Eagle Materials Inc (EXP) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Eagle Materials financial results for fourth quarter, fiscal year 2007, and fiscal year ending 2007 conference call.

[Operator Instructions]

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

Please proceed.

Thank you.

Welcome to Eagle Materials' conference call for the fourth quarter, fiscal year 2007.

Joining me today are Art Zunker, our Senior Vice President and CFO, and Craig Kessler, our Vice President, Investor Relations and Corporate Development.

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

To access it, please to go www.EagleMaterials.com, and clink 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 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.

The severe slowdown in residential construction spending and an exceptionally long, harsh winter negatively impacted our fourth quarter results.

As you can see, our fourth quarter operating earnings were down 18% compared to the prior year.

Fiscal 2007 earnings performance was a record $330 million, [eclipsing] last year by 25%.

During fiscal 2007, we generated over $240 million of cash flow from our operations, an increase of 29% over the same period a year ago.

A majority of this cash was utilized to fund approximately $150 million in capital expenditures, including $24 million to complete our Illinois Cement expansion, and $82 million for our greenfield wallboard plant in Georgetown, South Carolina.

We also repurchased approximately 2.7 million shares of our stock during fiscal 2007, at an average price of $36.93.

As of March 31st, 2007, our net debt to cap ratio of 25% was essentially unchanged compared to March 31st, 2006.

Fiscal 2007 was another record-breaking year for Eagle Materials.

Earnings per share was a record $4.07, 35% higher than the prior record year.

We sold out all four of our cement plants for a record 21st consecutive year, and achieved record operating earnings in our cement business, in our wallboard business, and in our concrete and aggregates business.

Last year, we completed the expansion, modernization, and startup of our Illinois Cement facility on time and under budget, a stellar performance by all involved.

We also began the construction of our new wallboard plant, and it remains -- in South Carolina, and it remains on time and under budget.

And recently, we announced a 14% increase in our regular annual cash dividend, because of our confidence in the strong and growing cash flow capabilities of Eagle Materials.

[Total] construction spending was down 2% through the first month of this calendar year.

The sharp contraction in the US housing market has impacted wallboard industry shipments and capacity utilization.

The outlook for residential construction remains difficult, and we expect industry capacity utilization to remain near current levels for the remainder of the year.

And after a difficult winter, sales volumes in cement have started to improve.

Better weather this spring and underlying strong demand for cement has helped most of our regional markets.

We expect fiscal 2008 to be our 22nd consecutive year selling out our cement plants.

Our wallboard revenues declined during this quarter because of a decline in both sales volumes and prices.

Our average net sales price declined 8% compared to the prior year, and our sales volume declined 13%.

A 33% drop in wallboard operating earnings compared to the prior year was associated with a much more competitive marketplace, resulting in lower wallboard volumes and prices.

In contrast, wallboard earnings for fiscal 2007 increased 28% to a record $198 million.

This chart shows wallboard prices have continued to drop.

For the quarter, our net sales price averaged $142 per MSF.

Pricing continues to decline at a rate of about $5 to $6 per month.

Lower cement sales volume due to difficult winter weather in all of our regional cement markets was the primary factor in the 2% decline in cement revenues.

For the year, cement revenues increased, primarily because of price.

Our fourth quarter cement earnings were down 5% compared to the prior year, primarily due to lower sales volumes and a higher percentage of purchased cement volumes.

During the fourth quarter, approximately 30% of our sales volume was imported product versus 13% in the prior year's fourth quarter.

Our $96 per ton [inaudible] is a record high quarterly price for Eagle Materials.

Demand in most of our markets is strengthening, which should support the upcoming announced price increases.

Our paperboard earnings increased 72% during this quarter compared to a year ago, primarily due to selling a lower percentage of low margin paper products, and keeping our production costs nearly flat year over year.

We achieved record fourth quarter operating earnings from our concrete and aggregates division, driven primarily by higher pricing in both businesses.

The increase in pricing was offset by lower sales volumes in both concrete and aggregates during the quarter, due to very wet weather in Central Texas and a difficult marketplace in Northern California.

Thank you for attending today's call.

We will now move to the question and answer session.

Mark?

Thank you.

[Operator Instructions] And our first question comes from the line of David MacGregor from Longbow Research.

Please proceed.

Hi.

Good morning.

This is Garik Shmois in for David.

A good quarter, despite the conditions out there.

I just wanted to know, your wallboard volumes came in actually better than the industry averages.

Can you talk a little bit as to why that was?

Were you winning market share?

What were doing there on that end?

We're fortunate to be -- really have our plants located in stronger markets in general, our core markets.

So that gives us a little better opportunity.

Okay.

So you're seeing pricing -- you're pretty competitive with all your competitors.

You haven't been coming down more aggressively, for instance, than some of the --

We really are a price follower, in that we're not the largest player in the industry.

So we're a price follower.

Our strength remains in our quality and our customer service.

Okay.

And could you tell us what your industry -- I'm sorry.

What your capacity utilization rates were for the quarter for wallboard?

Yes.

We were in the 80% range.

