Eagle Materials Inc (EXP) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Financial Results First Quarter Fiscal Year 2007 conference call.

During the presentation, all participants will be in a listen-only mode.

Afterwards, we will conduct a question and answer session.

At that time, if you do have a question, please press the 1 followed by the 4 on your telephone.

If at any time during the conference you need to reach an Operator, just press the * followed by the 0.

As a reminder, this conference is being recorded Tuesday, July 25, 2006.

It is now my pleasure to turn the conference over to Mr. Steve Rowley, President and CEO.

Please go ahead, sir.

Thank you and welcome to Eagle Material's conference call for the first quarter of fiscal year 2007.

Joining me today are Art Zunker, our SVP and CFO, Craig Kesler, our VP Investor Relations and Corporate Development and Jim Graass, Executive VP and General Counsel.

There will be a slide presentation made in connection with this call.

To access it, please go to www.eaglematerials.com and click on the link to the webcast.

While you're accessing the slides, please note that the first slide covers our cautionary disclosure regarding forward-looking statements made during this call.

These statements are subject to risk and uncertainties that could cause results to differ from those discussed during the call.

For further information, please refer to this disclosure which is also included at the end of our press release.

Despite a softening of residential construction in some U.S. markets, Eagle's regional sales opportunities have remained very strong, allowing Eagle to set record highs for first quarter revenues and operating earnings.

The increases were driven by record sales volumes in wallboard and cement combined with record high wallboard and cement prices.

During the first quarter of fiscal 2007, we generated $88 million cash flow from operations, a 60% increase from the same period a year ago.

The cash was utilized to fund $39 million in capital expenditures, primarily directed towards our Illinois cement expansion and construction of our new wallboard plant in South Carolina.

As of June 30, 2006, our net debt to capitalization ratio was 17% compared to 24% as of March 31, 2006.

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

We remain confident that demand will remain high and supply tight in our wallboard market and cement markets during the current fiscal year.

Eagle's wallboard revenues increased dramatically in the first quarter because of price increases successfully implemented throughout 2005 and early 2006.

The industry is currently operating near rated capacity and Eagle's first quarter sales volumes were a record high for the company.

Record U.S. industry wallboard demand combined with particularly strong regional demand close to our plants helped our low cost wallboard operations generate record margins producing a 130% increase in our quarterly operating earnings comparative.

This graph illustrates the current strength of the U.S. wallboard industry.

The industry successfully implemented a price increase in June which has increased Eagle's current average net sales price to near $180.00 per MSF.

For reference, a $10.00 per MSF increase in wallboard margins equals approximately a $0.35 increase in Eagle's annual EPS.

First quarter cement consumption remains strong in all of Eagle's markets requiring increased low margin purchased product to meet the very strong regional demand.

Eagle's cement earnings have improved because price increases have outpaced the impact of higher cost purchased cement and higher energy costs.

Our $91.00 per ton mill net is a record high quarterly price for Eagle Materials.

Demand for cement remains at a record level with imports projected to fill over 30% of the U.S. construction industry demand this year.

Our paper business experienced a 15% decline in their operating earnings this quarter compared to the quarter a year ago.

The decline is due to a higher percentage of sales of a low margin container board paper and a quarter to quarter shift in maintenance expenditures.

Our concrete and aggregate volumes decreased from the prior year's first quarter because of unseasonably wet weather in northern California while our operating earnings increased primarily because of improved pricing.

Art?

Thank you, Steve.

We are issuing guidance for the second quarter fiscal 2007 based on our internally re-forecasted cost, volume and prices.

We anticipate our second quarter diluted EPS to range between $1.30 and $1.40 per diluted share.

For fiscal 2007, we estimate that our diluted EPS will range between $4.40 and $4.70 per diluted share.

Strong wallboard and cement industry fundamentals have given Eagle Materials, increased confidence in fiscal 2007 prosperity.

Thank you for attending today's call.

We will now move to the question and answer session.

Tommy?

Thank you very much.

Ladies and gentlemen, if you would like to register for a question, please press the 1 followed by the 4 on your telephone.

You will hear a three tone prompt acknowledging your request.

If your question has been answered and you would like to withdraw your request, press the 1 followed by the 3.

If you are using a speakerphone, please lift your handset when entering your request.

One moment please for the first question.

And our first question comes from the line of Mr. David MacGregor of the Longbow Research.

Please go ahead, sir.

Hi, good morning.

This is Garik Schmoism [inaudible] in for David.

Nice quarter, guys.

Can you just elaborate a little bit more on what you're seeing in residential construction in your wallboard and markets?

Yes, we've experienced particularly strong demand in what we call the Southwest region which would be the middle part of the country, the Texas area and surrounding states.

However, California is slowing somewhat.

We don't really participate in the Northeast but I understand things are slowing somewhat in the Northeast but overall, demand for the month of June was at a record pace.

