Eagle Materials Inc (EXP) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, welcome to the financial results for the fourth quarter and year-end fiscal year 2006 conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to Mr. Steven Rowley, President and Chief Executive Officer for Eagle Materials. Please go ahead sir.

Thank you and welcome to Eagle Materials conference call for the four quarter and fiscal year 2006. Joining me today are Art Zunker, our Senior Vice President and CFO, and Craig Kesler, our Vice President Investor relations and Corporate Development. There will be a slide presentation made in connection with this call. To access it, please go to www.eaglematerials.com and click on the link to the webcast. While you're accessing the slides, please note that the first slide covers our cautionary disclosure regarding forward-looking statements made during the call. These statements are subject to risks and uncertainties that could cause results to differ from those discussed during the call. For further information, please refer to this disclosure, which is also included at the end of our press release.

U.S. construction industry spending has continued to grow at a fast pace allowing Eagle Materials this quarter and this fiscal year to set record high revenues for any quarter and for any year in Eagle Materials history. The increase was driven by record sales volumes in both wallboard and cement, combined with record high cement prices and a 34% year-over-year increase in wallboard pricing. Eagle's operating earnings for this year's fourth quarter were up 73% from the prior year's fourth quarter and Eagle's operating earnings for fiscal 2006 were up 54% from the prior year. Wallboard and cement inventories remain very low and both industries are operating at maximum capacity, with imports required to meet wallboard and cement consumption requirements. Improved wallboard profitability, combined with continued strong cement earnings, has allowed Eagle's diluted earnings per share to reach the highest levels in our Company's history for any quarter and for any year. As of March 31, 2006, our net debt to capitalization ratio was 24%, compared to 14% as of March 31, 2005.

During the year, we issued 200 million in senior unsecured notes, with an average maturity of approximately 10 years at an average rate of 5.39%. During fiscal 2006, we generated over $188 million of cash flow from our operation, an average increase of 31 million over the same period a year ago. The cash was utilized to fund 73 in capital expenditures, including 41 million for our Illinois Cement expansion project. We also repurchased over 4.5 million shares of our stock during fiscal 2006 at an average price of $36.36. During fiscal 2006, outstanding operational execution has allowed Eagle to take advantage of great industry opportunities and set many new performance records, including production, sales, and earnings. Looking forward, Eagle Materials is well-positioned to deliver another prosperous record-setting performance in fiscal 2007.

Total construction spending is up over 8% through March, with both cement and wallboard industry shipments at record levels up approximately 27% and 11% over last year creating continued upward pricing momentum in both of these industries. We remain confident the demand for our products will remain high and supply tight during the current year. Eagle's wallboard revenues increased dramatically in the fourth quarter because of price increases successfully implemented throughout 2006. Additionally our wallboard business set record high production and annual shipments of over 2.8 billion square feet in fiscal 2006. Low operating costs, combined with industry opportunities made possible by exceptional customer service and record production, has allowed Eagle's wallboard quarterly and annual earnings to reach all time highs of over 50 million and 150 million respectively. This graph illustrates the current strength of the wallboard industry.

The industry successfully implemented a price increase in March, which has increased Eagle's current net sales price to near record levels. For reference, a $10 per MSF increase in wallboard price is equal to approximately a $0.35 increase in Eagle's annual EPS. Eagle's fourth quarter cement consumption remains strong in all of our markets. And we remain on hard allocation, requiring increased low margin purchase product to meet very strong customer demand. Eagle cement earnings have improved because price increases have outpaced the impact of higher cost purchase cement and higher energy cost. Our $90 per ton mill net is a record high quarterly price for Eagle materials. Demand for our cement remains at a record level with imports projected to fulfill over 30% of the U.S. construction industry demand this year. Our paper business experienced a 53% decline in their operating earnings this quarter compared to the quarter a year ago.

The decline is due to a much higher energy cost and a higher percentage of low margin container board grade paper. A $50 per ton price increase has recently been implemented in the container board industry. Our concrete and aggregates volumes increased from the prior year's fourth quarter. However, operating earnings were negatively affected by significant rainfall in northern California during the quarter, made quarter to quarter shift in maintenance expenditures. For the fiscal year con/ag sales volume revenues and operating earnings all showed significant improvement. Art?