Okay.

We really -- our annual capacity is about [$3 billion], until South Carolina [is complete].

Okay.

I was looking at the -- what your shipments were, and it seems like, if you do a run rate, you might have been a little bit higher, about 85% or so.

I'm just curious about that.

And just lastly, did you eliminate any capacity during the quarter, or reduce shifts any further?

Cut back on that?

No.

And in fact, because of strength in a couple of markets, we actually had to increase capacity just to meet our sales commitments.

Okay.

Very good.

Thank you very much.

And our next question comes from the line of Kenneth Zenner from Merrill Lynch.

Please proceed.

Hi.

This is [Phil Jongworth] on for Ken.

I was wondering what was the reason for you guys not giving guidance, and then just whether in past cycles, when visibility was unclear, did you also stop giving guidance then?

And kind of what would make this cycle different from last cycle.

I wasn't around during the last cycle, so I'm not certain, so I can't answer that question, at least as far as giving guidance.

I was just in the cement business at that time.

But the real reason is things still are very uncertain in the wallboard industry, and we've also had a very long, wet winter, as far as cement and concrete and aggregates.

So while there's a very strong pent-up demand, there was also an associated increase in inventory that the [cement and] aggregates business has to work off.

So things are still just a little murky.

Okay.

Got it.

And then given the weakness in the Florida cement market, which is much more dependent on new residential construction, what is the risk that local producers there will try to chase volume and begin shipping cement into your markets?

Cement really has a very low value to weight ratio.

It's very difficult to ship it any distances like that.

So the risk is very low.

Okay.

Got it.

Thanks, guys.

[Operator instructions] And our next question comes from the line of Jim Barrett.

Please proceed.

Good morning, everyone.

Steve, could you talk about your wallboard business, and A, to what degree raw material increases affected your margins in Q1, and what your longer-term perspective is on raw materials, your intermediate-term perspective?

Yes.

We're -- every day, we come to work, at least for the last 15 years, with one goal in mind, and that's to become more competitive.

So it's the accumulation of a lot of hard work to remain up and competitive in the marketplace.

We've done a very good job controlling our costs.

Some costs are difficult.

We know that natural gas over the last few years has gone up dramatically.

And we also know some of the raw materials costs have gone up, including the cost of fiber for paper.

But we've done a good job becoming better operators and more efficient operators, and that has allowed us to effectively control [those costs].

Has that resulted in layoffs of personnel?

The layoffs of personnel is a very small part, especially in wallboard.

Wallboard is a -- much more dependent on variable costs.

So having programs in place to control the variable costs and be more efficient with the way -- again, as far as the paper is concerned, our very, very low basis weight paper that we produce in Lawton, Oklahoma, becomes very, very effective during times of very high pricing in the fiber and the [OCC business].

Okay.

Well, thank you very much.

Our next question comes from the line of Trey Grooms.

Please proceed.

Good morning, guys.

Great quarter, especially given the tough environment that's out there.

And congratulations on that.

It looked like wallboard pricing for the quarter came in a little bit higher than kind of what we were all kind of looking for as far as last fall, when we were kind of thinking the $125 range by the end of March might be what we were looking for at that time.

Can you give us an idea of what you've been seeing in wallboard volume and pricing trends in April?

In April, I do believe that the volume trends are up slightly.

The seasonality starts to come into effect, so you're starting to see volumes come up as the weather improves.

But pricing continues to drop at about the same level.

Pricing, when it drops, it'll come in waves.

It may be, over the three weeks or so, you'll go through another wave of a pricing correction.

But it continues, on average, to go down about that $5 to $6 per month.

And it varies from region to region.

But across the -- at least across our markets, it continues to drop at about the same rate.

Okay.

And then one of your competitors has mentioned recently that it had lost some share in the quarter.

What was your experience in the quarter as it relates to market share in wallboard?

And do you expect that -- your competition as a whole to become more aggressive with the pricing in the upcoming quarters in an effort to kind of regain market share?

It's hard for me to comment on our competitors.

We were fortunate, as I mentioned earlier, to be in markets that were a little stronger on the whole.

Our core markets, as opposed to the nation.

So that's the real basis for our increase in volume this quarter.

Okay.

Great.

Thanks, guys.

And our next question comes from the line of Michael Lucas from Appaloosa Management.

Please proceed.

Mr.

Lucas, your line is now open if you'd like to proceed with your question.

Hello?

Hello?

Yes.

Hello?

Hello?

Yes.

How are you doing?

I was wondering if you could just give me an idea of how you get such clarity in cement markets on a going forward basis.

Is it not -- what are you assuming for housing starts?

Oh, housing starts.

We're -- the general feel out there is in the [1.4 million] range.

So housing starts look pretty low this year.

But when you say sold out, is that the visibility in the cement market?

You actually -- do you pre-sell the cement?

Or is it just your assumption that you'll sell out all the plants for '08?

We have -- again, we purchase a fair amount of product.

And so what we do, if the cement market declines, and I think the PCA predicts that it's going to go down a percent or two this year, and when it declines, we just kind of turn the spigot down a little bit on purchased product, and sell out the manufactured product.

