Eagle Materials Inc (EXP) 2008 Q4 法說會逐字稿

Ladies, and gentlemen, thank you for standing by.

Welcome to the financial results for the fourth quarter fiscal year 2008 conference call.

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

Afterwards, we'll conduct a question-and-answer session.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Wednesday, May 7, 2008.

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

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

Please go ahead, sir.

Good morning, and welcome to Eagle Materials' conference call for the fourth quarter and fiscal year 2008.

Joining me today are Art Zunker, our Senior Vice President and CFO, and Craig Kesler, 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.

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.

Housing industry and financial market problems continue to feed off one another, reducing building material sales opportunities.

These reduced sales opportunities, coupled with additional new products from the many new wallboard plants entering the marketplace has the U.S.

wallboard industry operating at record low capacity utilization.

This has created an extremely competitive marketplace, particularly in the eastern half of the U.S., where these new wallboard plants have been built.

While currently the reduced demand for wallboard is painful, the very large drop in housing starts is needed to alleviate the current extremely high inventory of vacant houses in the U.S.

For Eagle, the impact to our fiscal 2008 was lower wallboard demand and lower wallboard prices, causing Eagle's annual comparative revenues to decline 19%, and operating earnings to decline 44%.

Additionally, our fourth quarter results were impacted by some one-time occurrences, including $4.5 million in startup costs at our new wallboard plant in South Carolina, $3 million in major maintenance expenditures at our Illinois cement facility, and a $1.3 million true-up of our state income tax accrual.

Fiscal 2008 has proven to be both challenging and rewarding for Eagle Materials.

We achieved record operating earnings in our cement business, while selling out all four of our cement plants, for a record 22nd consecutive year.

We completed the construction and startup of our new wallboard plant in South Carolina on time and under budget, and we steadily improved the operating performance at all of our facilities with respect to safety, quality, customer service and cost reduction.

Wallboard revenues declined during this quarter because of the impact of very weak residential construction combined with the new wallboard supply entering the marketplace.

Our average net sales price declined 35% compared to the prior year, while our sales volumes declined 5%.

The 110% drop in wallboard operating earnings compared to last year's fourth quarter was primarily a result of the 35% year-over-year drop in net sales price, combined with approximately $4.5 million of Georgetown startup costs.

Excluding the impact of starting up the Georgetown plant, our wallboard operations were profitable during the fourth quarter.

Our fourth quarter cement revenue decline is associated with a 3% volume decline.

The majority of the volume decline was in the Midwest and the West, where unusually difficult winter weather impacted our sales volumes.

Our fourth quarter cement earnings were down 13% compared to the prior year, primarily due to lower sales volumes and the $3 million in major maintenance costs at our Illinois cement plant.

During this year's fourth quarter, approximately 21% of our sales volume was imported product, versus 30% in the prior year's fourth quarter.

In fiscal 2008, we set a new Company record for cement sales volumes, and our $96-per-ton mill net was also a record high for Eagle Materials.

Continued very high recycled fiber costs, combined with reduced gypsum linerboard sales, were the major reasons for reduced quarterly and annual comparative paperboard operating earnings.

The lack of significant large construction projects and extremely weak residential construction has created a very difficult market for concrete and aggregates businesses in Northern California.

This was the primary cause for reduced quarterly and annual comparative results in concrete and aggregates.

Art will now cover Eagle's financial position.

Thank you, Steve.

During fiscal 2008, we generated approximately $151 million of cash flow from operations, a 38% decline from the same period a year ago.

Approximately $97 million was utilized upon capital expenditures, the majority towards the construction of our new wallboard plant in South Carolina.

The combination of capital spending and repurchasing stock has increased our net debt-to-cap ratio, at March 31st, to approximately 48%.

During the year, we issued $200 million in senior unsecured notes in a private placement transaction.

The average maturity of the notes is approximately 10 years, with an average interest rate of 6.35%.