Thank you, Steve. We are issuing guidance for the first quarter of fiscal 2007 based on our internally re-forecasted cost volumes and sales prices. We anticipate our diluted EPS to range between $1 and $1.10 per share. Wallboard and cement inventories remain very low, with strong demand requiring hard allocation, creating improved prospects from previously issued fiscal 2007 guidance. Thank you for attending today's call. We will now move to the question and answer session.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from the line of David MacGregor. Please go ahead, sir.

Good afternoon, guys. Nice quarter.

Thank you.

I'm just looking at your mill net in wallboard at 1.55 versus 1.70 and 1.77 from some of your other publically traded competitors. I realize you're in the west and the wallboard typically trades at a premium on the east coast versus the west and that's probably accounting for a piece of this. Is there something else that would account for your wallboard price being that much below the announced numbers from your peers? Or is it really just that geographic issue?

Really the geographic combined with the freight, as we continue to supply wallboard into the Southeast in preparation for our new plant coming online in a year and a half.

The sales into the Southeast should have provided a little more premium revenue, though, shouldn't it?

Except for there was a lot of freight. So this is a net price number.

Yeah, exactly. And then, just, again, with respect to wallboard, you've got fairly tight market right now. Can you just give us your assessment of how much new industry capacity is expected to come to market between say now and December '07?

Between now and December '07, there's really very little coming online this year. So I believe that [LaFars] is a plant that is going to be completed later this summer with a tie-in towards the end of the summer early fall and startup during the fall. So for 2006, you can pretty well assume that it's a wash at best as far as supply in the industry. And then in 2007, towards the end of 2007, our plant will be coming online as well as some other capacity from U.S. Gypsum, as well as, I believe, National Gypsum has a plant scheduled to come online, as well.

What would all of that represent in terms of billions of square feet?

The amount that's coming on this year is 300 - 350 million increase. I think that's the expansion at Buchanan. If we combine the rest of the expansions, between USG and National and ours, that is probably pushing another 2.5 billion in that range.

Okay. Thanks. And then on the paperboard, just with respect to the decline in EBITDA, how much of that was attributal to higher energy cost and how much of that was attributable to the container board mix? And also on the paperboard, if you could just gives us some sense of the timing on that $50 per ton increase? Was it on just the paperboard or was it also on the container board?

It was really just on the container board. And, I think roughly about 30 or 40% of the reduction was associated with higher energy cost and the rest with a greater percentage of container board sales.

And your outlook for paperboard EBIT contribution over the next couple of quarters?

Pardon?

Just trying to get your sense of the EBIT contribution from paperboard over the next couple of quarters?

I believe that it should be back about the same levels of last year, which --

$5-6 million range.

Per quarter?

Right. Thanks very much, gentlemen.

Our next question comes from the line of Jack Kasprzak of BB&T. Please proceed.

Thanks, good afternoon, everyone. Can you hear me okay?

Yes.

Thanks, did you buyback any stock in the fourth quarter?

No, we did not.

Is that probably due to the various initiatives you'd announced early in the quarter regarding collapse in the classes of stock and stock split, et cetera? Does that have an impact, I assume?

That's correct. I need to correct that slightly. At the very beginning of the quarter we bought a little bit of stock. But at the very, very -- it's prior to within the first week.

Okay. And then it looked like -- well at least versus the model we had put together, the cement margins were a little lower or a little light, was there some unexpected down time in the quarter in cement perchance?

We had a lot of winter maintenance on finish mill systems, which typically occurs during the winter months. And this first quarter is typically when we have our major kiln outages and we're in the process of that at a couple of our plants right now.

So there was not necessarily anything unusual in the March quarter on the cement side? Or -- ?

Maybe a little higher than normal maintenance cost.

Okay .

But not significant.

Anyway to quantify the impact of weather on your operations in the quarter.

The only real impact of weather was in northern California and it really impacted our concrete and aggregates out in northern California.

Okay, so that's relatively small. Is that the small piece of the whole pie, I guess?

That's correct.