So we're very, very comfortable that we'll sell out our plants.

Some of our markets are stronger than others.

The Texas market remains very, very strong.

And the mountain region remains strong.

Midwest is still somewhat difficult, and they've had a very, very difficult winter on top of the difficult economic conditions in the Midwest.

And Northern California remains [similar].

How much -- [I suppose you have] Northern California.

[I thought] most of your [inaudible] capacity is in Texas, Illinois, and Nevada.

Well, we're in Northern Nevada, which is just outside of Reno, but we do have a terminal in Sacramento to ship cement into the Sacramento market.

You mean you import it, then?

We import some, and we can also ship it by rail from our plant in Northern Nevada into Sacramento.

Okay.

You're not seeing a slowdown in the California market?

No.

Northern California is definitely slow.

Okay.

I just want to understand.

How much on the basis of last year did you, in fiscal '07, did you have as let's call it [trading] cement business, and how much was from your own production business?

In terms of your EBIDTA?

It's -- 25% to 30% was purchased product last year.

And very little margin on the purchased product.

So you can say that we were just maintaining our market position.

Very little impact to EBIDTA.

Okay.

So if there is a marked slowdown, that business will go away first?

It doesn't affect your bottom line, I guess you would think, and you keep selling out of the production plants?

That's correct.

Okay.

Is it not that we don't [have a fear] of seeing something like down in Florida [inaudible] or some of these areas have had very soft cement.

Obviously fell off a lot from residential construction.

But would you think that yours would fall off more?

Or is it your theory that it kind of stays where it is right now?

In general, for Eagle, we're more like the national average for cement demand.

So the main driver being public construction, being over 50% of the demand for our product, followed by residential in the 20% to 25%, commercial in that 20% to 25%, with a 3% to 5% for specialty products.

We're very comfortable that new residential is not going to have a huge impact on our cement demand.

Okay.

And just what are the metrics you're using?

Can you just give me the metrics for those three going forward and '08?

What do you think they're going to be?

In the 25%, 25%, 50%?

How much do you think housing will be down year over year?

How much do you think non-res?

And what do you think for public?

Sure.

It's -- I'd have to go market by market for ourselves, but I believe that housing, instead of being 25%, it's probably closer to the 20% demand in our markets this year.

Public construction, it'd be 55%, and commercial 20%, with again that 3% to 5% kind of filling in the gap for specialty products that we produce.

No, no.

I'm trying -- what I meant was in terms of what do you think -- if housing is down, I was just trying to figure out a percentage.

When you say you're going to sell out, it seems like even if you thought those other areas were off 7.5%, you'd still be -- and you thought housing was down 20%, you'd still be down, even on those numbers, or flat, in terms of cement volumes.

As we -- as I mentioned just a couple of minutes ago, we would just -- if volumes are lower, we will just import less product, sell less purchased product.

So our plants will remain sold out.

Okay.

When you import less, doesn't that bring the umbrella of pricing down?

Won't your margins come down as well?

No.

We don't -- we make little or no money on the purchased product that we import.

No.

What -- I'm trying to understand the market, though.

Doesn't the umbrella of -- people, if they need more product, obviously, they have to import it.

So it raises the prices because of shipping and what not, meaning you'd make more money out of your own production.

But if you pull away the imports, wouldn't the other products go down as well?

Because people don't need as much product.

Currently, the markets that we have, in general, they -- the pricing looks -- the pricing that we have in place looks strong.

It looks very strong.

We're going to see a $10 price increase in Texas.

It looks -- and we have an increased price in the mountain region at about the $6 to $8 level.

So those price increases, one is in place, and one looks -- is going to go into place in the next month or two.

And they both look very firm.

Okay.

Thank you very much.

And our next question comes from the line of [Dan Westhoff] from Paradigm Capital Management.

Please proceed.

Good morning.

Good quarter.

I just had a couple of questions about the Northern California market.

Last spring, we had some very bad weather.

Can you comment on how that affected you guys?

Yes.

We still -- we have a lot of weather, and I think the market is soft as well.

Certainly, residential is very soft in Northern California.

So it has had an impact, primarily on our aggregate operations in Northern California.

It's also to a certain extent on our cement operations.

So you don't feel you gained anything by maybe a possibly better winter -- better spring up there?

No.

Currently, demand is pretty weak in Northern California.

Right.

[Bringing brought down] by residential up there?

Primarily.

Okay.

Kind of going back to the cement, you mentioned that you pretty much had very minimal margins on the purchased cement.

Now does that affect your overall margins?

Will it bring it down a little bit when you have to purchase the cement?

And can you quantify that?

Yes.

Not a whole lot.

Well, a 100 basis points [or something], maybe?

In that range.

Okay.

That's it.

Thank you.

Thank you.

And we have no further questions at this time.

I'd like to turn the call back over to you, Mr.

Rowley, if you have any closing remarks.

Thank you for attending, and we'll look forward to talking to you next quarter.

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

We thank you very much for your participation.

11