Eagle Materials Inc (EXP) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Eagle Materials financial results for the third-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. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded Thursday, February 1, 2007.

I would now like to turn the conference over to Steve Rowley, President and Chief Executive Officer of Eagle Materials.

Please go ahead, sir.

Thank you and welcome to Eagle Materials' conference call for the third quarter of fiscal year 2007.

Joining me today are Art Zunker, our Senior Vice President and CFO;

Craig Kesler, our Vice President of Investor Relations and Corporate Development and Jim Graass, Executive Vice President 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 are 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 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.

Despite a severe decline in residential construction in most U.S. markets, more favorable regional sales opportunities allowed Eagle to set record highs for third-quarter revenues and operating earnings.

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

During the first nine months of fiscal 2007, we generated approximately $208 million in cash flow from operations, a 27% increase from the same period a year ago.

Cash has been utilized to fund approximately $100 million towards our major capital expenditure projects, our Illinois Cement expansion and construction of our new wallboard plant in South Carolina.

In addition, approximately $100 million was utilized for share repurchases and dividends.

As of December 31, 2006, our net debt to cap ratio was 21% compared to 24% as of March 31, 2006.

During the quarter, we repurchased approximately 780,000 shares of Eagle stock at an average price of $32.52 per share.

While total U.S. construction spending is up approximately 5% through November, new residential construction has declined dramatically from 2005's record levels.

The outlook for early 2007 residential construction looks to remain near current levels based on building permits, which are typically a better proxy this time of year for near-term trends because of inconsistent winter weather.

This graph shows that commercial and industrial construction continues to improve and looking forward, near-term outlook looks even better.

Although wallboard volumes and prices have declined since July, the current wallboard business condition has allowed Eagle to continue to enjoy high wallboard margins in the third quarter.

Our quarterly wallboard earnings increased approximately 7% compared to the prior year, primarily because of increased comparative wallboard pricing and lower natural gas prices, offset by lower sales volumes and increased maintenance spending.

As this chart shows, wallboard net sales prices are trending down.

For the quarter, Eagle averaged $160 per thousand and in December, our average price was $154 per MSF.

Eagle's third-quarter cement sales volume was strong in all of our markets.

Our third-quarter revenue increase was associated with both price and volume improvements of 13% and 5% respectively.

However, poor regional weather in January has negatively impacted cement sales volumes, increased inventories and delayed announced price increases.

As anticipated, this year's third-quarter cement operating earnings were negatively impacted by approximately $8.5 million associated with the shutdown and startup of our modernized Illinois Cement plant.

The Illinois Cement expansion was completed on time, under budget and is now fully operational at its rated capacity of 3000 tons per day of clinker.

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

Our $94 per ton mill net is a record quarterly high price for Eagle Materials.

Our paperboard earnings increased 19% during this quarter compared to a year ago, primarily because we enjoyed much lower natural gas prices during this year's third quarter.

Our concrete volumes, prices and earnings improved primarily because of strong market conditions in Austin, Texas and while we saw a slight reduction in our aggregate volumes, construction activity remained strong in both of our aggregate markets.

Our 227% increase in operating earnings was driven by higher margins as a result of improved pricing in the marketplace.

Art?

Thank you, Steve.

We are issuing guidance for the fourth quarter of fiscal 2007 based on our currently re-forecasted cost, volumes and prices.

We anticipate our fourth-quarter diluted EPS to range between $0.55 and $0.65 per diluted share.

Thank you for attending today's call.

We will now move to the question-and-answer session.

(OPERATOR INSTRUCTIONS).

David MacGregor.

This is Garik Shmois in for David MacGregor.

First off, can you tell us where wallboard prices are right now here at the end of January?

Yes, we just now -- January finished yesterday.

We can tell the prices are continuing to decline.

The rate of decline is about the same as it has been throughout the last three months, but we really -- it is too hard for us to come up with a real number.

We haven't even closed the books yet.

The rate of decline is pretty similar and that is pretty helpful.

And is there a general thought as to when prices might stabilize?

I think it is still way too early to tell.

The industry with the weather that we have had this winter, the industry is operating at about 80% capacity utilization.

