Eagle Materials Inc (EXP) 2009 Q4 法說會逐字稿

Welcome to the Eagle Materials financial results for the fourth quarter and fiscal year conference call.

(Operator Instructions).

As a reminder, this conference is being recorded Thursday, April 23rd, 2009, I would like to turn the conference over to Steve Rowley, President and CEO, please go ahead, sir.

Thank you.

Welcome to Eagle Materials conference call for the fourth quarter and 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 on the webcast.

While you are accessing the slides, please note that the first slide covers our cautionary disclosure regarding forward-looking statements made during this call.

These statements are subject to risks and uncertainties that could cause results to differ from those discussed during the call.

For further information, please refer to this disclosure which is also included at the end of our press release.

Our fourth quarter results continued to reflect our relentless efforts at driving costs out of production.

We know that we operate in cyclical commodity businesses, when economic conditions deteriorate, the low cost producer will always win.

Combining our low cost production, with exceptional customer service quality products, and always honoring our commitment helps Eagle Materials to generate profits and cash flow during tough economic environments.

Eagles fourth quarter and fiscal year results were once again ahead of our expectations.

During this year's fourth quarter we continued to generate earnings and substantial cash flow because of our plant operating efficiencies that continued to improve.

Looking forward, the construction industry remains challenged, thus construction product sales opportunities will continue to be difficult in all of our businesses, requiring routine coordination between sales and operations to maximize customer service and operational efficiencies.

We constantly embrace this challenge every day.

While we are proud of our past results, we never slowed down in our efforts to continually improve all facets of our businesses.

We also know that these efforts are rewarded through all parts of the business cycle, thus Eagle has positioned itself to dramatically exceed its last cyclical peak earnings in cash flow.

In the past three years, we have lowered our average share count by 15%, we added the new low cost wallboard plant, expanded and modernized our Illinois cement plant, greatly improved the operating efficiencies at all facilities, and invested in a import terminal in Houston, just name a few of the things we accomplished during the cyclical downturn.

Although last year, several US wallboard plants were closed, dramatically lower wallboard sales opportunities, combined with the multitude of new wallboard plants that come on line recently, has the US wallboard industry operating at about 50% capacity utilization.

And competition for sales remains keen.

The announced April wallboard price increase did not take, and in fact created addition marketplace maneuvering.

On a positive note, energy costs, and distribution freight have continued to come down in price.

American Gypsum's earnings margins continued to improve, primarily because of exceptional execution at our plant and in our logistics and sales departments.

Currently, a decline for wallboard sales opportunities is moderating.

However, we have not seen the bottom because we have not fully realized the impact of this year's reduction of residential starts.

Generally, there is about a three to four month lag before wallboard is condition is consumed.

This combined with the continued waning in commercial construction and repair and remodel demand, has wallboard demand reducing.

The combination of higher wallboard sales prices, lower freight costs, lower energy costs, and lower OCC costs resulted in our wallboard and paper board operating earnings increasing approximately $9 million, compared to last year's fourth quarter.

A 24% decrease in sales volumes was the primary driver of the decline in Eagle Material's quarterly comparative of cement revenues.

We reacted to the slow down in sales volumes by substantially reducing our sales of purchase products at all of our plants.

In addition, this year we operated our Illinois cement facility at about two-thirds capacity.

Due to state budget deficits and weak levels of residential and commercial construction, we expect cement volumes to continue to be weak in early fiscal 2010.

However, we should see improved volumes in the second half of the year, once the impact from the federal stimulus package takes hold.

For example, Texas is currently through a maximum bid letting process that should result in additional cement demands starting this fall.

The decline in our fourth quarter cement earnings when compared to last year's fourth quarter was due to lower sales volumes in all markets, combined with the increased cost associated with idling the kiln at our Illinois cement plant for the majority of the quarter, in order to control inventory levels.

We have now started the kiln back up, and believe that sales and production should remain in balance for fiscal year 2010, by operating that plant at about 75% of capacity.

Our concrete and aggregate operating earnings down 60% from the prior year.

