Eagle Materials Inc (EXP) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Eagle Materials financial second quarter fiscal year 2008 conference call.

During the presentation, all participants are in a listen-only mode afterwards we will conduct a question and answer session.

(OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded Tuesday, October 23, 2007.

I would now like to turn the conference over to Mr.

Steve Rowley, President and CEO.

Please go ahead, sir.

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

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 go to www.eaglematerials.com and click on the link to the webcast.

When you are accessing the slide, 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.

Because of the current broad housing industry melees, Eagle Materials wallboard sales opportunities became increasingly more competitive this quarter.

Lower wallboard demand and lower wallboard prices caused Eagle's quarterly competitive revenues climb to decline 18% and operating earnings to decline 43%.

During the first six months of fiscal 2008, we generated nearly $103 million of cash flow from operations, approximately $62 million was utilized to fund capital expenditures, the majority towards the construction of our new wallboard plant in South Carolina.

In addition we spent approximately $153 million repurchasing 3.7 million shares during the quarter, and an additional 300,000 shares subsequent to the quarter's end.

Since our spin-off in January, 2004, we have utilized our strong cash flow to expand our cement operations by 30%.

We expanded our wallboard operations by 30%, increase our regular dividend by 1200% and retire approximately 25% of Eagle's shares.

The combination of capital spending and repurchasing our stock has increased our net debt to capitalization ratio at September 30 to approximately 42%.

Subsequent to the end of the quarter we issued $200 million in senior unsecured notes in a private placement transaction.

The average maturity of the notes is approximately ten years with an average interest rate of 6.35%.

We use these funds to pay down debts borrowed under our bank credit facility.

As previously mentioned our wallboard revenues and earnings declined during this quarter because they greatly reduced new residential construction relative to last year.

Our average net sales price declined 37% compared to the prior year, while our sales volumes declined 7%.

The 74% drop in wallboard operating earnings compared to the prior year was primarily associated with the very competitive marketplace pricing resulting from a 15% reduction in industry demand.

Our continual efforts to reduce production costs were rewarded this quarter with production costs 1% lower than last year's costs even with significantly reduced production volume.

This chart reflects the highly cyclical nature of wallboard prices.

For the quarter our sales price averaged $110 per MSF while in September our net price averaged $105 per MSF.

Currently wallboard pricing remains challenging.

However, pricing adjustments are becoming more localized in nature where previously pricing adjustments were implemented rapidly across the nation.

Construction of our new wallboard facility in Georgetown, South Carolina, is nearing completion.

Construction is on time, on budget with completion expected in mid-November.

We continue to presell about half of the new pipe's capacity by shipping wallboard from our OEM home wallboard facility into the east coast.

Oklahoma.

We do this at an extremely large freight charge, more than twice our average freight bill.

Our wallboard net sales price, and operating margins, will benefit once our new plant becomes commercial around the beginning of next year.

Demand for cement was strong in all of our markets during the second quarter.

Our second quarter revenue increase was associated with both price and volume improvement of 3% and 9% respectively.

This year's second quarter cement operating earnings were approximately 4% greater than the prior year.

Included in the prior year cement operating earnings results was approximately $5.2 million related to cash distribution received as a result of the industry settlement of the dispute regarding antidumping duty and the receipt of insurance proceeds related to our Mountain Cement operations.

Excluding these one time items our cement operating earnings were up 22%.

Very strong operational performance from all of our cement plants provide us with new manufacturing production in our Illinois cement plant and higher prices created the increased quarterly earnings.

Our cement sales volumes for the quarter were an all time record for any quarter in Eagle's history and the first time Eagle surpassed 1 million tons sold in the quarter and our $96 per ton mill was up 3% over the prior year which was understated because we sold significantly more volume than the prior year.

The slight increase in paperboard sales volumes and sales prices were offset by higher recycled fiber cost causing our quarterly comparative paper operating earnings to decline 3%.