Believe that next year on average that is going to pick back up once the weather gets a little better to about 85% capacity utilization.

But until we get through this really -- it has been a pretty severe winter, it is just a little too early to tell.

And just lastly, can you talk about the January cement price increases a little bit more?

What markets you are able to pass along any increase if any and where the delays are occurring?

The delays are really occurring in almost all of our markets and we have had a few contracts that we are able to get some increases from some contracts that we have put in place.

The escalators came due on January 1.

But with that exception, the weather in all of our markets has really delayed the price increases, all of them.

Clyde Lewis, Citigroup.

A couple of questions if I may.

One maybe follow-on in terms of the pricing comments, whether you can say a little bit about aggregates and concrete.

The industry I think has posted price rises in aggregates in a number of markets and I am just wondering what sort of expectation you've got for this year in terms of pricing from a calendar perspective as opposed to your financial year.

The second question going back to wallboard and also cement.

Wallboard, have you done anything to sort of cut back on your capacity yourselves?

Are you taking shifts out or is it literally the case of maybe just producing a little bit less from each of the shifts that you have got running?

Third question on cement, I think you mentioned weather as being the problem.

Is it just whether you think in terms of the prices going through or do you think it is actually down to maybe softer demand in one or two markets in terms of being able to push through those price rises?

Sure.

The first question again?

The first question again was on aggregate price rises.

Just wondered -- can you say a little bit more about what you are expecting to see this year?

We clearly believe that the aggregate price increases, which are really more of an April timeframe, they look very solid in both of our markets.

So we are pretty comfortable that we are going to get an aggregate price increase of at least about 10% in both of those markets.

So we feel real good about aggregate price increases.

As far as wallboard capacity, we are currently operating with three shifts.

Three shifts would be three shifts plus overtime allows us to operate near that 80% or even with a lot of overtime closer to 85% capacity utilization.

So we have cut back on capacity by going to three shift operations in all of our plants.

And really we believe that in our markets weather is the predominant reason for price delays.

We still see a lot of pent-up demand.

So once the weather breaks, we are pretty confident that we are going to get these price increases.

Some other markets that we are not in are much more heavily influenced by new residential construction, but fortunately the cement markets that we are in are not seeing that same dramatic reduction of cement consumption based on a greater dependence on new residential.

Bill Baldwin, Baldwin Anthony Securities.

Just going to ask -- can you offer color as to what percent of your cost of goods is your energy costs, your gas costs and things like that in your wallboard operation, in your wallboard manufacturing operation?

It is about 20% and we did have a little reduction this quarter and quarter-over-quarter of about $6 per thousand because of the lower natural gas prices.

Do you generally secure your natural gas just, what, on the spot market or do you enter into long-term contracts?

We take a conservative approach.

Currently, we have about 20% hedged for this calendar year at about $7.50.

So we don't hedge at all.

We hedge pieces where we think it makes sense for certain of our plants, but for the most part, that is as much hedging as we will do.

(OPERATOR INSTRUCTIONS).

William Vogel, TRT, LLC.

Could you give a little color on the Northern California aggregates operation and whether that was something that was isolated to the quarter or something that is ongoing and whether it was the end market there or just your own operation?

Northern California was down a little bit this quarter, but currently in January, we actually had a pretty strong January.

So the weather that is related to -- sometimes you get some delays to construction from weather that occurred two or three months earlier or whatnot.

But in fact, we have seen a pretty strong rebound in January in our sale volumes in Northern California.

So it was really end-market-related, not operationally-related?

That's correct.

[Bob Sales], LMT Capital Management.

A couple questions.

Given the difficult weather in the quarter Q4 currently that we are into, the other side of it, do you think you saw benefits in the December quarter?

Prior to this cold snap and the snow hitting all over, it seemed like it was a pretty -- an awful warm Q3?

Clearly on the cement side, we had very strong sales volumes in Q3 because we did have milder weather during Q3.

And then with respect to wallboard pricing, two questions.

One is what are your expectations for the additional supply that will hit the market through yours and other plant expansion?

If you had to look into the crystal ball and think about where pricing ends up in this cycle, what do you think that is?

