Eagle Materials Inc (EXP) 2009 Q1 法說會逐字稿

Welcome to the financial results for first quarter Eagle Materials fiscal year 2009 conference call.

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

Afterwards we will conduct a question-and-answer session.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Tuesday July 22nd, 2008.

I would now like to turn the conference over to Steve Rowley, President and CEO.

Please go ahead, sir.

Thank you.

And welcome to Eagle Materials conference call for the first quarter fiscal year 2009.

Joining me today are Mark Dendle, our Executive Vice President and CFO, Art Zunker, our Senior Vice President and Treasure, 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 your 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 the press release.

Eagle Materials first quarter results were disappointing.

Rapidly escalating energy and transportation costs severely and negatively impacted our wallboard operations performance.

And while a wallboard price increase was successfully implemented during the quarter, it did not occur until the last week.

Therefore it had very little impact on this quarter's results.

Our response to this changing environment has been decisive and swift.

To right size our capacity utilization of our plant and to professionally manage reducing our presence in the marketplace going forward, focusing on core markets and opportunities that make financial sense.

While currently the wallboard industry is suffering from dramatically reducing housing construction, the impact of minimal spec homes currently being built will have a positive impact once the inventory of new homes declines.

Additionally our first quarter cement results were impacted by adverse weather conditions in the Midwest and a shift in the timing of our annual major maintenance at our mountain cement plant.

The impact of all of these items caused Eagles quarterly comparative revenues to decline 20% and our operating earnings to decline 64%.

The unfavorable wallboard supply/demand dynamics remained about this-- about the same this past quarter with the US wallboard industry operating at about 65% capacity utilization.

Low industry capacity utilization combined with the very high price of diesel, which increased trucking costs to the marketplace, dramatically lowered our average net sales price.

Subsequently our quarterly comparative revenues declined 22%.

The poor wallboard operating earnings compared to the prior year was associated with the decline in net sales prices and a significant increase in energy, transportation and raw material costs which have increased approximately $20 per MSF from the same period in the prior year.

These increases occurred even while our American Gypsum plant, customer service and logistic departments all performed at peak efficiency.

In response to the rising energy transportation and raw material cost the wallboard industry has announced an additional price increase for August.

A 13% decrease in sales volume was the primary driver of the decline in Eagle's quarterly comparative cement revenues.

The majority of the volume decline was in the Midwest where economic conditions are weak and copious amounts of rain fell during the quarter.

Our first quarter cement earnings were down 18% compared to the prior year primarily due to lower sales volumes and a shift in the timing of major maintenance at our Wyoming cement plant.

These issues were slightly offset by a record high $97.52 per ton mill net.

During the quarter approximately 20% of our sales volumes was purchased product.

The majority of our purchased product is being sold through our joint venture operation in Texas where demand remains strong.

Paperboard sales volume were negatively impacted by reduced sales to the wallboard industry.

Lower sales volumes combined with higher OCC and energy cost decreased our paperboard operating earnings 26% compared to the prior year.

Our concrete and aggregates operating earnings were down 48% from the prior year.

The primary driver in the quarterly comparison decline was an extremely weak construction market in Northern California which continued to put downward pressure on sales volumes in both business lines.

However, currently volumes in Northern California have started to improve as the result of several large road construction projects that have recently begun construction.

Now I would like to introduce Mark Dendle, Eagle Materials new Chief Financial Officer, and Art Zunker, who has announced his retirement effective December 31st.

Thank you, Steve.

In addition to lower quarterly earnings, increased inventory of cement, clinker and aggregates associated with lower quarterly sales volumes combined with increased fair parts inventory at Georgetown and Illinois Cement reduced Eagle's quarterly operating cash flow.

Capital spending during the quarter was limited to minor projects throughout our operations.

We continue to negotiate with contractors on the Nevada Cement modernization project, therefore no capital was spent on that project during the quarter.

As of June 30th 2008, our net to debt to capital ratio was approximately 49%.

Essentially unchanged from March 31st, 2008.