Okay. And then I just wanted to ask about guidance with regard to specific earnings per share guidance. You've given a lot of qualitative, I guess, commentary on the call here, and it's much appreciated. But the previous guidance you guys had issued was split adjusted $3.67 to $4. Just taking your comment on the wallboard side, $10 per MSF is $0.35 a share. And we know there was a $15 per MSF wallboard price increase that went into effect in March, why wouldn't the guidance just on that basis go up around $0.50 per share on both ends? And that doesn't even include lower natural gas costs, higher paperboard prices, second cement price increase, a lot of other things that could seem to work to the up side? I wondered if you could just talk about that?

Relative to, when we gave guidance in January, business is in much better condition today than it was in January. A year ago, we tried to update guidance that we'd given from the previous quarter. And when we did that we ended up being quite low for the year, simply because it was probably a little too early to try to predict what the full year would be without having any financial data from a month or a quarter under our belts. So this year we've decided to wait until we're a little further into the year before we quantify any improvement in the guidance that we've previously given.

So it doesn't -- the fact that you haven't updated the guidance specifically in terms of an actual earnings per share range doesn't necessarily suggest some new or increased risk or reticence on your part given the possible changing environment. It's just that you'd rather get a little farther into the quarter just to quantify exactly how much better things are? Is that more or less the situation?

I think that's a better way to look at. Clearly I don't believe there is any reticence. If anything there is an improvement from when we gave guidance in January, but it's just a little too early for us to quantify it. Especially realizing that things are still extremely tight as far as inventory levels in both cement and wallboard. And we're just heading into the busy construction period of summer and fall.

Okay, great. Thanks a lot and congrats on another great year.

Thank you.

Our next question comes from the line of Barbara Allan of Avondale Partners. Please proceed.

Thank you and my congratulations again, as well. As usual you've really maximized the returns on your assets and investors appreciate it. I wondered, I was a little surprised at the increase in the volumes in wallboard, 18%. I guess I was thinking that the best we were going to do is some capacity creep. How did you get such a nice big increase in volume?

Really, I think we've been saying that our rated capacity is about 2.8 billion and we were able to achieve that this year. So, as business improved throughout the year, we were able to maximize the operations and minimize waste and delay, which has allowed us to achieve record production performance. So really when we say that we have 2.8 billion square feet of annual capacity, we tend to be pretty accurate in those estimates.

Okay. So we got there. I guess -- I had thought it was pretty tight a year ago, as well. I guess the next question that comes up is you've got price increases in cement in three of your markets and I wondered why Texas was not included in that.

We received an increase in Texas in January.

Okay.

And there's another increase announced for July.

Okay. And the one in Texas held?

The one in Texas held.

And how much is the one for July?

$5.

Okay. And I may have misunderstood, but when you talked about, you mentioned tight inventories and imports. It sounded as if you were referring to both wallboard and cement. And so I just wanted to clarify, are we seeing imports of wallboard?

Yes, we are.

Which markets?

We've seen some on the east coast as well as the west coast. And I believe we have also seen some into the Houston market.

Okay. And lastly, could you give us an indication of your CapEx plans for 2007?

Use $166 million in your model and about $41 million for depreciation.

And 41 for depreciation. Okay, thank you very much.

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

Hi, guys, strong quarter, wanted to say that first. And second of all, just on your tax rate going forward. What do you expect there? I saw it jumped up to almost 34% from 29 -30% last year.

I don't believe it was that low last year, it was that in the first quarter of the fiscal year.

Right.

It was 34% for the last 3 quarters. For your playing purposes, use 35% and the reason for that is is that first quarter, when the tax rate fell down to that lower level, we had to reverse reserve we had for depletion. And as a result of that, that dropped our tax rate from right below the 35% range to a little below the 34 and we won't have that this year.

Right. So around 35%. Second of all, I just wanted to talk on your assumption on housing starts. I guess you said they were going to be down 6% in 2006 versus 2005 at the end of last quarter. I was wondering if you are still comfortable with that?

Believe that housing starts are going to be off somewhere between 5 and 10%, that's pretty hard to predict for this year. But believe in that range and that will, again, in the wallboard business about half of the consumption goes into new residential, so you will have a decline of about that much. Here we are, though, operating at full industry capacity utilization with imports. So a decline of somewhere between 4 to 6% would still leave a very, very strong industry with shortages in certain areas and other areas maybe a little softer. But in general, very, very strong demand, supply situation for wallboard in the coming year.