You know that is a little difficult to tell, but I will give some color on what I believe the volume impacts are.

I truly believe that next year we are going to average about 85% capacity utilization.

I think the demand is going to go down to somewhere between 32 billion and 33 billion square foot.

But then when you look at the new capacity, you have to really look at it as a weighted average as to when the new capacity comes online.

You also have to understand that a wallboard plant starts up a little different than the cement plant.

We just announced that we just finished construction and on a month's period, we are at full capacity.

Wallboard, once you finish construction, really takes three to four months before it becomes fully operational and you start making salable products.

There's just a lot of fine-tuning that goes into the process of building and commissioning a new wallboard plant.

So I still believe that on a weighted average in 2007, it is going to be somewhere about 1 billion square feet of new capacity that will really enter the market and also, we have seen some announced closures of some capacity already.

So net on net, I believe we will be in the mid-80s, which is not a terribly difficult market in wallboard.

It could be better, but it is not terribly difficult.

And going forward the following year, somewhere around, as I mentioned in the last conference call, about the same thing on a weighted average, about 2.5 billion to 3 billion feet come on and then the following year, about another billion foot of capacity comes on.

So this stuff is still pushed out a ways before you will really see the impact.

To try to guess at the pricing two to three years out, we really have to guess at what is going to happen to new residential two to three years out, way too early to try to predict that.

Right.

But is your expectation that this cycle finds a supply/demand balance within the calendar '07 or would you guess it is more within calendar '08?

If housing rebounds during the last half of calendar '07, then I think we're going to find a balance in '07.

If housing doesn't rebound in '07 and we are sitting here today looking at housing next year at the same way we are looking at it today then it would occur in '08.

John Lynch, Lynch Research.

A couple of things in terms of the cement marketplace.

Is there any significant difficulty in getting import cement in now and freight rates, are they becoming a hindrance?

There's not necessarily difficulty in getting cement in, but it is very, very expensive.

Prices have gone up even more dramatic than they were last year.

So the import costs coming into the U.S. are very high and margins on imports are likely to be very small if any unless we get the announced price increases.

And as a matter of policy, you do try to supply your customers rather than let somebody else do it?

As we have announced these capacity expansions, absolutely.

So we will maintain a certain market presence because we know that once these new plants are modernized and come up online, we want to have a strong customer base for our new, very capital-expensive expansions that we are currently in the process of putting in.

That leads me into the next one.

What in fact is the status of the Nevada new plant?

We continue to work and develop that project and we have not received our permit to construct.

We anticipate to get that hopefully in this next quarter, but the design and the rest of the development is pretty well thoroughly complete, but we have not finalized a contract or we have not received our permit yet.

And from the contract signing, are we, what, two years out before you see product?

That is correct.

And are you planning what you're going to do with the old site yet?

Right now we are contemplating modernizing on the existing location and so we are going to -- our capacity right now would he on the existing plant site.

Oh.

I thought you were pretty much limited by building around you.

No, that is not the case.

What is happening in that reserve of aggregates near Sacramento?

We continue to look at trying to develop that into a market much greater than the current local trucking market.

Our goal remains to finally have a rail link sometime in the future to take those aggregates into the Bay area.

The last time I thought about this, it seemed to me that your competition wanted you to build them a rail link too.

I don't recall that, but this has been a very long process.

So I'm sure that somewhere along the line that was contemplated.

Well you are doing nicely and I guess maybe the combination of product proves out better at a time like this because the gypsum throw-off of profits is very rapid, very quick when it moves and when it comes down, it is rather quick too.

So cement is much more stable I would think.

Thank you.

David Sachs, [Hocky Capital].

Could you just refresh the timeline for the capacity expansions, when they should be coming on and then just address the profit impact in this current quarter from the cement plant close and restart as to whether we should expect to see similar costs or expenses in quarters at other cement capacities coming on?

Nevada Cement -- we're going to start that.

Our planned construction start would be late spring, early summer and then that's let's say 18 months beyond that point before we will start up.

At Nevada Cement, it's not necessarily a tie-in as most of the new capacity will be separate from the existing equipment, which will be idled.

So therefore, we won't have near the disruption as we did tying into an existing operating unit at Illinois Cement.