Interest expense during the first quarter of fiscal 2009 includes approximately $1.4 million for our outstanding tax item with the IRS.

Thank you for attending today's call.

Charlene we'll now move to the question-and-answer session.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Garik Shmois with Longbow Research.

Please go ahead, sir.

Hi, good afternoon.

Just wondering if first off you can quantify the maintenance expense at the Mountain Cement plant?

Yes, that was -- of the $2 million, $2 million plus or minus range.

Okay.

And Steve, could you talk a little bit about your confidence in your ability to sell out your cement plants for I guess it would be a 23rd straight year this year, especially given volume weakness and the cut back on imports and the weather issues that you had in Illinois here in the last quarter?

Sure.

I feel confident in three of the plants that we'll be able to achieve it, but a slow start in the Midwest is going to be difficult to overcome, although we continue to work at ways to make that happen.

Okay.

And are you concerned at all about potential for price weakness?

No.

As we continue to work at ways to move that volume were clearly our first and foremost way to move the volume is in a manner that's not disruptive to pricing.

Sure.

Okay.

Thank you very much.

I will get back in the queue.

Thank you.

Our next question comes from the line of the Glenn Wortman with Sidoti & Company.

Please go ahead, sir.

Yeah, good afternoon, everyone.

Good afternoon.

Now just excluding the weather issues in Illinois, I mean how much of the volume impact do you think was from just lack of demand?

That's a little hard to understand.

The State of Illinois has had some budgeting issues that they just haven't been unable to pass a capital plan in Springfield.

So some of it's associated with that, some of it's associated with the weather, and it's a little difficult to tell which is which.

Okay.

Thank you.

And then just as far as the wallboard price increases.

Can you comment on-- and if you see this price increase sticking unlike the last ones and where you see prices going over the next few months to a year or so?

Sure.

The June 23rd price increase is holding very firm.

It's a little too early to know about the August price increase.

But the June 23rd is holding firm.

And we're looking forward to see what happens with the August price increase.

Okay.

And then just as far as just the industry dynamics in wallboard, just on a national basis, do you know like where the current capacity is and is-- or this-- I mean how much capacity is expected to come on line over the next year or so?

I think the majority of the capacity has come on line with the exception of one plant that'll come on later on this year up in the Northeast.

So I think all of the new capacity is on line or estimating that we're operating at about5 65% capacity utilization.

Okay.

And then with the continued weakness that we're seeing in the residential side and then just the outlook on nonresidential is deteriorating as well.

Do you see that capacity as utilization coming down much further?

It certainly has that potential and right now as a Company we're tailoring our operations to meet the demand in a declining market.

Therefore we're focused on margin improvement which is a little more important than sales volume right now and we are also prepared to idle additional volume if needed.

Okay.

And actually then also just going back to the industry capacity.

Is much of the remaining capacity still the older higher costs of variety?

That varies from competitor to competitor.

So that's a little hard to answer.

All right.

Thank you very much.

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

Please go ahead, sir.

Thanks, good afternoon, Steve.

I was going to ask with regard to your wallboard mill net in the September quarter, do you think the-- with the price increase, the June price increase which I guess the bulk of it you'll first fully realize in September quarter, will that be enough to get the mill net higher from the June quarter even with cost on the rise?

Yes that will be.

And on the cement side with regard to the price of coal, I think that's up sharply this year.

Can you remind us what you guys arrange for your coal purchases in advance?

And what sort of situation will we be looking at if any change in 2009 with regard to coal prices?

We have some exposure to rising coal costs.

But in general we're in a reasonably good shape for the next 12 to 18 months.

After that we have much greater exposure and we got a little issue with a force [inaudible] at one plant right now.

But we're working our way through that.

But in general we're-- as far as coal we're in pretty good shape.

So that-- so then through '09, as we know the world today, maybe a little bit of an increase nothing that is going to seems like would move the need in a meaningful way?

Nothing that would move the need in a meaningful way.

Okay.

And you mentioned -- I guess it was mentioned in California, Northern California, volumes down big in the quarter, but some road projects started up recently, some large road projects.