While wet weather and had a slight negative impact on our central Texas concrete and aggregates business, the very tough market in northern California was the primary driver of our reduced quarterly comparative results.

Thank you for attending today's call.

We will now move to the question and answer session.

Anthony?

Thank you.

(OPERATOR INSTRUCTIONS)

Our first question comes from the line of David MacGregor from Longbow Research.

This is Garik Shmois in for David.

On USP's call earlier today they talked about wallboard prices falling off at a price that's been decelerating here as they move through last quarter.

Have you seen the same pace of wallboard price declines?

In the last quarter it's really been about the same that it has been for about a year now, so.

On the $5 to $6 per month range, if that's what it's been dropping.

However, early in October things seemed to be a little bit more localized in nature, so as opposed to rapidly moving from one part of the country to the next.

But clearly during the last quarter we did not see really any change in the rate of decline.

Do you think the rate of decline could temper a little bit as we move through the winter months?

As, certainly as you start getting towards closer to your cost and cash cost basis that will clearly occur.

And as we are, so you would anticipate that will occur.

And what we are seeing now is much more localized in nature, the pricing decline.

In your cement business can you talk about any announced cement price increases for January and if they are getting traction?

Most of the January price increases are getting very little traction but there is a growing consensus for April price increases in almost all the markets anywhere from $5 to $10 per ton depending on the market.

Very good.

Thank you very much.

Our next question comes from the line of Dax Vlassis from Gates Capital.

Please proceed with your question.

I was wondering how much, I think the project for South Carolina was something like 150 million.

How much of that have you spent so far?

$125 million to $130 million.

Okay.

What about the other projects?

I think you had the Nevada Cement project I think was $200 million, and I think the Mountain Cement project.

Have you started those projects and if so how much have you spent?

I think the Nevada was a $200 million project and the Mountain Cement was $120 million.

Is that accurate and have you started spending?

That is accurate and our plans are to start spending in the spring and the summer on both of those projects.

Okay.

And the $5.2 million charge, that was in the segment operating incomes; none of that was in the joint venture income, correct?

No, that was not a charge.

That was money that we received from the government resulting from the antidumping duties, and yes, a fair amount of that was in the joint venture.

Okay.

What was the split?

The split is about 50/50.

It was about $2.5 million from the insurance proceeds, about $2.5 million for the dumping settlement.

What sort of, it looks like a lot of share repurchase in the quarter.

What sort of leverage are you comfortable with at this point on a maybe debt to EBITDA or, I mean how much further would you take on additional debt to repurchase shares?

We continue to look at what's best for the company and it's really a function of the timing of these capital expenditures as to how much we'll continue to repurchase shares.

So as we move forward with these Capex we will carefully look at appropriately utilizing our balance sheet.

And you have 1.8 million at the, left at the end of the quarter available on the current program?

About 1.5 million.

1.5 million after the 300,000 in the quarter?

That's right.

In the current quarter.

That's correct.

Okay.

And when you were talking about localized pricing, can you explain that a little bit more, just I mean as far as just certain markets are more competitive?

Or is it that there are regional players that you are competing with are more aggressive on pricing?

I really don't understand what you mean by "localized pricing issues".

Typically in wallboard industry but in when pricing goes up it goes up with national letters so you get pricing cross the nation.

When pricing goes do you understand it tends to be on a more regional and now even a more localized level.

But often when it's coming down once the price drops, say on the east coast, it rapidly goes across over the west coast and vice versa.

What's happening now is pricing drops are really just staying within the region.

That's a function of demand in those regions or is it a function of the cost of producing wallboard in those regions?

It's a function of the competitive nature of this industry and people wanting to either gain market share or maintain market share.

Okay.

And what do you expect your full year capital expenditures to be for this current fiscal year?

We are still looking at $120 million to $125 million range.

Okay.

Great.

Thank you very much.

You're welcome.

Our next question comes from the line of Trey Grooms from Stephens Inc.

Good afternoon.

