Eagle Materials Inc (EXP) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the financial first quarter fiscal 2008 conference call.

During this presentation, all participants are in a listen-only mode.

Afterwards, we will conduct a question and answer session, and if you should have a question at that time, please press the 1, followed by the 4, on your touchtone phone.

If at any time during this conference you should require assistance from an operator, please press the *, followed by the 0.

As a reminder, today's conference is being recorded on Tuesday, July 31, 2007.

I now have the pleasure of turning the conference over to Mr.

Steve Rowley, President and Chief Executive Officer at Eagle Materials, Inc.

Please go ahead, sir.

Thank you, and welcome to Eagle Materials' conference call for the first quarter of fiscal year 2008.

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

The severe slowdown in residential construction continues to negatively impact U.S.

industry demand in the pricing of gypsum wallboard.

Subsequently, Eagle's wallboard opportunities were also negatively impacted this quarter.

Lower wallboard earnings caused Eagle's consolidated earnings to decline 32%.

On a positive note, all of Eagle's other business lines--cement, concrete and aggregates, and paper, experienced a year over year increase in their quarterly earnings comparative.

During the first quarter of fiscal 2008, we generated nearly $43 million of cash flow from operations.

Approximately $31 million was utilized to fund capital expenditures, the majority towards the construction of our new wallboard plant in South Carolina.

As of June 30, 2007, our net debt cap to ratio was approximately 25%, essentially unchanged from March 31, 2007.

The outlook for residential construction remains difficult, and we expect wallboard industry demand to remain well below the calendar year 2005 peak of 36 billion square feet, and in the near term, negatively impacting Eagle's wallboard sales opportunity.

Eagle's regional cement businesses have not been as severely impacted by the housing contraction.

And while wet weather in Texas has delayed the timing of the announced price increase, underlying demand remains strong in Eagle's regional cement markets.

Our wallboard revenues declined during this quarter, because of the decline in both sales volume and prices.

Our average net sales price declined 24% compared to the prior year, while our sales volume declined 13%.

The 58% drop in wallboard operating earnings compared to the prior year was associated with a very competitive marketplace, resulting from a 17% reduction in industry demand.

This chart reflects the cyclical nature of wallboard prices.

For the quarter, our net sales price averaged $128 per msf, while in June, our net price averaged $120 per msf.

An increase in both sales volume and sales prices generated the 9% increase in Eagle's quarterly comparative of cement revenues.

Our first quarter cement operating earnings were up 26% compared to the prior year.

Very strong operational performance from all of our cement plants, combined with a new manufacturing production at our Illinois cement plant and higher prices, created the increased quarterly earnings.

Eagle's expanded manufacturing capacity allowed us to reduce our reliance on purchased cement, and sell higher margin manufactured product, and our $96.27 per ton [mil] net was a record quarterly price for Eagle Materials' cement division.

It is also important to note that this record pricing was achieved with an all-time, record high sales volume for any quarter in Eagle's history.

Operating earnings from our paperboard division increased 15% over the prior year, due to increased selling prices, partially offset by slightly slower sales volumes.

We achieved record first quarter earnings in our concrete and aggregate division, driven primarily by record pricing in both businesses.

Sales volumes were negatively impacted by wet weather in central Texas, and a very difficult northern California marketplace.

Thank you for attending today's call.

We will now move to the question and answer session.

Emma?

Thank you, gentlemen.

(Operator instructions)

Our first quarter comes from the line of David MacGregor.

Thank you.

Mr.

David MacGregor, your line is now open for the question and answer session.

Yes, thank you very much.

Good morning, gentlemen.

Good morning.

Are you there?

Yes, we are.

Okay.

Hi, Steve.

I guess first of all, on cement, can you talk a little bit about the Illinois plant, where you are in cap utilization right now, and where within the quarter things started to pick up for that plant?

Did you get a full quarter of the enhanced performance out of that plant, or was it more--later in the quarter?

No, we really received very good performance during the whole quarter.

We did have a direct outage, which is not unusual in the quarter.