I'm just a little concerned about with all these large home builders that are reporting double digit order decreases in the first quarter. A lot of these cancellations are coming up. If you think of it that way, where they are picking up say 10% market share, the housing starts theoretically may be down 20 - 25% by the end of the year. Just wondering what your take was on that.

If that truly did happen, that really becomes for us a fiscal '08 issue, not really necessarily a fiscal '07 issue. Very, very hard to predict that type of a drop with current data. Interest rates would have to go up dramatically. The inventory levels of new homes would also have to go up very dramatically for that to occur. Have not seen that type of a scenario out there. Although if interest rates continue to rise dramatically, anything can happen.

I'm just a little concerned because the 10-year cycle from '93 to 2002, housing starts averaged about 1.52 million. And in '05 they were 2.07. So if you just indicated a drop back down to normal levels, that would indicate a 26%, 27% drop from here. I'm just bringing up that point just because of concern. I guess just going back to historical means.

That would be surprising, but again I truly believe it would take another major increase in interest rates for that to occur.

Right. And on any other further wallboard price? Or any suggested or schedule price hikes?

There are are rumors, again, and because things are very tight and we are just now going into the busy construction cycle. So normally winter you have a tendency to give up pricing. This year we were able to get pricing throughout the winter, which is really unusual in the wallboard industry. It just shows how tight the supply is right now. And currently as you move forward into the busier summer construction season, it will just get tighter and lead times longer.

All right. Thanks a lot.

[OPERATOR INSTRUCTIONS] Our next question comes from the line of Robert Ryan from Banc of America Securities. Please proceed.

Thank you. Again on the wallboard side, perhaps we're experiencing a cooling of the new residential, on the new residential construction side. But clearly, your demand on that side of the business is as strong as it's been. So either that cooling isn't coming through in demand for your product or it's being more than offset by other sources demand for product. I was wondering if you could just speak to that a little bit? Is it the commercial and remodeling are making up the slack? Or is it that the residential construction market is healthier than we give it credit for? Or some combination?

I think the residential construction, the current amount, there's a lag between starts and when it becomes wallboard. So starts two or three months ago were still very strong, and that is now consuming wallboard at very good levels. However, in addition to that the commercial side of the business is rapidly improving, much higher than it was a year ago. And we continue to see dramatic improvement in the commercial side of construction, both from the cement side of the business as well as the wallboard side of the business. We do believe there'll be some offset there and again, with wallboard at very, very high levels or maximum industry capacity, the net effect of all of this is going to be still a very, very strong supply-demand scenario for wallboard in fiscal 2007.

And is there a phenomenon in wallboard when the industry is experienced price increases like we've seen in the past year or two, where customers look to pre-buy ahead of an anticipated price increase?

Generally, no, not in wallboard.

All right, thanks.

Our next question is a follow-up question from Barbara Allen of Avondale Partners. please proceed.

Thanks, I'm sorry I'm traveling, I don't have my notes with me from your January guidance, could you tell me what that -- remind me of what that was for the full year?

It was 3.67 to $4.00.

Okay. Thanks very much.

Our next question comes from the line of Alan Mitrani of Sylvan Lake Asset Management. Please proceed.

Hi, thank you. I just want to clarify, you talked about paperboard. You said there was a price increase, Not on the part that you charge internally, and not what you sell to, correct?

That's correct.

And you talked about EBITDA getting back to roughly a 5ish level in that sector? In that segment? That's correct. Given where that implies, that implies your margins are going to go back to the full -- rise pretty dramatically. Are there cost cuts that you're making or is it simply the pricing that you're doing that's going to get you there?

I think really there are a couple of things that are getting us there. Both cost cuts, the energy level is coming down a little bit. We also were renting some warehouse space. And during the year we cycled the machine up and proved that we could operate it at very high level production rates. But at the time, we didn't have immediate sales orders ready for it. And included in this year's cost were the cost of some warehousing, which we no longer have. So combination of reduced energy costs, reduced warehouse costs, increase in paperboard pricing will get our earnings levels back to that level.

Okay. And also it just strikes me. It's a little strange, you talked about anywhere from 5 to 10% plus price increases on almost all of your products, and it seems we know they've all stuck because we're already in May. And in talking to distributors in the business it's pretty clear that almost all of them expect probably another 10% wallboard increase, probably starting for you in your fiscal -- after June, probably starting in July. It just strikes me that your guidance for the first quarter at $1.00 to $1.10, as you said we're going into a seasonally busy time, seems low. It's hard to get there using much higher prices on all of your products and natural gas has come down over the last few months.