At March 31st, 2008, we had no borrowings outstanding under our revolving credit facility, and our first principal payment under our outstanding notes is not due until 2012.

In fiscal 2008, we paid $45.8 million to the IRS to stop interest while we appeal their proposed adjustment to our tax returns.

Additionally, our fourth quarter tax rate was impacted by $1.3 million due to the true-up of our annual tax rate.

Excluding the one-time true-up amount, our fourth quarter tax rate would have been approximately 31%.

Thank you for attending today's call.

We will now move to questions and answers.

Vanessa?

(OPERATOR INSTRUCTIONS).

One moment, please, for our first question.

Our first question comes from the line of Garik Shmois of Longbow Research.

Please proceed with your question.

Good morning, gentlemen.

Good morning.

Good morning.

I was wondering if you can talk about wallboard pricing trends during the quarter, particularly with respect to the announced increases in February.

And also, if you can shed some light on the increases that were announced for April, as well.

Sure.

As you know, it really is a very dynamic time in the gypsum wallboard industry.

We're going through really a very painful structural evolution in the East, where numerous large, new synthetic gypsum plants are now delivering product into a shrinking market.

And of course, as is the norm for this industry, competition for market share generally drives pricing down below industry average costs, which is where we are today.

Subsequent efforts to cover some of these ever-increasing inflationary costs are being met with fierce resistance from builders and contractors whose businesses are also struggling.

So, in regards to the February and April price increases, at best we covered the increased delivery cost associated with the current very high price of diesel.

And so, subsequently, if we want to get down to a mill net, because the delivery cost is subtracted from the gross price to get to our mill net.

Currently, our--Eagle's price is essentially flat with our fourth quarter results.

Okay.

And are you seeing maybe a regional discrepancy with respect to pricing, especially given the capacity that's coming online in the East Coast?

Pricing is always very competitive in this industry, in all the markets.

But, yes, you can say that pricing has been more difficult in the East, associated with the, again, dramatic increase in supply hitting that marketplace.

Okay.

And can you just update us on cement price increases?

I think in the press release you mentioned a positive outlook for Texas, but can you talk about attempts the Mountain Cement Plant in Nevada as well?

Where we stand today is, essentially, the only significant price increase that's holding is the $10-per-ton price increase in Houston.

All other attempts at price increases, at least in our markets, really are not holding.

Okay.

And just lastly, on the maintenance at Illinois Cement.

Is it possible to quantify the productivity improvements that you hope to generate from there?

Yes, it is.

When we put the expansion project in place a year ago, we had our assumption as to the fuel at the calciner versus the kiln a little bit backwards, so therefore we had to change the flow of fuel from one coal mill to another.

And the reason for doing that is to allow us to burn a much lower-priced fuel, petroleum coke, in the calciner.

The mill we had with calciner was just too small to grind the very hard petroleum coke product that we wanted to burn in the calciner, so it'll be a dramatic reduction in our fuel cost once that coal mill flip-flop occurs.

So that's what we are achieving now, and we do have 100% petroleum coke now on the calciner.

Okay, so the maintenance is completed at the plant.

That's correct.

Okay, great.

Thank you very much.

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

Please proceed with your question.

Good morning.

Good morning.

Good morning.

First off, on cement, it looks like, if you X out Illinois, that costs were actually down sequentially and year-over-year, which to me came as a surprise, given the fact that a lot of energy costs are up right now.

Can you kind of talk about what's going on there and what's helping you guys achieve that low-level of cost at those plants?

Sure.

The reason for that was the modernization of Illinois Cement.

So by doing that, we're able to dramatically reduce our cost structure of the Company overall, and then overcome some coal increased prices as well as power increased prices that we've had to absorb at other facilities.

Okay.

And then as far as Georgetown coming online, you guys were able to--I guess the startup costs were much lower than kind of your original expectations.

First off, can you tell us how you guys managed that and what was different?