Lower Ready-mix and aggregate sales volume, particularly in California, combined with lower Ready-mix and aggregate pricing in both California and Texas were the major factors attributing to our reduced revenues and earnings.

Now I will turn it over to Mark to discuss Eagle's financial position.

Thank you, Steve.

Eagle's financial position continued to improve during the fourth quarter.

Thanks to operating cash flows steadily improving through the year, Eagle has reduced its leverage and improved its financial flexibility.

Once again, capital spending was limited during the fourth quarter at approximately $3.2 million.

We anticipate our capital spending needs to be approximately $10 million to $15 million during fiscal 2010.

Separately, our fourth quarter tax rate was approximately 44%.

The increased rate was related to penalties associated with our outstanding tax dispute with the IRS.

Our fiscal 2009 tax rate was 33%, and next year we are projecting a 32% tax rate.

Additionally, fiscal 2009 corporate general expenses included approximately $6.3 million of stock-based compensation related to a fiscal 2009 stock award, of which $4 million was expensed in the fourth quarter.

No additional equity awards are planned for fiscal 2010, therefore, we anticipate corporate and general expenses to be in the $16 million to $18 million range for fiscal 2010.

Because of $17 million in positive operating cash flow in the fourth quarter, our net debt to capital ratio modestly improved from 45% at the end of December quarter to 44% at the end of the March quarter.

Thank you, and we are now ready for the question-and-answer session.

Ross?

Thank you.

(Operator Instructions).

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

Please proceed with your question.

Thank you.

First question is, Steve you mentioned about the competitive environment that you are seeing in wallboard, and some new renewed maneuvering on pricing.

Just wondering -- your expectations going forward, is this something that we could see retesting in possibly the lows that we got to earlier in the cycle?

Or can you just talk about the pace that you are seeing this competition?

It's really on a case by case, and a market by market basis, so it's not dramatically dropping wallboard prices.

It's just meeting competitive demands in each region, really not a dramatic drop in price.

However it's not stable, or we clearly didn't get any increase in the paper price announcement.

Okay.

And can you just talk a little bit about the performance in the paper board segment?

On the margin line, pretty impressive results.

Can you -- two part question --this first on the cost, what was the -- I guess the largest factor in the performance there?

And secondly how sustainable is this margin going forward?

So, a number of factors, the plant is operating exceptionally well.

We reduced our energy consumption by over 25%.

That is a huge difference in the cost to operate that plant.

And of course at the same time natural gas price has come way down.

In addition to that, the fiber cost have come down extraordinarily.

They come down about 56%.

So where we were a year ago at $160 per ton, plus $45 to $50 a freight, now we are about half of that, as far as delivered cost of fiber to the plant.

So those are the two main reasons -- or three main reasons operational efficiency, lower energy use, lower energy cost plus lower fiber cost.

Okay.

And could you update us on your hedging position for natural gas?

And --

We are about now, about 25% for the rest of the year under, just slightly under $6.00.

So that includes some winter gas for next year, which is a little higher than the current price.

And some little bit more gas hedged in the east coast, which tends to be higher price than the average price now.

Okay, just lastly, in cement, is it possible to quantify the maintenance outage in Illinois?

The impact it had on the quarter?

I don't have that -- the exact number.

It is a little difficult.

What i could tell you about cement is, that I looked at the numbers because I knew we would have this big impact of fixed cost, when you have an outage like that.

I'll tell you that in quarter, our variable cost for all of our operations were down $2.00 per ton.

And that's with energy costs being up $2.00 per ton.

So we kind of had a $4.00 swing, net the increase in energy, and currently we are starting to see our energy cost go down.

Okay, so that increase in $2.00 per ton in energy costs, that is rolling over right now.

That is correct.

Okay.

Thanks.

Our next question comes from the line of Kathryn Thompson with Avondale Partners.

Please proceed with your question.

Hi, thank you.

First, for your wallboard segment, where did your pricing end up for the quarter versus the average?

For the quarter, we were $109 to $110 mill net.

Sure.

And at the end of March, we are about the same, just slightly under 110, 110 to 109.

Okay.

So the exit price is about the same as the average price.