Typically, a cement plant has a yearly annual maintenance after a start up, and everything--you go through fine tuning.

Six months into the operation, though, we had a brick job.

So that was dealing with the negative impact.

And so, what would the cap utilization rate be at the Illinois plant?

I mean, we're running at full capacity.

Okay.

And could you just talk a little bit about the import pricing right now, and just conditions within that market?

Import pricing remains very high, and of course, that has an impact on all pricing in the U.S.

cement industry.

Can you say how much higher it is than the domestic price?

The sales price is a function of the marketplace.

As far as the cost to purchase versus manufacture, that really varies by plant by plant in each region.

Okay.

Just turning to wallboard, if I could, quickly.

I guess if conditions were to revert back to where they were in the last cyclical low, and pricing were to get back to those types of levels, how much more profitable do you think you would be this time than last time, at the cyclical trough?

In wallboard?

Well, of course, you'd have to take that and adjust it for inflation.

But we certainly believe we are a much tougher competitor today than we were during the last trough.

Relatively speaking, I don't think I'd (inaudible) a number to that, because we don't have numbers for all of the industry.

But we know that we are a--we consume much less natural gas, we're much better at producing paper, and we're also much better as far as the overall marketing.

The last trough, we had just purchased Republic Gypsum and Paperboard, and were combining those two businesses together.

So relatively speaking, we're in much better position today versus 2001.

Are you--do you have better labor productivity today than then?

Much better labor productivity.

Okay.

And then, is there a reason that you can think of why prices would not get back down to the levels that they had been in the past trough?

Well, clearly, manufacturing costs are much higher today than they were.

Natural gas costs are higher, labor costs are higher, paper costs are higher.

So once you get to the point where you're at cost or below cost, or near variable cost, those costs have risen dramatically from the 2001 period.

Okay.

Thanks very much, Steve.

Thank you.

Continuing on, our next question comes from the line of Trey Grooms of Stephens, Inc.

Please proceed with your question.

Good morning, guys.

Good morning, Trey.

Just real quickly.

You had made mention that the wet weather in Texas had impacted the cement price increases.

I'm just trying to get a feel for, kind of, what you guys' thoughts are on that, for going forward--how you feel about that price increase going forward.

This--as we've gone into the summer, and weather has kind of started to get a little bit more normalized in the last month or so.

There is a lot of underlying pent-up demand in Texas, and the business is there.

So as we move forward, we feel pretty good about pricing, and certainly our indications right now are for a $5.00 per ton price increase in the October timeframe.

And then--in which markets is that in, is that--

That would be in the Texas market.

There is also another $5.00 per ton price increase announced in northern California for the August timeframe.

Okay.

And then, turning just quickly to concrete.

Did the--the weather had some impact there, as far as pricing going forward in concrete.

It--what's your thoughts there?

It did.

We did not achieve price increases in central Texas, as well--right now, I do not see any price increases on the horizon.

But volumes are very strong, and the demand is very strong in central Texas.

However, our business in northern California is just the opposite.

Northern California is very slow.

Okay.

And then, if you could touch just quickly on what's going on with paperboard.

It was very strong this quarter, and--what's driving that strength, and your kind of expectations for going forward.

Would we expect to see pricing kind of hold there, and--just get your thoughts on what's going on with paperboard.

Operationally, we performed much better, much lower, what we'd call B-grade production, if we have to sell at a discount.

So the average net sales price is up, because you're selling less product at a discount.

So that was--the real reason is operational performance.

Okay.

Thanks a lot, guys.

Thank you.

Our next question comes from the line of Jake [Cottelmeyer] from Ramsey's Asset Management.

Please proceed with your question.

Hey, guys, thanks.

Can you talk about--this quarter, it seemed like some of your competitors on the cement side had a lot of wet weather impact, whereas you guys, you mentioned it, but it looked like you avoided most of it.

But in the first quarter, you guys got hit pretty hard.

How much of your volumes on the cement side slid from the first quarter to the second quarter to help you avoid that massive weather impact?