I have a couple of questions on Georgetown.

With that coming on line in November, if I heard you right you said and I think you've said before, you are preceding that market for about 50% of the capacity of that plant.

Is that correct?

That's correct.

Okay.

So with that you've outlined before that you expect a 5% cost savings, that you, in wallboard upon, I guess, the commissioning of this plant.

Can you help us understand, one, the mechanics behind that and then, secondly, do you think that you're going to be able to realize this type of savings or this level of savings running at kind of current utilization rates?

The first off we have to get commercial first so let me make sure everybody understands that although the capital project will be completed, the contractor will finish up in mid-November, it takes a month and a half to two months to really get the plant commercial.

So we anticipate starting to sell in early January, high quality number one grade wallboard.

So there's a little commissioning that has to go through after the project is completed.

Okay.

And during that time you clear very well some one time costs associated with that, you're making a lot of waste as you're lining up the equipment.

So you would anticipate that for some of those costs will hit in this current quarter as well as the majority of some start up cost occurring in the fourth quarter of the current fiscal year.

After that we clearly believe that the cost structure will be in line and we will be very competitive in the Southeast once that new plant is up and running with a very low cost price.

And then, still, kind of on that same line -- what kind of impact is this new plant going to have on the paperboard operations?

We will supply the paper from our paper plant in Lawton, Oklahoma.

And so that will obviously display some very, very low margins, probably even below something, maybe cash contributions but earnings negative sales into the linerboard industry.

So we will have a very positive effect.

About how much of the paperboard is currently going into that kind of secondary product market; roughly?

About 16,000 tons or so?

60,000 tons per year.

And this will, this will shave off how much of that do you think will it take?

I'm just trying to get a feel for how much of the product that's going into secondary market where you don't have any margin is actually going to be going into something where you are going to be making some money?

It depends on what the wallboard market is like at the time.

At full capacity this is going to be 25,000 tons a year or so.

Okay.

Perfect.

I appreciate it.

Thank you very much.

Our next question comes from the line of Mike Betts from JP Morgan.

Please proceed with your question.

Yes, hi.

I had a number of questions if I could.

The first one, Steve, could you just remind me, do you now have the permits to expands the Nevada and Mountain cement plants or is that still being obtained?

We are still -- we have not finalized either of those permits.

My second question, when you are referring to I think it was a slight decline in the cement price, I didn't quite, in, on a rolling basis Q2 versus Q1, I think you gave a reason and I'm not sure I totally understood it, is that because more cement is being sold in a cheaper area through Illinois or am I missing something there?

That's absolutely the reason, it is our lowest business that we have and obviously with the expansion we've dramatically increased the amount of sales at Illinois cement.

Thank you for that.

The third question was obviously a great performance on the wallboard costs.

I mean one of your competitors announced that their costs were up 6%; yours were down 1%.

I guess apart from congratulating you, the question is the sustainability of that and if you're able to give us any indication of what you've done particularly with the big volumes to get the costs down?

I mean do you see that as a one-off or is that the sort of differential that you can maintain?

We've been doing this very steady for many, many years and absolutely believe that there's no problem maintaining this.

Clearly there is some exposure to natural gas costs.

We do not hedge a tremendous amount of gas in this environment.

We are maybe 10% to 15% hedged through the winter months.

So there is a little exposure to higher natural gas costs as they go up.

But the rest of the costs are really contained and I think everybody has the same issue related to recycled fiber costs to, as far as providing paper for the paper that goes into the paper mills that becomes wallboard casing paper.

So I think everybody has about the same exposure in that market.

Apologies for jumping around between the various subsectors but on the cement for the price increase you indicated that January is probably not going to happen but April looks reasonably optimistic.

I guess being the cynic here, you know, the industry has tried to put price increases through for most of the last 12, 18 months without any success.

Why wouldn't, apart from the weather has been better, but why would an April increase have a much better chance than the January price increase?