We're, based on -- again, our first quarter is when Eagle Materials does the majority of its major maintenance in its cement operation. Whereas maybe we have some price increases, we may also in this quarter have some higher costs that, but we'll average out over the year. And then we have very little maintenance for the rest of the year.

Okay. So you will give more of a sense of where your guidance is once you pass the first quarter and you've already reported that?

That is correct.

Okay. And also can I understand? Could you just remind us what was exactly the CapEx for the year and the depreciation for this past year?

This past year our CapEx was $72 million, $73 million. And our -- .

And DD&A?

Hold on a second, Alan.

Sure.

It was -- oh, yeah, okay. $38.6 million for the year.

And one other thing. In looking at your margins in general, do you expect that the price increases that you're putting in in wallboard, given the declines in gas, should basically accrue to the margins?

I believe that -- the one other impact that you have is that transportation cost continue to rise both rail and freight. So, even if natural gas prices are coming down, the price of oil has gone up, so there's probably an offset there between those two. But I can say that the majority of the price increases that we're achieving will accrue to the bottom-line.

And last quarter, you announced a $20 increase in MSF, but only realized, at least in your actual numbers, a $10 increase from 144 up to 155 roughly. This quarter you announced a $15 increase, should we expect that increase, based on your slide it seems that way, to fall straight in as you said inventories were low. So instead of 155 from last quarter, we should be able to see 168 - 170 in MSF on a reported basis?

I believe that to be true, yes.

Okay. And do you -- okay, that's fine, thank you.

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

Hi, guys. Congratulations. Can you, just to further on that last question, your present realized pricing in gypsum and cement is what presently?

We're in the low $90 price for cement right now. And clearly, there are some upward pricing momentum with some price increases that were put into effect in April. And some further price increases that have been announced for July. So there's clearly some more upward momentum in cement pricing. Wallboard in April, we believe, although we haven't closed the books yet, but based on our gross price, we believe we're going to be in that 165 to 170 range, maybe 168 for an April pricing for wallboard.

Great. Okay. And no further increase, but some might come?

That's correct.

Got you. And just an update on the capital programs as far as where do you stand as far as the greenfield [Woberg] plant and the expansions and/or redoes of some of the cement plants please?

The Illinois cement project is moving along quite nicely. We're really ahead of schedule and under budget, ready for a tie-in in the November time frame with a startup in December. And that will be, again, a really tremendous boost to the cement side of earnings potential for Eagle Materials next year. So this year, probably net out almost a wash between the production from the tie-in and the increased production in the fourth quarter of next year. But in fiscal 2008, it will be a huge benefit both in cost reduction and as far as increased margins on new sales as opposed to sales and reduced sales and purchase product in fiscal 2008. We broke ground in South Carolina on March 31st of this year and construction is moving along in the early stages. And we expect to be on schedule and have that plant up and in-line in the fall of 2007. We continue to work on permitting at our in Nevada and Mountain Cement expansion projects. That just is a matter of time before the permitting is in place and we'll be able to move forward with those projects.

Got you. And in your capital budget for this year that you laid out, does that include the beginning of those Nevada and Mountain plants?

it does not. It just includes finishing Illinois Cement and the wallboard plant in South Carolina.

Okay. And then, Steve, even with these large and high return capital programs, we're still under levered because of how well the Company is doing. What is outstanding on your share repurchase plan? and would you consider going back in the market now that we're done with certain of the corporate actions?

Well, we have 3 million shares, I believe, that are outstanding right now. But we do have a lot of large capital projects that are staring us in the face. We'll continue to look at our options and again, with a very strong earnings this year, we should be able to fund these capital projects out of cash flow from ongoing operations. We'll continue to look at what's best for our shareholder, whether it be returning cash back to the shareholders through a dividend increase or additional share repurchases.

Great. Okay. Thanks a lot.

Our next question comes from the line of Cliff Walsh of Sidoti & Co. Please proceed.

Good afternoon, everyone.

Hey, Cliff.