The industry shipped 151 million square feet of wallboard a day which is at a record pace for the industry so even though there are some areas that are softening, on a whole, the demand for wallboard remains at a record level in the U.S.

Okay, and on the flipside, what are your expectations regarding commercial construction maybe for the second half of the year?

Commercial construction remains strong.

All the indicators are that commercial construction is really buoying up the demand for wallboard.

Steel stud manufacturers are reporting very strong pricing and a shortage of product throughout the summer.

Our percentage of 5/8 versus 1/2 inch is shifting more towards the 5/8 or the commercial grade wallboard so all indications are that very strong commercial construction is supporting strong wallboard demand.

Okay and just lastly, I noticed that cement volumes grew 1% which is a little bit down from prior quarters.

Is that largely due to northern California's slow downs or is there something else that is going on there?

We continue to sell out our manufactured product so it's really a function of our purchased product and the amount of purchased product that we're able to bring in though we sold quite a bit more, I think the percentage was almost 50% greater.

We just sold less manufactured product, actually reduced inventory for the quarter, so it was really just a function of how much imports that we were able to bring in.

Okay, great.

Thanks a lot.

Thank you, and our next question comes from the line of Jack Kasprzak of BB&T Capital Markets.

Please proceed with your question.

Thanks, good morning.

I'm struck by the level of confidence and you guys use the word confidence in your outlook.

There's obviously a lot of fear about the housing market and how it might transpire over the next few quarters.

What bolsters your confidence at this point in the face of indications that there is a slow down in housing that should continue to unfold, I suppose and is there a level of housing starts below which your outlook for overall wallboard demand might shift?

Well, housing starts really since April have been around on a seasonal adjuted average about 1.85 million so we have started to see the impact of reduced housing and I think last month it was about the same level so we have really started to experience that impact.

If housing drops below 1.85 million starts then there might be some other impact but so far, commercial constructin and repair and remodel demand has picked up the pace we're confident right now that demand still remains very tight.

There's not a lot of new capacity coming on in the industry, if any this year, marginal or a very small amount that will come on in calendar year 2007 and we still have imports coming in to the U.S. in the 1 to 2% range, so even if there is somewhat of a softening, we will see that demand for wallboard or capacity utilization, will remain well above 90% which is a very, very strong industry and pricing perspective for the industry with that type of demand.

So I guess that's an interesting point.

If 1% to 2% of demand are imports and the industries have basically sold out, customers are still somewhat on allocation, you can withstand or absorb some modest percentage of new capacity.

Would you think it would be four or 5% that the industry could pretty readily absorb through declining imports, getting rid of imports and modest reductions in utilization rates without changing the pricing picture?

I think pricing clearly with capacity utilization in the mid-90s is very strong and we're really above that right now and pricing remains strong until you start going somewhat below that 90% capacity utilization so it's at least a 10% or 11%, 12% swing in supply and demand before we see any major impact to pricing.

That's great and on the subject of cement, you mentioned in the press release there's already a $10.00 a ton price increase announced for January '07 by at least some people, some players in the industry.

I wonder if you could talk about imports right now, cement imports, are they any easier or any difficult to get right now or more expensive?

I think freight rates might be up some.

That seems to be a key toward dictating what future cement pricing might be.

Our year over year cost of purchase cement is up about $11.00 so the price of imports has definitely gone up and that has bolstered cement pricing in the U.S.

I do not see those prices going down in the immediate term therefore our cement business looks very strong for us.

In the first half of the year, this first five months, cement imports in the U.S. have been almost at a pace that would be 40 million tons plus imports into the U.S.

I do believe that might drop off a little bit in the last half of the year as that is dramatically more than was imported into the U.S. last year.

Okay, great.

Thank you very much.

Thank you.

Ladies and gentlemen, as a reminder, to register for a question, please press the 1 followed by the 4 on your telephone.

Our next question comes from the line of Mr. Jim Barrett, CL King and associates.

Please proceed with your question.

Actually my question was just answered, thanks.

Thank you and our next question comes from Mr. Michael Corelli of Barry Vogel and Associates.

Please proceed with your question.

Hi, good morning.

Good morning.

Were there any share re-purchases in the quarter?

There were no share re-purchases this quarter.

Okay, considering the company's confidence in this year's earning guidance and construction activity, etcetera and the significant decline of the share price, what is the attitude towards the share re-purchase?

We continue to look at what is the best option.

We continue to look at share re-purchases, dividends, as well as some acquisition opportunities as to what is the best use of our cash for shareholders.

We'll continue to look at that in the next quarter and we have three million shares authorized for re-purchase and as we move forward into this quarter, we'll take a look at the share price and make the best decision possible in the quarter.

Okay, thanks.

