Eagle Materials Inc (EXP) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Eagle Materials third quarter fiscal year 2009.

(Operator Instructions) As a reminder, this conference is being recorded Thursday, February 5, 2009.

I would now 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 third quarter of fiscal year 2009.

Joining me today are Mark Dendle, our Executive Vice President Finance and Administration and CFO, and Craig Kesler, our Vice President Investor Relations.

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 can 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.

Exceptional business performance is always magnified during difficult economic periods.

Eagle Materials wallboard, paperboard and cement operational performance during the third quarter was outstanding.

Our third quarter financial results were better than expected and reflect the incredible performance of our plant, sales and customer service organizations.

When building materials and construction product sales opportunities become difficult and when the outlook for future sales opportunities continues to trend down, Eagle Materials knows how extremely important it is to rapidly redefine the focus of every valued Eagle employee towards completely new and different challenges that will improve our competitive position in a weak marketplace.

This may sound easy, but in reality it requires a lot of hard work and flexibility.

Eagle's positive results showed the amazingly swift transformation of our smart, loyal and dedicated employees.

Their willingness to accept new direction has greatly benefited all shareholders.

I've been asked to pass along a message from our employees to our shareholders.

Rest assured that we realize that the current austerity optimization process is a journey not a destination and that every day we continue to improve our ultra competitive low cost position while maintaining the absolute highest levels of safety, quality, and customer service.

Dramatically lower wallboard sales opportunities combined with a massive amount of new wallboard capacity coming on line during the past 12 months has the US wallboard industry operating near 50% capacity utilization.

While several US wallboard plant closures have been announced competition for sales remain keen.

To illustrate this severity of reduced wallboard sales opportunities, our third quarter quarterly comparative revenues declined 17% even with improved quarter to quarter pricing and with the addition of our new Georgetown plant selling products in a new southeast region.

The October wallboard price did not hold and, in fact, it created some marketplace disruptions.

The January wallboard price is partially holding predominantly where pricing had been irrationally low.

On a positive note, energy costs and freight to the marketplace continues to improve.

American Gypsum margin improvement continues to come from exceptional execution in our plant, logistics and sales department.

Currently the outlook for wallboard sales volume continues to decline because of further reduction in residential construction combined with waning commercial construction.

The combination of lower wallboard and paperboard sales volume combined with slightly higher energy cost resulted in our wallboard and paperboard operating earnings declining by 31% when compared to last year's third quarter.

As I stated back in October, our wallboard operations were turned to profitability in July.

They have remained profitable each month since.

Additionally, as previously mentioned, our wallboard net sales price has modestly improved as a result of the January price increase.

An 18% decrease in sales volumes was the primary driver of the decline in Eagle's quarterly comparative of cement revenue.

The majority of the volume decline was in the midwest and the west where current economic conditions in construction remains very weak.

Import of foreign cement into the US continued to recede in favor of supplementing regional supply demand imbalances with US manufactured cement from neighboring regional markets.

Our third quarter cement earnings were down 17% compared to the prior year primarily due to our lower sales volume, higher energy prices, and operating our Illinois cement plant at 60% capacity.

Our concrete and aggregate operating earnings were down 87% from the prior year.

Lower Ready Mix and aggregate sales volumes combined with lower Ready Mix and aggregate pricing were the major factors contributing to our reduced revenues and earnings.

I'll now turn it over to Mark to discuss Eagle's financial position.

Thank you, Steve.

Eagle's financial position continued to improve during the quarter thanks to operating cash flow improving from the previous quarter to $41.2 million.

Capital spending in the quarter was approximately $1.8 million.

We anticipate our capital spending to remain at these low levels during the current economic downturn.

As of December 31, 2008, our net debt to capital ratio improved from 48% in the September quarter to 45% in the December quarter.

We are in the process of repurchasing 100 million of our senior notes.

The purchase will be funded by borrowings under our revolving credit facility which currently has a lower cost of debt than our senior notes.

In addition to lower cost borrowings the purchase of the senior notes modestly reduces our outstanding debt and improves our financial flexibility with the combination of fixed term debt, variable revolving debt and cash while at the same time maintaining a large amount of readily available liquidity.

Thank you for attending to today's call.

We will now move to the question-and-answer session.