It's--some of our first quarter impacted more by seasonal, meaning very wet and cold weather.

So we had more of--as opposed to rain, it was a cold weather in the Midwest, as well as in the mountain region, that impacted those sales volumes.

Maybe there's some pent-up demand there, but in reality, we were just able to perform.

I think the Midwest, if you look at the PCA numbers, was--a severe decline in sales is almost in the market.

We were just well prepared for that marketplace with our new capacity coming on line.

Got it.

And then, on the paperboard side of things, it looked like your paperboard--your internal revenues only decreased 7%, versus your wallboard shipments were down 13%.

Why is there not a stronger correlation between those two there?

Part of it is the fact that--again, the reason the price was up is, we just performed better.

The correlation between our sales is--we also have a long term supply agreement, that--with a--one of our competitors.

And they actually polled very good volume, because the plants that we supply are some of their lowest cost and better plants, that they choose to run at a higher rate of capacity, as opposed to industry average utilization.

Got it.

And can you guys comment at all on the wallboard price currently today?

Well, the June price was up--was about $120.00, and the rate of decline--I have not really seen it slow down much.

It's been in $5.00 range per month for the last year.

And as people continue to try to adjust their market position and gain market share, that price continues to decline.

Okay, thanks, guys.

Thank you.

Our next question comes from the line of Jack Kasprzak from BB&T Capital Markets.

Please go ahead.

Thanks.

Good morning.

I was going to ask about wallboard pricing, but I guess you just answered that.

So, could you update us on the South Carolina plant?

When do you expect you might start that plant up?

Start up that plant?

We are--we're on time, and on budget for a November substantial completion.

After that--wallboard plants are a little different than a cement plant.

You'll go through a couple of months, two to three month period of commissioning that plant.

And--so we expect to be really commercial in--somewhere in our fourth quarter.

Okay.

And with regard to the other plant expansion projects you have on the cement side, can you update us on those projects, where you are with the Mountain Cement and the Nevada Cement expansions?

We're--engineering is essentially complete.

We're at least working towards the final completion of all the engineering.

But we're also continuing to pursue and wait on our permits to construct, so that's something that's a variable right now.

But as soon as we have our permits to construct, we'll initiate progress.

Is that the permits for both of those projects, Steve?

Permits--yes, for both.

So you're still waiting.

Okay.

And can you remind us, the cost of those projects, if you go ahead and do them?

Our estimates are still in the couple hundred million dollar range for Nevada Cement, and the low hundreds to mid-$150 million range for Mountain Cement.

Okay.

And how much do you have left on your share buyback program, currently?

We have about 5.3 million shares left.

We--during--since the close of the quarter, during our--during between now and then and this blackout period, under a 10b5-1 plan, we have purchased approximately 180,000 shares at an approximate price of $43.50 per share.

So you've bought about 180,000 shares since the end of June, until the blackout period?

Yes, until today.

Yeah.

Okay.

Okay, great, thanks a lot.

Thank you.

Continuing on, our next question comes from the line of David Wilson of Wilson Capital Management.

Please proceed with your question.

Good morning.

Good morning.

I just wanted to follow up a little further on the wallboard pricing.

Have you seen any competition shut down facilities yet, and if not, how much lower do you think the price needs to get before you begin to see that?

Permanent closures, there have been a couple announced.

And then some idling of another plant that USG just announced.

They idled their Detroit plant, so--USG has announced closure of, I think, three facilities.

But of course, the whole industry has to operate at demand, so you just operate at lower shifts.

So some plants are operating two shifts--other, less competitive plants may be operating only one shift, and shipping to a much closer radius than they have in the past.

So what was your--I apologize if you talked about this, I missed the first, maybe, minute or two.

But, what was your utilization on wallboard for the quarter?

In the low 80% capacity utilization.

And the industry was about where?

Up at--at about the same price, or the same--

About the same?

Okay.

So that's with running two shifts instead of three shifts, and some marginal closures along the way.

What is--and what was the cash flow number you gave out for the quarter?

About $43 million.

$43 million--I think you said there was $31 million in capex?

