote by each class, and I think it requires a majority approval by each class.

When do you think you'll be able to file the preliminary?

Next week.

Jay McCandless from Avondale Partners.

I wanted to know what prices you are assuming for your '07 guidance on both cement and wallboard?

Art?

Yes, as we said earlier, we're using current pricing, which is approximately $155 for wallboard, and then in cement it's in the mid to low 80s.

Mr. Kessler, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Thank you. At this point, this would end the investor conference. Thank you for attending. We have contact information towards the end of the presentation. We appreciate you all joining us today, thank you.

This concludes the conference call for today. We thank you for your participation and ask you to please disconnect your lines.