Can you talk about the cost per ton of cement in the quarter? It was up a little bit sequentially. And I was just curious as to how much of that was a result of lower volume versus higher electricity costs and maybe some other imput costs that have gone up.

A lot of it had to do with, again, an increase in our purchase cement. And I believe the impact of the purchase cement was around $1.50 increase in the cost. Power and fuel are another $3 increase this year, in this quarter verses last. And the maintenance increase was about $4, which was really a function of a lot of winter maintenance to the finish grinding systems.

Steve, was that year-over-year increases or was that quarter to quarter?

That was quarter -- I thought you asked for quarter.

I did, yes. Thank you.

And year-over-year it was a little bit more on the purchase cement, about $2.5 increase due to purchase cement. And maintenance costs were only about a $2 difference, year-over-year.

Okay. And you had mentioned that you were planning on doing some maintenance in June, in the June quarter. Why not do that in a slower period?

Generally, these things they cycle on an annual basis, so we take a major outage and/or a fractory in a cement kiln will last approximately 12 months. And so, you will build inventory during the winter quarters.

Okay. All right. Thank you very much, guys.

Our next question comes from the line of Josh Adam of GLG. Please proceed.

Hi. Just have a question on wallboard. Virtually every discussion that I've conducted recently with wallboard distributors has indicated that A, the entire country is on allocation, B, that allocations have been reduced not expanded. So it seems like supply is getting even tighter. C, and more importantly, when I questioned them on the amount of their demand that they're able to fulfill, they consistently indicate that it's somewhere between 70 and 80% depending on the region. And so my question really is, if you currently added, if the industry added 20% capacity, which obviously can occur for another 4 years or so at least in aggregate, everyone's obviously concerned about the housing market as it's been expressed on this call. But it seems like we're in such a significant deficit situation that even significant capacity additions, which obviously won't occur because we have good visibility over the next few years. It seems like it is going to be difficult to take industry capacity utilization below 90% any time in the foreseeable future. Do you have a perspective on that?

Currently the industry operating at maximum capacity, which, I believe, is just a little bit less than demand. We have some imports coming in, but the industry last year operated at about 36 billion square feet and the demand was about 36 billion square feet and change in that area. And so while there are -- might be some areas that are, people are saying they're short or short 20%, I think that might be just the fact that lead times have gotten out to three or four or five weeks, whereas before they used to be instantaneous deliver of wallboard. So I think that 20% right now seems to be overstated. However, wallboard has historically grown at a very high rate, somewhere between 3 and 4% annually. So if you take the 36 billion square feet and you think three to four year out, the industry can absorb a fair amount of new capacity.

And my follow-up question is just looking at exchange traded commodities, this year particularly the metals, it seems they have, in a lot of these situations, the deficit isn't as great as that of wallboard. And yet prices have gone up dramatically and some of it arguably is speculative activity. But I just wonder, even though it would be relatively unprecedented for the wallboard industry, now that massive consolidations has occurred and domestically 85% of capacity is provided by five players, all of which are seemingly right now rational. Is it possible that you could just accelerate price increases dramatically over the next year or two to the extent that utilization remains as high as it is and that the deficit situation persists over that period? And there's further negative weather conditions which cause further rebuilding activity, et cetera? I just wonder if there could be kind of a new paradigm in the wallboard industry with the deficit situation and significant consolidation that has occurred?.

Although there is consolidation, the fact that there is consolidation does not mean that there will not be a lot of new capacity added. And currently there is a fair amount of capacity that has been announced, including another capacity announcement I believe last week by National in the Arizona market. So while this industry does very well when supply is very tight. When it weakens down to the 90% level, pricing drops dramatically. And that while I don't foresee that in the coming fiscal year, two to three years out, if all of this new capacity that's been announced is actually built and if housing does recede somewhat, we will be back below 90% capacity utilization and pricing will again fall back to much lower levels than they currently are.

Okay.

Our next question comes from the line of Mitchell Williams of Oppenheimer Funds. Please proceed.

Hi, thanks, I just wanted to go back to the imports for a moment. Can you quantify what level of imports you're seeing in the marketplace? Is it something like 1% or 5% or 10%?

Pardon me, it's in the 1 to 2% level. And generally the quality remains pretty poor. Wallboard is not easy to transport like a bulk solid, like a cement, or a clinker, or a bauxite or steel. So it tends to have some breakage and a little excess waste when it comes in. But when there isn't any wallboard to be had, people will use it.