That's correct.

Is that correct?

Okay, thank you.

Thank you.

Continuing on, our next question comes from the line of Kenneth Zener of Merrill Lynch.

Please go ahead with your question, sir.

Good morning.

Morning.

I'm wondering if you can just walk us through the logic, given your strong low cost position, why you would target, let's say, capacity utilization at 80% instead of, let's say, 90%?

And kind of just focusing on your new South Carolina plant when it comes on line.

If you guys can sell an additional 10% capacity, that would be an additional 75 million square feet.

How come you don't just run it at a higher rate and take the extra profit?

Because it would expedite the rapid decline in current pricing.

So that's--currently, what's going on is, some competitors are trying to gain market share, and in fact, I think, during this last quarter, as that was occurring, the rate of price decline actually accelerated.

Right, and I guess--when I look back historically at the commodity pricing of wallboard, it seems to be that--that's kind of like the sun setting, that aggressive pricing is going to happen no matter what people do.

So I'm just wondering, how come you just don't run it, and--because you're so low cost, gain the benefit?

The pain will be felt broadly, but less so by you.

Why do you have that kind of defensive posture, especially as you think about the new plant opening up?

We are maintaining our market share in the southeast, with a long haul out of Oklahoma.

But that--while I think we're still slightly profitable there, that gets painful, because of the amount of freight that we have to get to that market.

So--but we're obviously not going to run from a marketplace just as we're about to start up a new capacity, so we're going to be a responsible supplier in that marketplace, and we're going to stay there.

Right, I guess, a responsible supplier--I mean, you're just going to hold your market share, given--as the new plant opens up, it seems like you could really push the volume.

I mean, it doesn't necessarily add a lot of incremental earnings per share, I guess, as the price deflates, but that's going to kind of happen no matter what you guys do, is my impression.

Once we start a new plant, we'll be in a much more competitive position in that marketplace, with a much lower delivered cost position out of the new plant.

And then relative to that marketplace, we will be much more profitable and generate the incremental earnings, as opposed to having this huge freight bill.

Right.

No, it's an enviable position.

I guess, just switching--looking at the Reno cement plant, which had been serving--I guess last year, during--the strength in Reno was really not exporting any cement into northern California.

It sounds like you are now exporting cement, and how much--I guess, if you're railing that down over the Sierras, how much additional cost is that per ton?

That's a minor amount, but it's in the--somewhere, $12.00 to $15.00 per ton to move it from Reno into that market.

Thank you very much.

Thank you.

Continuing on, our next question comes from the line of Andy Feinman of Iridian Asset Management.

Please proceed with your question.

Thank you.

So, during the June quarter, did you buy back any stock?

In the June quarter, we did not, but since the end of the June quarter, we have purchased what I mentioned to you--

Right, I got that.

Okay.

There were a couple of things on your balance sheet and your press release that were not there before.

One of them was a $41 million federal income tax in Current Liabilities, and--so that was a new line item, and I was just wondering if you could explain that.

And I'll tell you the other one, in case they're related, was that Other Assets went from $22 million at the end of the March quarter to $101 million.

So I was just wondering if you could explain those two numbers.

Sure.

I'll let Art handle that.

Thanks.

Yeah, Art Zunker.

Because our fiscal year ended on March 31st, we adopted a new accounting standard, FIN 48, on April 1, 2008.

And upon adoption of these standards, the adjustments were made to the balance sheet.

And these relate to adjustments to the tax benefits which are subject to the IRS audit that we had previously disclosed.

And upon adoption, all these were made to the balance sheet, and the only ongoing P&L impact related to this adoption is interest expense, which is currently estimated in the zone of $1.8 million and [$2.0 million] (inaudible).

Okay.

So $1.8 to $2 million is what you said would be an adjustment to interest expense, and that would be the only thing that would hit your income statement?

(inaudible)

So--okay.

But I think--I guess, what I think I heard you--the asset, going from $22 million to $101 million--well, I don't know.

I guess that's maybe--you had to call some things goodwill that you didn't previously call goodwill?