The real reason is, we still, even with demand in cement being off again next year slightly but still the U.S.

industry requiring approximately 20% more import than can meet demand, import costs January 1are going to be set again up dramatically by an amount another $10 per ton.

At those prices for imports the importers, there will be negative margins.

So without some price increase at least in the markets impacted by imports will you see a reduction in imports, which would support prices.

So one way or the other, you should see price increases primarily associated with the very high cost of import product in the U.S.

Okay.

And the final question that you probably don't want to get pushed too far here but I will at least have a go if the average wallboard price in September was 105, it's declining $5 or $6 a month that suggests we are closer to 100 at the moment, maybe not quite there but close to it.

I think in the past had you a hope that the price might trough around about 100; is that something you still stick to or do you think at the moment the risk is clearly on the down side to that or would you just prefer not to be pushed on it?

I don't mind being pushed on it.

This industry has a tendency to push pricing down to near cash cost or slightly below for a quarter or so and then rebound.

So we are now starting to reach that level where most of the players are at least upside down on an earnings perspective and approaching cash cost.

So we would anticipate that we are going to ride through this a quarter or a quarter and a half and then at that point in time the industry has a tendency to realize that this is not sustainable and you will see price increases start to be implemented and hold, to get back to at least to where everybody is about a break even level until the demand or the supply side gets corrected.

Doesn't this in reality, Steve, require a lot more closures particularly with new capacity on stream?

In fact we have seen more and more closures being announced, so that will occur.

The very high cost plants will be closed.

A lot of this is planned.

Many companies that no they have some high cost plants had a natural what they refer to as a "harvesting program" and that's part of the cycle and they know that that will occur and they will retire their older plants and replace it with new capacity.

One of the reasons for the new capacity coming on line is the realization that the older capacity truly does have a higher cost had a useful life that was no longer viable in the U.S.

Okay.

Thanks very much.

Our next question comes from the line of Jack Nashim, who is a private investor.

Please proceed with your question.

I do not have a question.

You answered it with the other conversations.

Thank you very much.

(OPERATOR INSTRUCTIONS)

We now have a follow-up question from the line of Dax Vlassis from Gates Capital.

Please proceed with your question.

I just had one question on the cement business.

Can you give sort of end market sales or some sort of, some sort of understanding of how much you're selling into the infrastructure market, commercial construction or if there's any kind of break down that you can give to help us better understand the cement business?

Thank you.

Sure.

We follow that very closely and in particular for our specific plant location and as we average them out our cement plants just happen to end up almost identical to the national average of the PCA reports.

So we are about 50% that goes to public infrastructure, 20% to 25% would be commercial, 20% residential, about 5% goes to others.

We are probably a little stronger in the oil well on sales than some of our competitors.

So it may be a little higher than other but that's our split.

Thank you.

Our next question comes from the line of Richard Stillman from Dundee Securities.

Please proceed with your question.

Good afternoon, sir.

I notice that the aggregate prices dropped quarter over quarter from $7.15 a ton to $7.02.

Do you think that is continuing or do you think aggregate prices will hold at this level?

I think aggregate prices are starting to rebound a little bit.

We've had a lot of inventory in Texas because of the weather this summer so we had some pressure but that is no longer the case.

Our aggregate prices are actually firming up in Texas.

Aggregates however in Northern California, while prices haven't deteriorated volumes clearly have simply because there's not been a lot of work in Northern California.

The one good news for Northern California is the state did pass a highway budget and work is being bid right now so in the early spring we should anticipate seeing volume start to improve in Northern California.

Thank you very much.

Our next question comes from the line of Chip Rogers from Carlson Capital.

Please proceed with your question.

Good afternoon.

Good afternoon.

Could you talk about the disparity you are seeing in the market you talked about, a market like the Southeast relative to the west, can you talk a little bit more about maybe price disparities and what you are seeing in wallboard?

I think it's really associated with new capacity that's coming on line in the East Coast and anticipated new capacity which would be ours and certain capacity that will come on line shortly.