And as we get the price higher, it would seem that imports become more attractive and I'm just wondering do imports put some kind of lid on pricing or what is the breakeven point to where imports start to fill the marginal demand and kind of like make pricing level off?

Again, it's pretty difficult to bring quality wallboard across the ocean. You can bring some across, but it does have a high percentage of waste. So even though the front-end price looks really good when it gets there and you open the hull and there's a fair amount of waste because of the breakage, then it gets hard to justify even at this pricing level. The other issue that you have is in the U.S. the commercial wallboard requires a UL fire rating. And generally the wallboard produced overseas has not gone through the testing, so you're not able to use it in commercial construction. So there are a few issues, it's not as easy to import wallboard into the U.S. as it is other commodities.

When you talk about imports,are you distinguishing between Mexican and Canadian imports verses European imports?

I'm really talking about movement across the ocean.

Okay.

As by truck as across from Mexico or Canada. I think there's some import that comes in from Mexico. And I think in the Canada/U.S.,I think it's probably almost even the amount of imports and exports that come across or back and forth.

When I was looking at capacity add numbers, there were a couple of plants in Mexico and Canada that the people construction that were saying they were especially for exporting to the U.S. I am just wondering is that something that figures into your planning?

Yes, it does.

Okay, fair enough. Thanks.

Our next question comes from the line of Daniel Lawrence of Citadel Investments. Please proceed.

Good afternoon. Congratulations on a good quarter.

Thank you.

Hello, can you hear me?

Yes, we can.

Oh, sorry. Going back to the dynamics of the wallboard market, can you give us a sense as to when you would expect your customers no longer to be on allocation?

At the present no, things are very, very tight and going to get tighter as the summer construction really starts to kick off here in the next month or two.

When would you see that allocation dynamics start to shift? Is that more of an '07 event? Calendar '07.

Calendar '07, which would be our fiscal '08, that would be true if we see a significant drop in housing starts.

Okay. Okay. Now, in speaking with some of the distributors and, obviously, it's a market by market, they've said that they've received some verbal notifications about price increases in wallboard coming in the summer. I was just curious if you had notified any of your customers or you heard of competitors doing so and what would be the magnitude of those increases?

Really, there's nothing been formally announced, it's just rumors that are out there. So it's really hard for me to substantiate that.

Okay. And then finally with regards to the earlier fiscal year guidance you guys had provided back in February, what price increases in cement and wallboard, if you can remind us, were included in that?

Really, it was kind of pricing at the time and pricing at the time for wallboard was around $155 level. For cement it was down around the mid 80, 85 to $86 level. So pricing has obviously improved dramatically in both of those business line, with potential further price increases later on this year.

Right. And with regards to your earlier comments, when do you expect to update full year fiscal guidance?

Next quarter.

At the end of -- okay. Great, thank you very much.

Our next question is a follow-up question from David MacGregor of Longbow Research. Please proceed.

Yes, thanks. The maintenance costs in the first quarter. Can you quantify those for us?

In the first quarter of this year.

You mentioned you had a number of maintenance programs going on. I was just wondering if you could quantify the P&L impact of that.

Yeah. It's -- P&L impact. You're talking about the fourth quarter, just -- David?

I think he's talking about the first quarterer.

The quarter that's coming up.

I don't have the budget in front of me.

We don't have those numbers in front of us, David.

Would they be fairly typical, could you give us a sense of what they would be last year?

I believe they'd be fairly typical and potentially better than actual last year. Last year we had some higher maintenance costs than we normally have in the first quarter. You don't have those numbers with you? I do not have them with me. Can I follow-up with you later on that? You certainly may.

And then on the pricing increases that are rumored for this summer, how much lead time would typically be involved with an announcement? Would it be about six weeks? If you were going to produce a price increase on July 1st, when would you be communicating that to your customers?

In cement the price increases are already out. So there's a letter for -- .

Talking wallboard here, I guess.

In wallboard, it's in about a month. A month to slightly less than a month, usually when you announce the increase and actually implement it.

Okay. Good. Thanks very much.

Our next question comes from the line of John of Fidelity. Please proceed.