(Operator Instructions) Our first question comes from the line of Kathryn Thompson from Avondale Partners.

Please proceed with your question.

Hi.

Thank you.

First on the wallboard segment, where did pricing end up at the quarter end versus the quarterly average that you stated?

Very near the average.

Right around $105.

Okay.

And then also given that there's already been some capacity takeouts over the past couple of months, do you see additional capacity coming out of the industry other than those that have been announced?

If so, where geographically do you think it should come out?

We have not seen or heard of anybody announcing capacity coming out of the marketplace.

The only thing that we know of, the majority of the new capacity that has been added in the last one to two years has all been predominantly in the east, Midwest, or east, predominantly the east.

That's where the biggest supply/demand imbalance currently resides.

Okay.

Moving to cement, did you sell all your cement volume out of your plants in the quarter and what are the prospects for the current quarter?

No.

we have not sold out of Illinois cement plant for sometime now, for all of this year.

I don't think any quarter this year we sold that plant.

With that exception --

Excluding Illinois, which is running at two-thirds capacity as you said earlier, excluding Illinois, have your other plants sold all its volume?

We continue to sell out our volume, although we have grown some inventory out west.

Okay.

What was kind of the same question on cement side as wallboard.

Where was pricing at the end of the quarter as opposed to the average and kind of tagging on to the previous question, do you anticipate idling any facilities in '09?

The price was about the same as the average right near the $95 range, and if business does not pick up in the west, we certainly will consider having to idle some capacity out there as well.

As far as pricing goes, we are hearing that if you include transport, import pricing is about on par and taxes as current production.

Could you confirm if that is a similar trend that you are seeing?

I think you have to take that on a case by case basis and in the board and in the marketplace.

That would be hard for me to discuss.

I can just tell you I know that in Texas even though the import prices have come down dramatically, it is nowhere near our cost of manufacture.

Okay.

Perfect.

Also, aggregates, I assume that there was a bit of a mix that continued to be a factor in your pricing in your just reported quarter.

Do you expect mix to continue to be a factor in the current quarter?

This quarter maybe not as much because a lot of that had to do with a base or sub base job in northern California with the weather being difficult, there's very little work taking place this quarter.

Maybe that will moderate in the fourth quarter but, again, the large volume of our current sales out western aggregates is going into the base market.

All things equal on in terms of aggregate pricing in California, I understand mix was an issue in this quarter and the previous quarter, but all things equal for your California aggregate pricing, what has pricing been sequentially and year-over-year?

It hasn't moved much.

It may move a little on a specific job but in reality even if you build some inventories and aggregates, you don't have a tremendous amount of capital tied up in the inventory build, so it's much easier just to be patient and wait till the market turns rather than try to dump that inventory into the marketplace.

Would you characterize it as flattish year over year?

That's correct.

What about Texas?

Texas the same thing.

The issue always in Texas, because the deposits are fairly poor, there's a fair amount of base that has to be mined when you are producing the washed aggregates, and so the base tends to get pretty competitive whereas the pricing on your concrete aggregates and asphalt aggregates tends to remain pretty stable.

Okay.

What was D&A for the quarter?

Depreciation and amortization?

Yes.

For the quarter ended December 31, it was $12.7 million.

Okay.

And then also I guess interest expense on an annualized basis would be about a million dollars below the -- on a quarterly basis from the Q3 run rate?

Is that a correct assumption?

That's correct.

That's all I have for right now.

Thank you.

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

Please proceed with your question.

Good afternoon.

Just a couple of questions.

One, Steve, with cement volume and demand obviously down, can you talk about how you guys are running your cement plants differently in this environment and then also kind of how you see plant costs trending in '09?

Sure.

It's really important to properly maintain a cement plant.

As we have said all along, we stay ahead of that instead of getting behind it.

So properly maintaining these plants are very efficient and they generate tremendous amounts of free cash flow.

But when the market turns and you have to operate not at full capacity, it really requires a completely different mind-set throughout the entire organization.

Cost reduction versus producing incremental ton of capacity becomes paramount but you have to do that not at the expense of maintenance.

So you force efficiencies to be better and the cost of the materials that you use as well as you find ways to use less energy and less fuel and alternate fuels that may cost a little less to produce the products.

So a tremendous amount of energy that goes into that.