And then put in a liability, just in case you have to pay it, that $41 million, I mean, is that--

Yeah.

Ultimately, when the dispute is resolved, that asset will get classified (inaudible), and the majority of it will go back in goodwill.

Until the time that we come to a final resolution with the--the dispute with the IRS, it will be classified in Other Assets.

And effectively, what we've done is gone back and recognized the tax benefits that the IRS are questioning upon their examination and put them into the financial statements.

Okay--okay.

I got you.

Thanks very much.

Thank you.

Continuing on, our next question comes from the line of Richard Stoneman of Dundee Securities.

Please proceed with your question.

Good morning, sir.

Question is, your aggregate production declined in the first quarter of fiscal '06 due to poor weather conditions, and it declined again this year to 1.2 million tons.

Is there a reason that it declined again this year?

Again, primarily two reasons.

It was really weather in Texas, and the marketplace in northern California.

The price increase--did that occur in Texas, or in Texas and California?

It occurred in both places.

And the price has increased two years in a row, with volumes declining for you and others.

How long do you think it will be before prices stabilize with declining volumes?

With aggregates being a very, very local business, and it's really a limited supply in most local markets, it is--it's rare that you would see a market impacted so severely that you're going to see a decline in aggregates.

Generally, aggregates pricing is stable or improving.

It can get to a point where things--but it would have to be a very severe local economic decline before you would see that for--

In California, in '99, 2000, the price declined markedly.

Are volumes approaching that level again?

I don't believe so, and there are some other things that are occurring, certainly in the California legislature as well as the Illinois.

They're--both these legislatures have some issues, and they're currently at loggerheads, which has delayed some of the spending.

Probably the pent-up demand is there--we just have to get the legislatures to come to an agreement, and we'll see demand pick right back up.

Thank you very much.

Thank you.

Our next question comes from the line of David [Sacks] of Hawkeye Capital.

Please proceed with your question.

Hi.

A couple quick questions.

First, on the wallboard earnings, was the profitability decline just a function of negative absorption?

Or was there some other phenomenon occurring, whether it was weather-related, or materials?

Strictly volume and pricing, for wallboard.

Okay, and if then if you just--unrelated to today's earnings question, but if you could just describe the northern California aggregates opportunity that you have, and the timeline before you can get into a more significant production position, and transportation--you talked about an annual report, the rail link.

If you could just more fully describe that?

Thanks.

We continue to move forward with that, although it's a lengthy process to get our entitlements.

We do feel comfortable that we proceeded and done a very good job, at least connecting the rail link to the asset, as far as our land position.

But now we are just in the initial stages of entitling the ability to move aggregates out of that (inaudible), by rail.

And what's--if you were to get permitted, what would you suggest the scope of that project could be, in terms of costs to implement, and production volume increase?

We're a little early on that, but clearly, it is a--it's a major capital expenditure, and seat-of-the-pants, I'll say in the neighborhood of somewhere--probably pushing, by the time everything's done, $75 million to $100 million.

And--but that would expand the plant more than double or triple the existing capacity.

Do you have any further questions, sir?

I'm fine, thank you.

Thank you.

Continuing on, our next question comes from the line of Mike Betts of JPMorgan.

Please proceed with your question.

Yes, good morning.

I had a few small questions, if I could.

Could I start firstly on wallboard?

I mean, you just mentioned, Steve, that most of the decline was volume and price.

Obviously, your other competitors have suffered from higher waste paper costs in terms of the paper.

Have you not been impacted at all by that?

And if not, why, would be my first question.

Yes, our--we have been.

The cost to produce paper has been impacted by our ability to buy paper.

But we have that as a separate business line.

Right.

So that would hit the paperboard division rather than the wallboard division?

That's correct.

Okay, and how much did your waste paper costs go up by, then?

Because obviously, that division performed very strongly as well.

The costs went up by about 15% to 20%.

Okay.

Then if I could, just on cement--I guess, two questions.

Firstly--and maybe I should know this, but there was a big increase in the joint venture deliveries, up 27%.