And then, secondly, kind of on the tail of the previous question, can you give us an idea or a reminder of kind of what your expectations are for cost benefits coming out with that plant coming on and the full impact of that plant?

Yes.

Clearly, the Georgetown--both the construction and startup exceeded our expectations.

It has gone very well.

A lot of effort went into, not only building a nice facility, but training all the new employees that we hired in that area.

And we're really fortunate to be able to hire a workforce that was very qualified.

It was a marketplace that needed some new industry.

I think there had been a recent steel mill that had closed, so the quality of employees that we were able to hire in that area was just outstanding, and that helped us to rapidly bring this plant up to a very high operating efficiency.

Okay.

And then, I guess, on--I know it's constantly changing, and you said that, sequentially, that you guys' gross price for wallboard, it sounded like, was essentially flat.

Do you expect that trend to continue, or do you think that there's more pain ahead, I guess, in the industry?

Or do you kind of feel that we've hit kind of an area here where we could see a bottom to wallboard pricing?

Clearly, the current pricing is very painful, but we still have this structural issue of really very, very low industry capacity.

Utilization is not the lowest in the history of the industry.

So, structurally, we need to have something change, either demand to grow or some of the older 60-year-old capacity to close, before we really have a good chance at getting a price increase to cover some of this inflationary cost that we're seeing.

Okay.

And then, just lastly and I'll jump back in the queue, I noticed you guys didn't buy back any stock in the quarter--not really a surprise, given how aggressive you've been in the prior two.

Can you give us kind of an update on your thoughts on stock buybacks going forward?

And we're also going to continue to watch the wallboard industry to see where pricing finally turns.

But in the meantime, we've got a lot of capital investment that we're looking at going forward.

Our Nevada Cement project continues to develop.

We have now received our permit to construct from the state, and are finalizing the negotiation with bidders as we speak, so timing for starting that project, as we have stated in the past, should be for early this summer.

So--okay, got you.

Thank you.

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

Please proceed with your question.

Thanks, good morning.

I wanted to ask about wallboard pricing, as well.

Steve, I thought--if I'm not mistaken, there was a price increase announcement for April by the industry, so am I right to assume that, given the factors you've already outlined, that that's probably going to fail, or at least most of it, not hold?

Is that the situation?

Essentially, Jack.

That price increase, even before we hit the announcement date, the majority of that had already been negotiated away with one-off deals.

There might have been a little bit of money left to cover the increased delivery costs associated with diesel.

But it is just a very, very competitive market, so there's--it's tough to get a price increase in the wallboard industry right now.

Sure, I just wanted to clarify that.

Thank you.

On cement, on the subject of price increases as well, you mentioned the only area where you have a price increase holding is Houston.

You said Houston specifically, but is it not the case that there's some amount of pricing holding in other parts of Texas as well?

It looks like the other attempt to get $5 in the rest of the state is not going to hold.

Okay.

So that's a relatively new development, correct?

That is correct.

Yes.

And then, with regard to the Fernley, Nevada plant, how much of the cement that you guys produce at that plant do you typically ship to California?

You kind of have to look at where you are in a cycle.

During a couple of years ago, or even last year, I don't think we shipped from the plant--relatively little or no cement to that market.

As Northern California and Northern Nevada has been hit hard with this homebuilding recession, we've stopped purchasing product to ship into Northern California, and have started shipping some from Nevada.

But in a normal market, really little or no product would go to Northern California.

Okay.

So you guys really don't have much dependence, if that's the right word, or exposure on the cement side to the state of California, then.

No, that's correct.

The exposure was from any profits that we would get from purchased product that we'd bring into that terminal.

Okay.

And can you remind us how much you have left on your share buyback authorization?

And also, while you're at it, CapEx for fiscal '09 update, please.

I'll let Art handle that.

Jack, we've got about 717,000 shares left underneath the repurchase authorization.