And I think a lot of people are aware that the state put through big bonding initiative a year and a half ago and maybe some of that money if finally filtering through.

But the budget situation in California, are you guys -- how close are you guys to that?

Is that a situation we should be worried about?

It looks like it's deteriorating some?

This money has already been put in place.

Is that California road situation something that's of concern, do you think?

California, they're going through this budget.

So I know they're taking about a number of ways to resolve it, one of which is raising taxes.

So it's clearly you have to stay on top of everything that's going on in California because it's such a large state and has a large impact to the economy.

But I-- until you see where all that plays out, it's hard to know what next year will be.

Right, I guess they haven't even voted on the budget.

Hopefully they'll do that in early August.

That's correct.

Okay, great.

Thanks, Steve.

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

Please go ahead, sir.

Thanks, guys.

And also, Art, I wanted to congratulate on your retirement and wish you the best of luck there and also with Mark on his new role as CFO there, congratulations.

Thank you.

I guess the first question would be on cement price increases in Texas.

There was some earlier in the year.

But it sounds like there could be some other price increases announcing cement for the Texas market.

Could you guys kind of give us an idea of what you're seeing there and your expectations for that?

Sure.

The price increases in April held.

And currently there is another price increase for kind of Central and South Texas of about $5 per ton that was implemented in early July and it's still a little too early to tell how well that's sticking.

Okay.

But just for your sense of kind of the way the demand structure is right now in Texas, do you have just kind of your gut what it's telling you as far as your feelings for the price increase this second one?

Demand is remaining strong.

And the cost of imports continue to go up.

So you can -- that's what we know and how that ends up is what we'll find out in the next month or so.

Okay.

And then on volume, on the cement volume fall off there, you spoke about weather in the Midwest, but could you give us kind of an idea -- you also mentioned the demand has continued to be weak in the Northern Nevada market.

Can you give us an idea of kind of how those two impacted the cement volume as far as maybe the closer look at tons or mix?

Sure.

The majority of volume that we lost in Nevada was purchased product.

So there's not a huge amount of impact on earnings there.

That's in 20,000 to 25,000 ton range.

Then we also had some lower volumes in the Mountain region as well.

That was really just a function of weather and as soon as the weather broke the volumes started picking back up and the volumes are very strong there right now.

And then-- but the vast majority was where we had all that rain in Illinois and the Midwest and surrounding states and there's a lot of cement looking for a home right now.

So it's pretty competitive trying to find a home, but not too disruptive in as far as trying to lower prices dramatically to move the volume.

So I think people are looking at larger swaps and other ways to move it which would minimize freight and also minimize any imports up into that market.

So everybody's working to resolve that in a manner that is not very disruptive to the marketplace.

Okay, thank you very much.

I'll get back in queue.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of Mike Betts with JPMorgan.

Please go ahead, sir.

Yeah, hi, Steve.

I had sort of three questions if I could.

First, two are probably quite brief.

On Mountain Cement and the maintenance, in last year did that occur in the quarter that we're now in?

Was it just brought forward a quarter, or what was the timing issue there?

It actually occurred in the second quarter.

Second or third quarter.

Kind of between those two.

Okay.

My second question was, and I'm sure you've seen the USG numbers as well.

I mean they obviously got a bigger price increase in the quarter.

I mean now-- I mean some of that's obviously regional differences.

But also was there any impact on your sort of average price of the opening of the plant in South Carolina, was that also a factory and what happened to that headline price that we see?

Clearly there was a geographic shift for us.

So we had more sales out of South Carolina and there's a lot-- all the new capacity is coming on in the East.

So that's where pricing tends to be the most difficult right now.

So you're absolutely right, that was a part of it.

Okay.

And my third and final question was, just in terms of covenants in terms of debt, are there any covenants that you got that sort of divide the net debt to EBITDA or our interest cover -- I mean, that-- I mean could you just remind us what those covenants are if there are any?

Sure.

We do have covenants and it's the net debt to EBITDA is three and a half times.

And the interest coverage ratio is two and a half times.

Okay.