Perfect.

There been some debate about gaining pricing leverage going forward.

Understanding that the April pricing is going to be difficult to pass on if at all.

And there has been thoughts, that you won't be able to get pricing, the industry won't, unless additional capacity is taken out.

What are your thoughts on the subject?

One of the reasons we are seeing pricing and people chasing a little sales opportunities little harder, is because of lower energy and transportation costs, margins had improved.

For us, they've improved dramatically by the end of the quarter.

And in fact, our margins sequentially is up about $9 versus the third quarter.

So we look at the margins that we had in wallboard in Q3, versus March, we are up about $9 in operating margins.

And I would assume that the industry has seen similar swells in their margins, which again would create more competitiveness on the sales side.

So of your margin increase, was how much of the driver was that pricing versus other inputs?

Sure.

The -- the growth price was up about $3.00 on average, freight costs down about $3.00, and manufacturing costs were down about $4.00.

That's about ten, so that's somewhere in there.

You kind of hit near that $9.00 number.

Okay.

Going forward, do you expect to see a greater impact from lower commodity prices, particularly the natural gas?

Yes, we do.

And the

Better degree than what you saw in your fourth quarter?

That's correct.

We had more gas hedged in our fourth quarter, at higher cost than we have hedged right now.

And that hedge rolled off in March, correct?

That's correct.

Okay.

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

No.

Clearly we did not.

We -- not only has been business very difficult in the Midwest, the winter was difficult again in the Midwest.

So that reduced sales as well as inventory had swollen to such high level, that we shut the kiln down for the majority of the quarter.

Things are starting to improve in Illinois and Wisconsin, and we are off to a pretty good start this spring.

So that's a pleasant surprise right now for us.

Did the weather, was weather a greater factor towards the latter part of the quarter, or earlier part of the quarter?

It's kind of hard -- it's throughout the whole quarter is the best response.

Okay.

Also kind of the same question we had for wallboard prices at the end of the quarter versus the quarter average.

I don't think there was much difference in the pricing in March, than the quarter.

So pricing was about the same.

And the other market that's very difficult for us, as we mentioned is northern California and northern Nevada.

And that is very slow, and where as Illinois has kind of picked up this spring, that market is still shifting at very low levels.

Okay.

Any anticipation of continuing idling any facilities in Illinois?

Currently we have our kilns down for annual maintenance at Nevada Cement.

And one kiln will start up on schedule as routine, once the maintenance is done.

The other kiln is anticipated to be down for the majority of the summer for inventory control levels.

So really in summary for pricing, it's -- you're seeing kind of a deceleration of trends that you saw for wallboard cement and aggregate segment, is that an accurate assessment?

Whereas in wallboard, it went down very rapidly.

And in cement it's just on a one off basis, where you have a little competition in one area, and you meet that competition, so it is a very gradual decrease in pricing.

Okay.

Finally, could you give updates -- on I know Texas should be having big stimulus lettings this week.

Any update on size and bidding trends from stimulus lettings in Texas?

We really don't have, until the process is through, we really don't have color to share in those regards.

Okay.

Great, thank you very much.

Thank you.

Our next question comes from Mike Betts with JPMorgan.

Please proceed with your question.

Hi, Steve.

I just had one question really.

It's when I compare the wallboard price increase for you, which is about $6.00 on the previous quarter, for USG, it was kind of 2.5, and for Temple-Inland, their prices were down $3.00 in wallboard.

I mean, these are some of the biggest differences I think we have seen amongst the competitors for a while.

I just wondered if you had a view, as to why that had occurred.

Sometimes that occurs because you are stretching for a little extra volume.

And when you stretch for extra volume, you are going to give a little price.

The other thing that really impacts materials is our freight costs.

When the cost of transportation goes down, our plants are generally a little more remote to the market than the competition, so lower freight costs really helps American Gypsum.

Okay, but in terms of underlying trend, there -- it wasn't anything to do with regional differences, southwest may have been a bit stronger than other markets.

In general it was -- I can tell you that we had a price increase in early January, that kicked up the gross price $3.00 to $4.00.