Yeah, hi, thanks. Just going back to the sort of cost per ton of cement. I was wondering if you could help me understand the puts and takes again for the fourth quarter of '06 versus the year ago period. It looks like to me, there's about a $10 per ton increase in costs, and I think you mentioned that maintenance was two year over year, and purchase cement was 2.5. I don't think you mentioned what power was. What might account for the other $5.50, thanks.

I think on the quarter, it's about $8.5 and 4.00 of it was maintenance. And between fuel and power that was about $3.00 and then $1.5 for the purchase cement. That was the put and take on the quarter-over-quarter.

Year over year?

In the year-over-year it was about 2 in maintenance, 2.5 in purchase cement, and again about about 2 in fuel and power. And the rest a function of --

$1.50 in overhead and insurance and things like that.

Okay. Do you happen to have the average cost of natural gas in the quarter? As well as the year ago period?

For the year our average cost in wallboard for natural gas was about $8.30. For the quarter it's going to be about $9. And currently for this current year, we're about 30% hedged at about the $8.30 level.

Okay, great, thank you.

Our next question is a follow-up question from Barbara Allen at Avondale Partners. Please proceed.

You just answered my question. It was about natural gas hedging. But I did want to see if I remember this correctly, but it seems like the last big cycle that we had in wallboard, the industry was very consolidated then too. As I recall there were five companies that had maybe 80% 85% of capacity. Do I remember that correctly?

I think that's very close. I think there might have been one or two extra, but it was still fairly consolidated.

Yeah. So it's the capacity additions and whether they come on over a longer period of time as it looks like they're going to do this time, spread out over about three years as opposed to 12 to 18 months the last time.

That's correct.

Thank you.

Our next question comes from the line of Alan Mitrani of Sylvan Lake Asset Management.. Please proceed.

Hi, again on the natural gas. Just want to be clear, you spent $8.30 roughly for natural gas, that's in fiscal year '06, correct?

That's correct.

And then for the quarter you were talking about this past quarter you just spent $9 roughly?

I believe so.

And do you have an expectation of what your costs will be this coming quarter?

I don't have those numbers in front of me right now.

Okay. Is your thought process. Obviously you're getting price increases in this product, significant ones over last year, and your input cost seems to go -- natural gas has been relatively weak over the last six months from where it peaked. Can you talk about your thought process about maybe hedging more than 30%?

Again, if you look out in the -- for the next month or two, natural gas prices look pretty good, but if you look out six to nine months or even then you look out a year beyond that, 18 months out hedging doesn't look to be a very good bet at this point.

Okay, but your price increases are more than making up for it, obviously, given that your margins are going up significantly?

That's correct.

And also, besides the capital improvements that you're talking about in capital expansions, have you thought anymore about M&A in terms of any of your segments?

We're always looking, it's just when business is good, opportunities are usually not available, which is the current condition.

Okay. Everybody seems to be focusing, besides on what's going to lie out in fiscal year '08, but it seems like there's some confusion relative to your guidance, your previous numbers, and why you didn't update your guidance this quarter given how high prices are going. Can you just maybe give us your sense as to why you didn't talk about that now and why you prefer to wait a quarter?

Again, the real reason was last year we tried to do that at this point in time. We had given guidance a quarter earlier for the year. And really at the time we gave the guidance we felt it was pretty good guidance. At the end of the year, the guidance we gave a year ago at this time was 35% lower than what actually occurred. So this year, rather than get into that same issue, I chose not to give guidance this early in the year. Clearly I believe there is business conditions have improved from where they were when we gave guidance in January, but I'll reiterate, we still do not have any information as to any financial information as to this current fiscal year with some unknown price increases that are going to go into effect throughout the year. Which would more than likely lead to me giving guidance lower than should be expected for the coming year. So I believe that at the end of the next quarter we should be far enough into the seasonal business cycle to be able to give much better guidance for fiscal '07.

Okay. For what it's worth, there's nothing wrong with sort of telling it like you see it and then if you're too low, you update it later based on -- there's nothing wrong with guidance that turns out to be too low. And if situations change, you could always update that. It's neither here nor there. I appreciate you help and your insights. Thanks.

Mr. Rowley, there are no further questions at this time, I would like to turn the presentation back to you.

Thank you and I look forward to talking 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.