Thank you, and our next question comes from the line of Mr. Cliff Greenberg of Baron Capital.

Please proceed with your question.

Congratulations on terrific results.

Could you just review Steve, what the June pricing in both your wallboard and cement businesses was as opposed to the quarterly and one more time, what increases off those June prices are expected in different markets based on announced wallboard and cement price increases?

Sure.

The June price in wallboard was about $170.00.

Currently we're closer to $180.00 after the June wallboard price increase so we expect July to be somewhere from $178.00 to $180.00 mill net in July.

Cement -- the price was about $91.00.

We believe that in July it will be up slightly, $91.50 to $92.00, in that range and going forward, not only do we have price increases announced in three of our markets, large ones, between $10.00 to $12.00 in January, we have some price increases currently going into effect in Texas and Wyoming as well as some other price increases announced in the northern California, northern Nevada market for the fall.

Thank you very much, and our next question comes from the line of Mr. Jonathan Goldberg, Highland Capital Management.

Please proceed with your question.

Hi, good morning.

Just had a quick question about your aggregates division.

It looked like volumes came off a bit and I was just wondering if you could comment on that and also likewise, it looked like your pricing has been pretty strong in that business.

I'm wondering if you could talk about that dynamic and whether you've put through additional mid-year price increases or announced anything for '07 yet.

Sure.

The volumes are off primarily because of all the wet weather that occurred in February, March and April in northern California and then it just took awhile to get going in this quarter so the real reason for volumes being down is strictly weather in northern California.

Prices however, are very strong and we're seeing another $0.50 to $1.00 increase in sand and asphalt rock in northern California as well as about another $0.40 increase later this summer or fall in the Texas market in aggregates.

And just given the bad weather you've been seeing, or you did see rather, in California, are you seeing some kind of demand pickup there?

I mean, do you expect volumes to kind of rebound sharply in the coming quarters or what is your outlook on that then?

Yes, that's absolutely correct.

The June shipments were very high and we anticipate shipments to improve and during that rainy period we were able to build some inventory so we do have some inventory to sell as demand rebounds.

Great, thank you.

Thank you very much and our next question comes from the line of Mr. Cliff Walsh, Sidoti and Company.

Please proceed with your question.

Can you comment a little bit on the cement cost in the quarter?

I was expecting to see a little bit more leverage there.

You know, your cost per ton was up sequentially but you had significantly more volume so can you talk maybe about the cost pressures you're seeing on the cement side from energy and maybe other areas?

90% of the manufactured cost increase was related to either fuel, coal or coke, and electricity.

The blended cost was up about $6.36 per ton and that is because of a greater percentage and a higher cost of purchase product which went up about $11.00 per ton on a quarter to quarter comparison so roughly half of it was the impact of purchase product and the other $3.00, 90% of that was fuel and electricity.

Okay, great, and on the flip side, paper board costs were down.

Any thoughts on the driver there?

Part of the driver for paper board costs, which I think were nearly flat in total, was the fact that cost of fiber was down although it came up in June so I would expect fiber costs to increase on the order of $10.00 to $15.00 per ton in the next quarter.

The real impact there again was a higher percentage of container board sales into the market and those container board sales were about again, 9% to 10% higher than last year.

Okay, great.

Thanks, guys.

Thank you very much, and our next question comes from the line of Mr. Mike Betts, JP Morgan.

Please proceed with your question.

Yes, good morning.

I had a couple of questions if I could, please.

The first one was just on wallboard prices.

I mean, obviously we've had the June price increase.

Is there any talk of a further price increase at this stage and then secondly, just to clarify on the $10.00 price increase in cement from January 1.

Has that, I mean, does that apply to all your main areas and has that generally been followed by all the majors at this stage or are we still awaiting developments on that?

I remember a year ago that Cemex also announced a price increase for mid-year as well as the following year.

Has anybody done that yet?

Thank you.

Sure.

Your first question again was wallboard?

Yes, please.

And future price increase in wallboard -- the answer is at this point in time, there is not even a rumor but we just increased less than a month ago the last price increase so as far as wallboard is concerned, right now, there is absolutely no indication of any further price increases.

On the cement price, almost all of our markets have shown a $10.00 to $12.00 per ton price letter by one of the majors, either Cemex or Holcim in three of our four markets and the price increase a year ago for mid-summer, some of that is holding in a couple of our markets so we're seeing that in the Texas and in the Colorado markets right now.

And Cemex has not done the same this year by announcing an increase for the middle of the next summer at this early stage?

They have not.

Thank you very much.

Thank you.

Mr. Rowley, there are no further questions at this time.

I will now turn the call back to you.

Thank you for attending today's call.

We look forward to next quarter.

Thank you very much.

Ladies and gentlemen, that does conclude the conference call for today.

We thank you for your participation.

We ask that you disconnect the line.

Have a great day.