By the end of the year, by the end of the fiscal year, or the end of the quarter, the gross price had come back down about $3.00, $2.00 to $3.00.

However, distribution come down further, so mill net ended up being about the same at the end of March, or for the March month, as it was for the quarter.

Okay.

And apologies if I missed this earlier, but just on that point, have you now seen all the benefits of the low freight costs or are there more to come through?

They in fact they have continued to come down, but they've moderated in the rate of decline.

Okay, thats great.

Thank you very much.

Our next question comes from Trey Grooms with Stephens Inc., lease proceed with your question.

Hi, this is Trey with Stephens.

Couple of questions.

Steve, you talked on the volume in kind of demand in environment in your Illinois and Nevada markets.

Can you touch on what you are seeing in the other markets, as well for cement?

Sure in the other markets it is declining, we have a lot of flexibility in the other markets.

So we are not seeing as big a pinch as we did in those markets which were way off.

We have a little bit larger market, little bit better flexibility with our marketing plan in both Texas and the mountain regions, which allows us to move the product a little more effectively.

However, both those markets, or one of the flexibilities was the oil well cement.

And we are starting to see the impact of reduced demand for oil well cement, its down 25% to 30% in both of those markets.

Okay.

And then on costs.

You guys have outlined before, that you're expecting costs to come down I believe in cement and wallboard for fiscal 2010.

If you think about all of the shutdowns and things that you've just recently -- that you talked about on the call here.

Can you talk about how those planned to affect, and when you look at a year-over-year basis, and take those in to account, are we still going to be down as far as looking at per unit costs?

The cost will be down from this year, we are very confident of that, unless some one off thing occurs.

But yes, costs are coming down because energy costs are coming down, and our energy consumption is going down, in most of our plants.

So while those costs went up, there was a lot of focus last year, because the cost energy went up, on how to mitigate some of the increase cost.

And we will see the benefits of that, throughout this year.

Okay.

The shutdowns don't really impact the cost that much.

The shutdowns do, but we kind of, we are past the Illinois, we are up and running again now at Illinois.

So we are past that shutdown.

We will have some increased costs associated Nevada throughout this summer, but that will not be as much of an impact, because Illinois we had the whole plant shutdown.

And Nevada it's only half a plant because it's only one kiln thats shutdown.

So there will be a little bit maybe in the first quarter here, first or second quarter, but it wont have the same impact of this shutdown.

Okay.

That's helpful.

Then, just one housekeeping, what was D&A?

I don't know if you touched on it.

But D&A in the quarter, depreciation and amortization?

Depreciation in the quarter, and amortization was $12.7 million.

Okay, Steve.

My last question, you touched on the -- kind of your expectation that wallboard is going to continue to be -- to decline and be fairly difficult.

If you look in your crystal ball right now, when, your best guess, do you see wallboard demand finally finding a bottom?

When -- right now, you are starting to see some really positive things in the financial markets.

You are also starting to see a lot of positive things as far as refinancing of mortgages and whatnot.

Once those things get through the system, you will see residential construction start to come up.

So if we step back and look at a macro and then try to follow down to the construction industry, and then down to our industry which are the supply and construction products to the construction industry, the first fix is the financial markets, and there are some very positive signs there.

Once we get past some of the things that everybody is talking about, the stress tests, et cetera, and banks start to feel a little more confident, then we will start to see money be available for construction.

Right now this is not -- there may be money that's lent by financial institutions, but there is very little being lent for new construction.

Once we start seeing that occur, whether its residential or commercial or whatnot, you will start to see the demand for construction products pick up, including wallboard and cement.

Okay.

I do have one follow-up question, sorry.

When ever you do see that kind of pick up in demand, where do you feel is kind of a ideal place for capacity in the wallboard industry, once that demand comes back, where do you think we will be running there?

I believe this recovery will be a fairly slow recovery, so we're -- it's not going to spring back by the end of this year.

Maybe next year we will be a little better year, as far as residential construction.

In the following year, hopefully we will be back to more normals levels of residential construction.