You also minimize your maintenance cost as opposed to really bringing in a lot of outside help to have an outage instead of being maybe a ten-day outage performance in eight or seven days because you have a lot of contractors that come in to help out.

You go ahead and accept that your maintenance is going to be 10 or 11 or 12 days and you do perform all your maintenance with your employees.

With all that said, kind of looking I guess cement cost on a -- plant cost on a per unit basis, would you expect that to trend down somewhat in '09 given what you just said?

The answer is yes, we believe that would be the case.

Okay.

And then for wallboard, would you mind giving us your best guess on where you see wallboard consumption shaking out in '09?

It's pretty difficult right now, and if I had to put a guess, the front half is going to be less than annualized at a less than 20 billion per annual basis.

Let's hope that the second half of the year is higher and maybe we come in near that 20 billion square foot for '09.

But the first half is less than that and trending down.

Okay.

And last question.

With all the distressed assets in the aggregates and cement industry we are seeing out there right now, are you seeing anything interesting that you think you might make a run at it at some point this year?

We are always open to look at opportunities, but it has to be the right opportunity.

I think it's a little early, but if things continue to decline from an economic perspective, maybe something becomes available that peaks our interest.

Thank you and congratulations on a good quarter.

Thank you.

Our next question comes from the line of Glen Wortman from Sidoti.

Please proceed with your question.

Good afternoon, guys.

Good afternoon.

Thank you.

Aside from the cost controls you just discussed, is there anything going on in cement that is aligning you to preserve margins?

That's really the lever that we are pulling.

Okay.

And then looking to the paperboard segment, what's behind the profitability improvements there?

Because it looks like you are seeing volume declines as well but margins look like they are going higher.

Very similar to what we talked about in cement.

We are able to buy fiber that is nice right now.

That is something that is just happening because the economy fiber costs are lower but we dramatically reduced the freight to bring the fiber in.

We reduced our natural gas consumption by 27%.

It's a huge impact to the cost of producing paper.

We reduced our waste quality product by 75% versus last year, and we reduced our chemical spend by more than 34% by operating the machines better.

So it's really that focus on cost control that is making the difference.

And then finally with respect to cement pricing, it came down a little bit in the quarter.

Was that due to weakness across all your markets or was that in any particular market?

It is primarily in the midwest and the west, although things are starting to get difficult in all markets.

Okay.

Thank you very much.

And our next question comes from the line of Todd Vencil from Davenport.

Please proceed with your question.

Hi guys.

How are you?

Nice job on the margin performance in the quarter.

Thank you.

Remind me the magnitude of the January wallboard price increase.

The magnitude was 10%, 10% to 15%, I believe.

I think it settled in at about 10%.

Okay.

And only part of that has held?

Would you want to venture a guess as to how much of that held?

It's still a moving target.

Less than half, but still a moving target.

Okay.

And when you think about wallboard, how much, do do you have a feel for how much of a benefit you are getting from lower energy cost at this point?

Sure do.

From a sequential perspective, we've had about a $7 or $8 benefit.

Year-over-year, I think we've had a benefit of $2.5 or so, I think.

Do you have those numbers off the top of your head for cement as well?

For cement, it's a minor benefit there.

I think, in fact just the opposite.

Power costs are up about a dollar and fuel cost is essentially flat.

Any outlook for that to change, or is that where you are going to be for a while?

I think we can improve on that.

We are working on alternative that would help improve those costs.

Right.

So, Steve, I realize this is a question everybody is trying to answer but I'd love to hear your thoughts on it as the most educated of the two of us who are talking right now anyway.

With demand continuing to fall off, and I'm thinking specifically about wallboard, with demand continuing to fall off and with a really nice decline in your energy cost, how can -- and looking at something like a 50% capacity utilization number, how sit that the competitive situation is allowing for you guys to continue to get price of that business?

That's what I'm really scratching my head over it.

I'm glad you did it and you did a good job but do you think you can continue to do that this year?

You just have to look -- now you are talking about maybe some regional differences.

The majority of this price increase, as I mentioned a little bit earlier on the prepared comments, was in some markets that were just irrationally low in the price and just made no sense, and people were at or below cash cost on average on those marketplaces.

So it made sense to get price increase there, and we are achieving that.

As you go forward, it's really a function of each competitor and how efficient they are.