That's great.

And one final question if I could, Steve, I can seen it in my spreadsheet.

The ready mix concrete price was quite a lot lower than in the fourth quarter of -- or the previous quarter rather.

Was that caused by regional changes or was there anything else behind that?

That was really-- primarily regional changes.

Okay, that's great.

Thank you very much.

Our next question comes from the line of Michael Corelli with Barry Vogel & Associates.

Please go ahead, sir.

Hi, good afternoon.

Good afternoon.

What can you tell us about your wallboard price currently?

Well, currently we're-- there is a price increase that went into effect June 23rd as we mentioned and that's holding firm.

And again we're -- we continue to tailor our operations to meet demand of our profitable market.

While we're maintaining a minimal presence in our secondary market.

So we're backing off a little bit from the marketplace and that's helping to support the price increase.

So do you have an average price of where you would be now versus what you averaged in the quarter?

It's a little early because there are some protection that takes place for a week or two with some customers there's some job quotes to it.

It takes about a month before you can really fully vet that out.

Okay.

And as far as your price versus USG what they reported today, I mean is this on the same basis?

Are they netting out transportation costs the same way that you are?

Or is their price being reported on a different basis?

I think their price is recorded there properly.

It's-- they might be a little -- some of their plants might be a little closer to the marketplace.

Okay.

And could you just talk about what your plans are for CapEx this year.

Art?

Yes Mike, we're looking somewhere there's the total of $40 million to $50 million for the year.

Obviously that number has come down from last quarter since we're delayed-- the Nevada projects were delayed.

We're still negotiating with the vendors there and obviously the spin and while we push later into the year.

Okay.

Great.

Thanks a lot.

Our next question comes from the line of [Sanjay Sims] with [Bloombergson].

Please go ahead, sir.

Hi, Steve.

I just had a couple of questions.

First one was on, I mean you guys are the lower cost players in the industry, and now you're now sort of break even or a little bit less in wallboard.

What's your thoughts on how the other guys have-- like how much pain they're under?

And we'd seen reports in the past where people have said, well, people just sort of grit it and bear it out and are they in real pain and at some point they will cut capacity.

If you just comment on that issue.

It's hard for know comment on my competitor's pain.

But I can comment on our pain and we don't like it which is why we're going to change the way we're going to market.

And we're going to reduce our presence and get back into markets where we know we can make some money.

So you'd be willing to cut back capacity, is that right?

Absolutely.

Got you.

And the second questions is more of a bigger picture one you can-- whatever you want to say you can.

It's more like the housing starts issue and then in the last I don't know how many cycles three or four it's typically bottomed at about a million and we're still through that and going down.

And is it that we-- when you think about this issue do you think that we end up like 700,000 starts or something before we've hit bottom given the access out there and all that kind of stuff?

I think those numbers are a little hard to quantify.

Sure.

What I would really like to see is the real estate pricing stabilize.

As soon as that happen, then the financial market stabilize even if this thing turns around.

Okay.

Okay.

Thank you very much.

Our next question comes from the line of Justin Boisseau with Gates Capital Management.

Please go ahead, sir.

Hi, thanks.

I just want to make sure I understood.

You said CapEx for the full year $40 million to $50 million, was that correct?

That's correct.

So that means basically there's-- you have no outstanding capital projects for the remainder ever the year, right?

Well, actually the $40 million to $50 million that includes some reduced spending for Nevada.

By the time we get that project started it's going to be latter part of the fiscal year so that number is reduced from what we previously announced.

Right.

Okay.

That's all I had, thanks.

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

Please go ahead, sir.

Hi, just wanted to follow-up on a previous comment you made, Steve, about potential capacity closures on your part.

Would it be mostly in the form of shift reductions or would you be willing to close plants if necessary.

For us it makes sense just to reduce shift.

Okay, so it'd be more of I guess the same of what you have been doing and how you've been responding during the course of the cycle?

That's correct.

Okay, thanks.

And there are no further questions at this time.

I'll turn the call back over to you.

Thank you and look forward to the next call at the end of the second 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.