So it's really a function of supply/demand again in each region.

So supply/demand right now is much looser in the Southeast than it is in other parts of the country and that's the reason for the competitive nature of pricing.

I would assume the freight costs at these low prices is not the economics of moving wallboard around isn't as good as it has been in the past?

in the past there was a higher price in the East Coast just because of the nature of the wallboard plants were higher cost on the East Coast so it was easy to take lower cost wallboard production than in the Southwest or the middle part of the country and waterfall it to those higher prices.

When the issue is flip flopped though and you still have high cost plants on the East Coast they really get pigeonholed.

And just separately on the buy back, the share buy back here -- you guys aren't messing around here, it look like you have 1.5 million shares left in the current authorization.

Is that something to go back to the board and bump that authorization again?

It will be a discussion at the board meeting but it will be a discussion associated with all opportunities.

So capital projects and balance sheet management, we will discuss it and decide what's appropriate.

When is the next monthly board meeting, when do you discuss it next?

That will be next week.

Great.

Thanks a lot.

Your next question comes from the line of John Hudson from Greywolf Capital.

Please proceed with your question.

Hey, Steve, I wanted to follow up on your earlier comments about how industry wallboard pricing tends to fall to or below cash costs for some of the high cost guys at least for a quarter or two?

And then would you expect to see some of the high cost plants go out and in fact we are expect to go see a lot of new low cost capacity come on line and replace some of that high cost.

I guess what I'm struggling with is the industry cost curve is going to continuing to go down probably.

So does that mean we would expect, assuming there's not a big rebound in demand do we expect to see prices continue to fall because the high cost capacity is going to be replaced by even lower cost?

It's really become, at this price level it's no longer a national business so it's really hard to think of pricing from a national perspective.

When demands is so tight that price is going up, it tends to go up on a national level.

But with it now at prices at this level and demand at this level it becomes a case by case for each region as to what the price is.

So in areas where there is a lot of capacity coming on line, we would anticipate high cost capacity going away, but there is so much high cost capacity that's currently in the East Coast a little more increase of new low cost capacity just shutters that high cost capacity here very rapidly.

So there's not a battle for market share that would force the prices down, those guys just go out?

It just would not -- you are going to make a decision, am I going to run my new low cost facility at half utilization or 60% utilization or run a very high cost plant at the same utilization?

In the same market or am I going to shut a high cost plant down and run my lower cost plant at much higher utilization?

Right.

So that the overall supply doesn't change that much?

Is that what you're saying?

At the end of the day the supply matches the demands and it's going to match demands regardless because there's not enough inventory space, there's very little inventory that the industry holds or that the distribution side of the business holds that the GSDs, so in reality you're matching demand and production on a monthly basis.

Right.

Okay.

Thanks.

Our next question comes from Ken Zener from Merrill Lynch.

Please proceed with your question.

Good afternoon.

With the large repurchase that you guys had could you give us a better sense of why now essentially and why not before?

Was there something about the capital projects are still out there, so housing still continues to face head winds...

What was the exact dynamic that led you guys to make such a large repurchase this quarter versus some other quarter?

Well, prior to this last quarter the stock price was quite a bit higher.

We clearly new that housing and wallboard pricing was going to continue to drop and anticipated that in fact that the wallboard industry tends to have these issues.

And as the perception for the housing and wallboard industry continues to get more and more negative, we anticipated that we would have an opportunity to buy back our shares at a very, very reasonable price.

So we held off buying six months ago because of that, but did not know that it would go this low.

And we are somewhat surprised at how low our stock price is and has gone but absolutely we are primed and ready to take advantage of the opportunity.

So does that mean that when you're looking out at the things you continue to let your leverage continue to creep up given your perception of where the price is?

Obviously I would think that position if your average price is 38 wouldn't change too much and, would you still be as interested?

To a reasonable level.