But as I look at wallboard, I'm looking at all of our plants here and I see waste in the 1% levels, the low 1% range.

That's incredible performance and that's what gets your cost so low and gives you that advantage over the price in the marketplace.

So the real, when you get to capacity utilization in the 50% level it's more a function of what is your delivered cash cost to marketplace and if you are more effective at that you are going to make money.

If you are less effective or there is transportation costs that impact that, then you have an advantage and you have a chance, and if those costs move any, you are not going to continue to operate below cash cost, so you will have price improvement when those things occur.

Okay.

That makes sense.

Have you seen any, in the areas maybe where the price increase isn't holding where the price wasn't as irrationally low, are you seeing any discounting behavior by the competition or is everybody kind of hanging in there?

In those cases I don't think we achieved much benefit, but I don't think we gave much back this time.

In November we actually did get some back, but the October/November price increase is a little bit difficult.

This one I have not seen a lot of give back from the original price.

Got it.

And on the cement side, any kind of regional pricing or competitive differences, any place stand out as being either -- you talked about what the demand situation looks like.

Is anybody really pushing down on price in any of your markets?

We are not seeing that in any market.

Okay.

And then final question I guess.

In the concrete business, can you just talk a little bit about how the sort of price cost dynamics are sort of playing out there where you guys are operating?

That's difficult and the further in the value chain you go down, the tougher the competition always gets.

So that's very difficult for us in both the Texas market as well as the northern California market.

So margins are pinched and very, very small in both those businesses.

Has your material spread declined in the last quarter?

Maybe not in the last quarter but they are pretty low.

Got it.

Thanks a lot.

Our next question comes from the line of Mike Betts from J.P.

Morgan.

Please proceed with your question.

Hello?

Hello.

Hi, Steve.

I had a number of questions.

Can I just first clarify you talked about $7 to $8 in terms of natural gas benefit.

That per thousand square foot or is that some other unit?

No.

That's correct.

Could I ask then how much hedging you had in the quarter?

If you had all the benefit now of the lower natural gas prices or was there any hedging in place?

We had some hedging in place, not a tremendous amount, but we had some hedging in place, less than half, maybe 40%.

And then going forward we are about that same level 35% to 40% hedged and it's fairly low numbers.

So less than $7.

Okay.

The decline in waste paper costs and, therefore, I guess in line of board paper costs, was that a benefit in the quarter in terms of a significant dollar saving there as well?

Absolutely.

Are you able to quantify what the saving was?

The fiber costs have gone from about $165 to about $110.

That's per ton of fiber?

Per ton of fiber.

That's correct.

And how many tons of fiber do you use per thousand of square foot of wallboard?

I'll get back to you on that.

Okay.

Thank you.

Maintenance costs.

I don't think there were any in Q3.

Correct me in terms of major cement plants down for maintenance in Q3.

Are you expecting any in Q4?

Yes.

We'll have a long kind of maintenance inventory shutdown at Illinois Cement even though we have been running at reduced capacity in the winter.

It has been very difficult there, so we do have some maintenance to do, and with sales very, very weak, we are going to take an extended outage and perform some maintenance.

So will we see a cost that is much different in terms of maintenance of Q4 versus Q4 of last year?

I would have to check and see if we had maintenance at another facility last year's Q4, but I'm not certain.

I'm guessing you'll see a little difference.

Okay.

And then I had a question if I could just on the financial side.

I guess this is more to Mark.

You are using some of the committed credit facilities to refinance this bond.

What do you now have left in terms of committed credit facilities from the banks?

Well, the bank credit facility is a $350 million facility, and we'll be drawing down -- we've drawn down $95 million for the first of the notes and then we have about $15 million outstanding on letters of credit which also goes against the facility.

And how long is it committed for?

Through June 2011.

Okay.

And a really minor one, but I wonder why the tax rate increased in the quarter.

Is that the nine-month tax rate a pretty good guide for what you would expect for the year and why did it go up?

It went up for several minor reasons.

An adjustment in the depletion factor, also true up of the state taxes and once we filed the return, the actual return in December of 2008 for the prior year we were also able to trip the rates for any return to accrual differences.

Okay.

That's great.

And last one just quickly for Steve.

From the turn of your comments earlier, Steve, the $15 cement price increase that the industry has tried in some markets, no sign at all of that sticking in any of your markets by the sound of it?