Very similar at Mountain Cement.

Once those projects are put online, we will not see the same type of disruption when they are starting off, when it is started up.

Okay.

And secondly, if you could discuss in sort of a macro sense as the downcycle in wallboard is occurring now in pricing, we have got roughly half as many competitors in the market.

How would you contrast or compare this current cycle versus say the cycle that predated it when there were 13 or 14 manufacturers?

The pricing decline has been at a rate of about half of what it was during the last downcycle.

And is that -- from the way you are looking at it in terms of production volumes, it seems like the industry, we listened to USG's call a couple days ago, they too have been moderating capacity, taking downtime for low-end workers.

Is that representative of what the industry is doing as you have heard?

Are most people producing to demand as opposed to producing to capacity?

That is absolutely the case and of course there is a reason for that.

The industry and then the distribution there is very little inventory.

So that is one reason for the volatility in this industry as well.

You reach a point where your warehouse is full, the distribution warehouses are full and there is no place to put it.

So you are forced to go to this type of utilization.

Michael Corelli, Barry Vogel & Associates.

Just a question about cement capacity coming online.

Obviously, there has been a lot of talk about wallboard.

Could you tell us besides yourselves what else is planned in the industry?

Yes, this year, there is not a lot of capacity that has come.

There are a lot of projects that are just starting, the construction is starting.

So for this calendar year, I would not anticipate a lot of capacity.

It has really been the following calendar year that we're going to start to see some capacity come online.

There will be a plant that will come online that will impact Eagle in the Denver market that will be a plant that will come online probably late next year that will impact Texas, the Texas market.

I think there is another plant that has started that would be almost two years out that would impact the Illinois Cement operation somewhat, but almost a waterfall effect from a distant [river] plant.

All right.

Could you tell us what the size of these additions are going to be?

The addition in the Denver market is about 1 million tons of capacity.

The addition in the Texas market is also about 1 million tons of capacity.

The first plant that is coming online on the [river] system is about 1.5 million to 2 million tons of capacity and then the Holcim plant, which will come online, I think that is a very large plant, a longer scale construction, that is at almost 4 million tons of capacity is going to come online about three years out, two and a half to three years out.

All right.

So it sounds like it is a while away, but it does sound like there is a reasonable amount of capacity that could be coming into the market within the next few years.

That is correct, but again cement is more of a regional business as opposed to a national business and there is a lot of imports that will be displaced when that capacity comes online.

Cliff Greenberg, Baron Capital.

Happy new year and all.

Could you just review the amount of money you have left to spend on the wallboard plant in the two new cement additions once we get going and the timeframe for when that comes on?

And then just give a little -- you explained what you have done with your cash flow so far year-to-date on a go-forward basis.

How do you expect to use your cash flow outside of what is needed for this capital plan?

I think we still have -- in the wallboard plant, we are going to spend about another $40 million or $50 million this year followed by another $40 million in the following -- in next fiscal year, which will complete that project.

Illinois Cement is essentially finished and Nevada Cement will be $100 million next year and $100 million the following year.

And then the Mountain Cement projects are a year out and beyond that, about $100 million in '09 and another $20 million to $30 million in '10 or FY '10.

Right.

And the timeframe to when they cut on?

When does the wallboard plant come on, Steve?

The wallboard plant will be -- we will be starting it up about this time next year and as I mentioned earlier, it takes about three months to really work the bugs out before we really make a salable product.

So we can say that we will really be in production, full production of making salable product at the beginning of fiscal '09.

And then your thoughts as far as continued -- what -- are we continuing the policy of share buyback or what are we doing with available cash flow?

Even spending this capital, you will still be underlevered I would imagine.

You are absolutely correct.

We still have plenty of cash and we continue to look at what are our best options.

Obviously we continue to look at share repurchases, dividends, also look at some acquisition opportunities and we are obviously going to do what is best -- yield the best return for our shareholders.

During this next quarter, we will continue to look at -- we have about 6 million shares authorized for repurchase and as we move forward, we will take a look at the share price and make our best decision possible.