We don't want to put the company at risk or we've worked very hard to put together a very nice debt structure and we clearly would not want to have to unravel that by risking a tremendous amount of lever on the company.

We are going to do the right thing.

And have a balance sheet appropriate for the business going forward.

And I guess if I'm just thinking about, we can talk about wallboard obviously cement is becoming an increasingly important part of your business, which is really just tied to elevated freight rates, so high-end international inflation coming here.

But when you look at the wallboard business, the South Carolina plant, you obviously some companies want to maintain share and other people want to grow but is there any real, you see plans coming on on the East Coast, is there $65, $75 cost, is there any reason why that really shouldn't be falling to kind of the $90 price out there, essentially all these new plants are coming on line?

I mean you could get reasonable returns on capital but it would seem to continue to put pressure on the pricing.

At a point where it's still profitable for you guys and some of the other new producers?

The issue that we discussed in one of the previous questions that you have a real dichotomy of very, very high cost plans.

And a tremendous amount of high cost capacity is still out there.

So as the new capacity comes on then the, if you drop the price any more at all or try to go down much lower than the pricing that we discussed, you're just happy to reach into your back pocket and put more cash into the business.

So you will just naturally see the evolution of more of the high cost capacity shut down.

And I guess new capacity for you guys, for instance, what would be your target of returns on capital that you would be willing to accept, let's say on that new plant?

Would it be a 10% return on capital given probably 160 install in MSF cost of the plant, would you be willing to accept 10% or 12% returns for a sustained period which would keep it in that $95 price range?

The return is, once you have built a plant the return is what it would be and you look at a return over a reasonable period which is more than a six to one-month period that maybe we're discussing.

So clearly we expect all of our capital projects to achieve 15% cash on cash return.

And when we went into this in even in a down side scenario we believe that over a five-year period that we are easily going to achieve that type of return on investment.

In the near term with pricing very difficult then you have to look at turn, somewhat lower returns.

But over the pay back period you are going to achieve that type of return.

And if pricing gets difficult that just means that more capacity comes out until the industry balances out.

Great.

Thanks much, Steve.

Our next question comes from the line of David Wilson with Wilson Capital Management.

Please proceed with your question.

Good afternoon, Steve.

I'd like to just clarify one thing.

When you talk about elevated freight rates, I assume you're referring to seaborne freight on the imports?

Because anecdotally most truckers I speak with have been cutting prices and I'm not sure where you stand on truck versus rail internally.

But could you maybe talk about that a little bit?

The discussion about cement freight was clearly all the ocean freight coming across.

So that is absolutely going to go up next year.

And most of the importers have set up their supply demand to lock in the majority of their imports on an annual basis that usually resets around the first of the year.

And the cost to ship cement across the ocean is going up dramatically.

What about on the wallboard side where you don't have that issue in terms of freight both truck and rail?

In the wallboard side it really is, rail costs continuing to up both as far as moving wallboard, as far as moving raw materials for cement, your solid fuels, as far as moving aggregates, as far as moving cement back to the terminal rail costs continue to increase and impact margins accordingly.

And so therefore you look for other alternatives.

Fuels closer to the plant, fuels that you can truck; a shift away from transporting wallboard by rail and transporting wallboard by truck.

And all of those things are impacting margins that you optimize your logistics accordingly.

Thank you.

Our next question comes from the line of Stan Westhoff with (inaudible) and company.

Please proceed with your question.

Hi, guys, I just have one quick question about wallboard.

With the slow down that's been going on, do you have any plans at least in the short term to the I would some of your plants that might be closer together, it seems Albuquerque and Bernalillo or whatever it is?

No, we do not have any plans to idle any of our plants.

We have very good low cost position.

Maybe idle a shift or two if required but that's the most that we would look to do, instead of running four shifts we are going to run three shifts.

Or two shifts or whatever.

Yes.

All right.

That was all I had.

Our next question comes from David MacGregor from Longbow Research.

This is Garik Shmois again.