Would that be a fair judgment?

Absolutely.

Okay.

Thank you very much .

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

Please proceed with your question.

Hi.

Good afternoon.

Thanks for taking my call.

Just for follow up on aggregate prices.

Just wondering if you have any price increase in the market right now for the first of the year.

We do not.

Okay.

Any thoughts on whether you might be able to secure some price increases in 2009?

I believe that aggregate inventories, at least in our markets, are pretty high, so until the inventory levels come down, it will be difficult.

Very good.

And just last, most of my questions have been answered.

Just wondering, as we look at cement imports, and there's been a lot of discussion about whether or not they'll make way into the US and most of the answers we've been getting is no, but one of the markets that may be vulnerable in our estimation may be northern California.

Just wondering assuming let's say imports do enter the northern California market a lower price and domestically produce cement, would it pose a threat theoretically to your cement produced out of the Nevada facility?

We really have a very small amount of sales in northern California and it would have just a minor impact.

Very good.

Good quarter.

Keep it up.

Our next question comes from the line of Alan Mitrani from Sylvan Lake Asset Management.

Please go ahead.

Hi.

Thank you.

Just to understand the debt buy back.

In looking at the tranches of the debts you have you said you bought back the series A from 2005 and the series A 2007 issue.

Is that correct?

Primarily the 2007.

Primarily came out of the 2007 series.

The tranch A from 2007 was only $20 million and the tranch A from '05 was only $40 million.

So maybe you can tell us which other tranches were taken out?

It was primarily out of the 2007 series A, B and C.

A, B and C?

With a little bit out of the '05.

Okay.

Is the goal, maybe you can understand the goal.

You were good at laddering these expirations throughout starting in the 2012, 2014.

I understand you can get a little bit maybe buying back at a discount of 5% discount, and maybe save some by arbitraging the LIBOR because LIBOR is lower now off your credit line versus a fixed rate here, but is the goal to push out maturities and then figuring you would be able to over the next couple of years pay down the bank revolver?

Clearly it's just really to give us the flexibility that we need almost to the point of if the world really has some very, very difficult issues, what do you do if these markets really collapse.

We don't have any worries there.

We feel that we are able to maintain the current amount of debt, the $400 million without having any issues with covenant requirements.

But as the world remains uncertain, you want to have that flexibility to not have a gross debt covenant but more of a net debt covenant.

So by switching over to having a piece of term debt, a piece of variable revolving debt as well as cash on the balance sheet, it allows you to handle any situation that may potentially come your way.

So just to understand.

Thank you.

I think I understand that.

So basically what you are saying is this gives you the ability, if you wanted to, to pay down pieces of the debt as you go to pull down your gross debt whereas before you could not pay it down because it was fixed and trenched out?

That's correct.

Perfect.

Okay.

Also, do you expect to stay profitable this whole year, this whole coming year?

Yes, we do.

And do you feel because your wallboard business has managed to stay profitable basically throughout this downturn, maybe one quarter out didn't, I think you came close, do you think the wallboard business can stay profitable throughout even with permits and housing starts continuing to trend down?

Yes, I do.

And then lastly commercial construction.

You've always had a descent crystal ball.

Seems like there's not much on the drawing board for the back half of '09 into 2010.

What is your best guess as to what the commercial declines you are going to see for calendar '09?

Commercial construction is really an 18 to 24-month build out.

So for the last maybe six to nine months we've started to wane.

So another six to nine months out we should hit a very low level and then see whether anything new comes about where you might start to see an improvement, but clearly it is going to continue to wane for another six to nine months.

The stimulus package, when it gets passed, how do you see that impacting you?

Probably not a whole lot in calendar '09.

Really the majority of that would start to impact us in '010.

And I realize there's not much money around for acquisitions these days, but what are you seeing from distressed sellers or how often are you looking at books from competitors, maybe give us a sense for what the market is like?

I think it is still a little early.

While there are some assets that are becoming available, we haven't seen anything that would entice us to do a lot of work, but more and more become available every month and we'll remain vigilant because we think there are some things that will really improve our position.

Great.

Thank you.

Mr.

Rowley, there are no other questions at this time.

I'll turn the call back to you.

Thank you and I look forward to talking to you at the end of next 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 lines.