Was that a comparative issue, or is there anything that I'm missing there that's behind that?

And secondly, I think you did try to put cement price increases--obviously, January struggled, but I think there were then some attempts to raise prices in Texas in, kind of, April and June.

Did they just not hold because of the weather?

That's correct.

The prices didn't hold.

And in Texas, last year, we became partner in a joint venture cement terminal in Houston, and that's the reason why our volumes were up in Texas.

Okay.

And I guess the big increase in the interest charge was just because you ceased capitalizing interest on the Illinois expansion?

Or was it also to do with what Art was talking about earlier?

I wasn't quite clear with that $1.8 million to $2.0 million was a quarter issue or a year impact?

It was a--it's quarterly, going forward, until we get this resolved.

It's about $0.02 a share.

Oh, so that $1.8 million to $2.0 million is a quarterly charge?

Okay.

That's correct.

Okay, thank you very much.

Ladies and gentlemen, as a reminder, if you would like to register for a question, please feel free to press the 1, followed by the 4 on your touchtone phone.

Once again, ladies and gentlemen, please feel free to press the 1, followed by the 4.

Our next question comes from the line of Jim Barrett from CL King and Associates.

Please go ahead, sir.

Good morning, everyone.

Steve, could you talk about the marginal costs that you see in your markets for your competitors who have what you would characterize as higher cost plants?

That--that's really difficult.

I really don't have any idea what the costs are.

I just know our positions, and how far we can ship with freight to a market and still have a nice profit.

Okay.

And so maybe a related question.

When you look at your markets, and I understand that you can ship them a long distance, given your cost structure.

When you look at your competitive set within your specific markets, do they mirror the industry in terms of high cost, medium cost, low cost competitors, or do they skew one way or the other?

Could you repeat that?

I'm not exactly sure what you're asking.

Okay.

When you look at your specific competitors in wallboard, do they tend to mirror the industry in terms of cost structure?

Or do they tend to be more low cost, or conversely, more high cost?

I think it really is on a case-by-case and a plant-by-plant basis.

If you're receiving gypsum from a distance--say, from Spain or from Nova Scotia--they tend to be higher cost plants, and they're--typically, those plants on the east coast are a little smaller.

So that has an impact.

I have no idea what the--what their actual cost structure is.

I just know that the starting point is higher.

And if you have a manufacturing plant on top of a gypsum deposit, like we do in our current facilities, you start with a much lower position.

Okay.

And then finally, although I could guess as to the rationale, why did you pick South Carolina to situate your newest plant?

Because--two reasons.

Because the gypsum source, we were very happy with the supply, Santee Cooper, and very happy with the agreement with Santee Cooper.

And we liked the marketplace.

We believe the Sun Belt is where new growth is going to occur, and we think the southeast is just an incredible opportunity, including the Carolina markets.

Okay.

Okay, well, thank you very much.

Thank you.

Gentlemen, continuing our question and answer session, we now have a follow up question from the line of David MacGregor of Longbow Research.

Please go ahead, sir.

Steve, I wonder, just with respect to wallboard, if you could just bring us up to date in terms of the volume of new capacity that you're now expecting to come into market in the second half of '07, and then all of 2008?

In the second half of '07, there is probably going to be--and again, you have to realize, it takes almost two to three months to really make it commercial.

But there will be somewhere around a billion and a half to two billion that starts to come on line, so whether it's the second half of '07, or the first quarter of '08, in that timeframe.

And then, you know, another billion right on its tail.

So you're saying, you're looking at anywhere from three to three and a half billion square feet of new capacity being start-upped--or, starting up, between now and the end of 2008?

In the end of--absolutely.

Okay, thank you very much.

Thank you, sir.

Gentlemen, that ends our Q&A session.

There are no further participants, apparently.

I'll return the presentation to you once again to continue, or for your concluding remarks.

Thank you, and I look forward to our next call a quarter from now.

Thank you.

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

We thank you all for your participation, and ask that you please disconnect.

Thank you once again, and have a wonderful day.