Just wondering how much high capacity for wallboard is still on the market, high cost capacity, I'm sorry?

That really is a function for each competitor.

It really is not a question for me.

Okay.

And what's the total amount of wallboard capacity additions that you're expecting for calendar year '08?

We are kind of tracking this where we are for currently '07 and believe that to date the essentially the capacity that's been added has been offset by closures with what I would assume a reasonable start up curve.

So I think there is been about somewhere in the nature of 1.6 billion to 1.7 billion for the capacity that's actually come on line on a normal start up curve with about the same amount that closed at the same time.

So right now as far as if you want to do look at that and then the rest of the reduction is just in capacity utilization.

My numbers will look different.

I think we are still at 80% capacity utilization versus some of our competitors might have stated lower capacity utilization but it's the assumption that these plants were fully operational.

Once you start them up I still believe you have a little bit of a learning curve before you reach full production rate at a new facility.

That 1.6 to 1.7 is this year from what you observed?

Yes.

Okay.

Any figure you want to outline for 2008?

Well, in 2008 you'll have another 2.5 million?

Okay.

Okay.

And just lastly can you tell us what the going freight rate is on a square foot basis for truck and rail transport for wallboard?

It really varies.

So it would be hard for me to give you that number.

Okay.

I understand.

Thank you.

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

Please proceed with your question.

Hi, guys.

It sounds, Steve, that we have not yet gotten the permits to expand the two new plants out West but you are expecting them and all systems to go to start the expansions in the spring and summer of next year?

Is that the right, am I hearing that correct and what else has to happen to get the permits?

Absolutely.

We are very, feel very, very good on where we stand on permitting both of these projects and it's just, takes a little time to go through the process.

And the returns are still up to snuff to be that once you get the returns you are gung ho to go do it?

Absolutely.

These are very good projects and the price of cement still is very solid in the U.S.

Right.

Great.

Any update or any thoughts about the aggregates expansion in California in the future?

We keep working on that project.

It's, that one is going to take a little longer to permit than the cement operations but we continue to work very hard at that.

Okay.

Can you assess, hopefully when would you be able to get permits for that and what is the likelihood of you actually obtaining those permits in time?

I think the likelihood, we will obtain the permits.

There's no reason why we shouldn't be able to retain those permits.

But it's very difficult to talk about permitting, especially in California.

In other states permitting tends to be bureaucratic in nature.

In California the authority is more political in nature so it is a little bit more difficult to predict.

Okay.

Good luck.

One last question, how many actual shares are outstanding at the end of the September quarter on a primary basis?

I think it's 44.3 -- 44,300,000.

Got it.

What you are saying is you bought 300,000 more after that and so the run rate primary shares is about 44 million.

Right.

Correct.

Okay.

Thanks.

Our next question comes from the line of David Saks from Hockey Capital.

Steve, could you comment a little bit on your views for housing starts in 2008 -- your perspective on the intensity of wallboard use in new construction homes, if you think homes will be built smaller what you've seen in terms of renderings?

And then I had a question on the shares.

Thanks.

The general prognosis right now is for most people is about 1.2 million total starts.

For me to give any color beyond that is, it's hard and there's just too many things out there right now with what's going on in the credit markets as well as other issues associated with home building.

So 1.2 I think, I've been talking about 1.2 for over a year now and I hope that it doesn't drop below that.

Leverage covenant for the debt you...

Three and a half times.

Is that on TTM basis or?

Yes, it is.

Then could you just go over the mechanics of the options that you gentlemen granted in terms of the time line, the performance hurdles, and if in fact there might be a change in control at some point in the future what would happen to those shares if you've met or not met certain of the operating hurdles?

There is a change of control functions associated with the, those options.

But other than that I don't think there is any, the timing on the options, they were seven-year options, I believe.

So other than that it's all performance based and nothing vests unless you achieve the performance.

Hopefully we meet the top quartile of that.

Thanks.

Our next question come from the line of James Callinan from RS Investments.