And then, for CapEx for fiscal 2009, we're currently looking at something around $115 million, with the majority of that applicable to the Nevada plant that Steve talked about earlier.

Nevada plant for the majority, okay.

Right.

Great.

Thank you very much.

We have a question from the line of Glen Wortman of Sidoti.

Please proceed with your question.

Good morning, guys.

Good morning.

Where do you guys see maybe your wallboard capacity utilization trending to over the next year or so?

We are going to be very near industry average, so we think that we have--with the new capacity that we've brought online, that, of industry capacity, we've got somewhere between 9 and 10% of industry capacity, so in that range.

Okay, okay.

Also, with respect to your four cement markets, would you still say that consumption still exceeds domestic capacity?

And if so, by how much, if you can just kind of give us, say, a ballpark?

Cement's a regional business, and clearly the demand is very--it remains strong in the markets that we're playing in.

If we look at a national basis, there still is a need for imports into the U.S., but there are a number of cement plants that are currently under construction.

I do not think that we'll see a lot of new capacity hit early this year, but towards the end of this calendar year and next year, we'll see quite a bit of new capacity come online in the cement industry.

Okay.

And then, finally, as far as the two cement expansions, what are your current projections for when they'll be up and running?

The timing for Nevada Cement is maybe an 18- to 24-month build-out as we're looking at the current marketplace.

And our Mountain Cement facility probably is going to start up about a year after we start construction of the Nevada plant, and we'll--as we look at the market, we'll decide whether we're going to fast track that or go at a normal construction pace.

Okay.

All right, thank you very much.

Our next question comes from the line of David Sachs with Hocky Capital.

Please proceed with your question.

Thanks.

Could you talk a little bit about your perspective on the housing market, what you see housing starts looking like this year, when you might think the supply and demand balance that you referred to in your opening comments would more normalize?

And then, if you can compare the current market conditions in wallboard to past downturns, and typically, when the industry has run at these levels of capacity utilization, how much time or pain does it take before the high cost producers evaluate or take action on their plants?

The housing industry--and we've talked about a lot of inventory out there, so the good news is that the homebuilders have dramatically reduced the amount of homes that they're building.

If you follow permits, they're down dramatically, so that is going to help alleviate this issue.

Financial markets I think are starting to show some signs of strengthening.

When you put that into perspective, sometime in '09 to see a turnaround in homebuilding is not unreasonable.

As far as the wallboard industry, this is probably, as far as capacity utilization, as deep as I've seen it.

Maybe many years ago it might have been deeper, but this is a very deep trough regarding capacity utilization, and it just depends on how long the very high cost plants want to continue to play in this market before we see a turnaround.

But clearly, with capacity utilization in the low to mid 60s, it's a very, very difficult marketplace.

And is there anything unusual about the competitive dynamics, given what's happened in the decline, that surprised you in terms of pricing integrity or in terms of how your competitors are dealing with inflated raw material costs and higher transportation costs?

I think it's just--I really don't see anything unusual there.

It's sometimes that you have things moving diametrically opposed, one being the pricing coming down associated with what's going on in the market, and the other with costs that have become maybe more dynamic than they have in the past, especially with these diesel prices, natural gas, paper, starch, power costs.

All of these things have gone up at the same time, and it takes a while for the industry to realize the impact of these increased costs, and to realize how much that has reduced margins or negatively impacted margins.

What's your best guess of the industry's cost compared to Eagle's cost?

That's pretty hard to--for me to guess at.

Okay.

Would a number in the 110-to-120 range make sense for an industry weighted average cost, given the age of capacity?

There are so many plants, and you have so many new plants, and you have some old plants, and you're in a transition where some of the older plants are shutting down, so it's kind of hard to pinpoint the actual average cost, but that probably is as good a guess as I could come up with.

All right, thank you.

Mr.

Rowley, there are no further questions at this time.

I'll turn the presentation back over to you.

Thank you, and I look forward to another call at the end of our first quarter.

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.