And while I do not fully understand nor do I like the volatility of our stock price during the last nine months in repurchasing stock, I must at least contemplate this volatility even though our current stock prices currently are one heck of a bargain.

Alan Mitrani, Silver Lake Asset Management.

Actually I just was looking for -- I think you just answered it with Cliff -- what the capital spending plans were going to be.

Are there any changes to your capital spending plan over the next couple of years?

No, there is not.

Bob Sales, LMK Capital Management.

Can you help us understand in the cement business if we were to look at '06 versus '07, how would demand between residential commercial and infrastructure, or roads I guess, break down in '06 and how do you expect, in this calendar year '06 versus calendar year '07, given the drop-off in residential?

We will -- in general, if you look at on a national basis when you get the data from the Portland Cement Association, the [bottom] of about 50% public infrastructure and about 25% new residential and 20% to 25% commercial.

Those are kind of general numbers for the nation as a whole.

If residential is off a little bit, it might go down to the 20% level and the commercial might come up.

We would anticipate that coming up this year.

But cement is definitely a regional business and certain regions have a much greater dependence on new residential than other regions of the country.

So you will see areas of the country that have a much greater impact to the cement demand based on new residential.

Whereas, we think that the markets that Eagle is in, it is about average and we have also been fortunate that the Texas market, the new residential, has not been impacted near what the national impact has been for new residential in the Texas market.

Which regions or states would you identify as having strong residential dependence at this point?

Clearly the Florida market is one of those markets.

Southern California typically can be that way as well.

Although Southern California can also swing because when they do their public infrastructure, it comes in volatile chunks.

So you will have very little one year and the next year, you will have a large amount of public infrastructure.

And then last question for you, in the roads or public infrastructure piece of the end consumption, is that tied to the roads that go into new subdivisions?

That is -- no, that would be different.

You think of it as infrastructure, but that would not need funded, federally funded.

So that would not be part of that 50% that we would be talking about.

[Paul Nuda], private investor.

In general terms, would you provide some color as to the most important dynamic that sets you apart from your competition please?

Being a low-cost producer.

It allows us to have margins throughout all of the cycle and then when the cycle gets difficult, it really allows us to separate ourselves and have a lot of staying power with our production capacity.

Janice Wong, Dundee Securities.

I wanted to talk to you about aggregates.

I was a little bit surprised that with aggregate volume down that pricing can be so strong.

I was just wondering if you can provide any additional insight on that.

Aggregates, because the demand issues occur often, whether it is a weather-related or sometimes these things have a delay of three to four months because of weather occurred some time in the past.

You just have to look at each regional business and the markets that we are in still looked like there is very strong demand and you have to look forward as to the demand in each market.

So the demand for aggregates in Northern California for example next year is very strong.

There are many projects that are on the board and there is a shortage of aggregates in Northern California.

So therefore you have a strong pricing power.

So it is just a matter of I guess short-term lower volumes over the long term the strong outlook?

Is that what you're saying?

That is correct and again, the normal weather pattern in Northern California is to have a slower market during the fall and winter months.

It seems there are no further questions from the phone lines.

Actually, I spoke too soon.

We actually have another question from Alan Mitrani with Silver Lake Asset Management.

Regarding the volume question in California, do you expect volumes to be up in aggregates for California this year and if so, can you give us a sense of what you're planning maybe on a calendar year basis for aggregates in California because we saw that Vulcan reported yesterday their volumes were down as well in the quarter and they didn't give necessarily such strong guidance?

Although it seems as if the highway work and the public infrastructure work should really take it up in '07.

Could you just give us your sense of what you're seeing for volumes this year?

Our volumes once again is really just kind of a Northern California and even more of a Sacramento and North [boards], our operation in the Marysville area, look -- again look very strong.

So based on the market that we look at, we feel that we will have a volume increase in Northern California.

Can you quantify that for '07?

Is it 2% to 5% volumes, somewhere like that?

It is kind of difficult as you are bidding jobs.

There is some price related to that.

But overall I would say that there is going to be at least a 10% increase in volumes for us.

10% for calendar '07?

Calendar '07.

Wow.

I guess it is easier comparisons at least in the back half.

Thank you.

There are no further questions from the phone lines.

Thank you.

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.