Just a little housekeeping.

Capex plans for next year?

I know this year was 120 to 125.

And also a question on cement margins.

They are 36% now on the wholly owned.

Just what's the incremental margin potential of growth there?

Capex probably about the same next year as this year.

That would be a reasonable assumption.

And as far as cement margins, you're talking post modernization?

Well, maybe you could just talk around both situations with the plants coming on line obviously you'll have cut that operating margin but since they are not permitted just if you have good organic growth next year similar to 7% or 8% or 9% could these margins continue to expand?

The margins -- obviously we see our costs being controlled reasonably well.

We talked about issues according to freight, rail freight associated in fuel.

Electrical costs have gone up dramatically as well.

But cut pricing has come at a greater level.

But I believe that these margins should, should be absolutely stainable if not improve.

Okay, thanks.

Next question, follow-up question from the line of Trey Grooms with Stephens Inc.

Just a follow up to a few questions ago.

When you said that you expect to still start spending on these two new projects, Mountain and Nevada in spring and summer, so that you still anticipate kind of a mid to late calendar '09 for those to be up and running?

That's correct.

Okay.

And then you talked about just briefly a moment ago on cement margins; you expect them to be sustainable.

Is that, can you fill in any kind of what exactLY is behind that, the expansion there in the quarter and along with that whenever you have the expansions completed where you see, what the other two expansions, where you see cost savings coming from out of those two, would it be kind of similar to what we saw out of Illinois?

Yes, and we still actually, I believe that there's a lot of room for further improvement at Illinois that we haven't realized yet.

So we still have room to improve Illinois as far as the type of fuel that we are burning and as far as the actual production that we are getting out of the plant.

We are able to now produce more than we can grind so we have to add some more capital back to Illinois to balance the plant out.

And then when we talk about both Mountain and Nevada, the cost savings clearly on things that the technology is there and we are improving that technology in our other facility.

there will be dramatic reduction in our fuel consumption and our power consumption as well as manpower per ton required to produce it.

So the, and overall maintenance cost.

So these, the technology to reduce costs and improve margins is obviously there and we are showing that we are able to do that and that current projects is a very good example.

Great.

Thanks a lot.

We have a follow-up question from the line of Mike Betts from JP Morgan.

Please proceed with your question.

Thank you.

Just one final question from me and it's on the cement imports.

Because just correct me if I'm wrong but I think Illinois is giving you additional about 100,000 tons capacity a month, and actually the cement imports only dropped by about 30,000.

Am I missing something here or is demand particularly stronger in Illinois or have you gained market share?

I mean your volumes are obviously well up more than the industry although I understand the industry data is still expressing very weak markets in the Southern states but I'm slightly surprised that the imports aren't down more given the new capacity or am I missing something there?

You are.

Last year we also invested in a cement import terminal in Houston and so the joint venture sales went up dramatically because of participation in that joint venture cement terminal in Houston, Texas.

Can you just remind me when that came on stream, which quarter?

It would have been the fourth quarter of last year.

Okay.

That would explain it then.

That's great.

Thank you.

Our next question comes from the line of Liz Barney from Eagle Capital.

Please proceed with your question.

Hi, there, it's Liz Barney.

A quick question on the cement price increases.

Is that across all of your markets that the price increases have now been pushed out to April or are there any exceptions to that?

No, I think that's almost all of our markets that we are seeing that in.

That's, I don't think there is any January price increases that seems firm.

I guess with one exception I have not heard that it's been delayed in the Midwest.

The Midwest, though, is the market that has the greatest amount of seasonality associated with it.

It's very difficult to get price increases when the weather is below zero and snowing.

Okay.

Then how much of the shipping costs per ton or how much do you expect them the shipping costs per ton to go up on January 1 when the freight rates reset?

It's about $10 per ton.

$10, okay.

Great.

Thanks a lot.

I appreciate it.

Mr.

Rowley there are no further questions at this time.

Thank you very much.

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

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