When we hit that level, we need to have 90% capacity utilization, very good pricing power in the wallboard industry.

So that's the level that we need to achieve a couple of years out.

Okay.

Great, thanks a lot.

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

Please proceed with your question.

Good afternoon.

Looks like you guys are gaining some market share in wallboard, can you comment on your share gain expectations, as we move through fiscal 2010?

Our market share for the quarter was about 9.3%.

And the reason is, primarily our new plant that we added in really and a new market for us, which was eastern regions and South Carolina.

So we look over the course of the last year or two, the reason for American gypsum gaining that market share has been that we have a presence in a much larger see graphic territory, than we did a couple of years ago.

So that's the real reason.

And if we look at sequentially, I think it was the fact that as our margin expanded, we became competitive in a little greater market territory.

Thank you.

I know we touched on the cost side from the maintenance impact, is there any way you can you quantify the volume impact of the maintenance shutdown in Illinois, if there was any and the bad weather impact?

I mean kind of

That would be very hard for me to quantify.

Okay.

Then just moving on to concrete and aggregates -- it looks like your margins improved greatly there as well, can you just give us a sense of what went on there?

I'm not sure there was any improvement there.

Things are just very weak.

Those are two very small businesses for us and two fairly small markets.

The northern California market is extremely weak.

And the central Texas market, we actually had a reasonable quarter this quarter.

So, If there was any increase it was due to activity in our central Texas market.

Okay.

Then finally just on cement pricing, do you expect any moves either way as we move forward here?

I anticipate going forward volumes continue to creep down a little bit to there to be on a case by case basis, a need to meet the competition but not any dramatic movement down.

Clearly in this environment where volumes continue to drop, we no longer have the safety valve of foreign imports coming in to the US.

You will see some slowly declining pricing in select markets.

Okay, thank you for your time.

(Operator Instructions).

Our next question comes from the line of Todd Vencil with Davenport.

Please proceed with your question.

Hi, guys.

Thanks a lot.

Just a follow up on something you said a moment ago, because it dovetails with something we heard the other day.

One of your competitors said on the call the other day, what they think would be sort of mid-cycle or sustainable levels of demand, that would imply about 85% utilization of current capacity.

And you said we need to get to 90, so does that imply in your head, that the industry probably needs to shut down additional capacity?

It's clearly to get pricing power, it may start to happen in the mid-80s, but when we see a real pricing power in the wallboard industry, it's always been in that 90% level.

So the answer to that, it's a question of supply and demand.

And currently we say that supply is at the 36 billion level, you are going to have to be -- have to have demand in the 33 billion level, to have any kind of pricing power in the industry.

So, you just have to walk through the demand.

And so that is a function of not only housing, but commercial, as well as repair and remodel, to come up with where you believe the demand will be two to three years out.

Okay.

So let me ask it another way.

Do you think that the industry is going to go through a phase of capacity closure, and do have any feel on how likely that might need to be soon, or not so soon?

It's very hard for me to talk about what a competitor may or may not do.

We are comfortable with the plants in the fact that we have a low cost position.

So we don't see a need to really make adjustments to the way we are operating our facilities.

However, you are always looking for a way to be a better cost producer.

In one case, we have two plants very close together, or one plant with two lines, if it makes more sense to run one line four shifts instead of two lines, two shifts, we will take a look at it and see what allows us to maximize our profitability.

And from that same perspective you look at from a, how do you complete the sale to the customer in a timely and successful manner, by a geography, excess capacity in the geography but I'm not that far away from the next plant that I can meet that sale in a timely fashion, maybe it makes sense to look at modifying the way that you operate your system of plants to be seamless as far as the customer interface is concerned, but actually maximize your profitability, especially now that transportation costs have come down.

Fair enough.

Clarification if I can.

On your comments about the natural gas hedges, you said for the rest of the year I think 25%, I have in my notes, was that for calendar '09 for fiscal 2010?

For our fiscal year.

Okay.

And then Mark, I don't know if you want to take a stab at projecting DD&A and interest expense for 2010 or for fiscal 2010>

Well, it will probably hover around the 12.7 for the last quarter, plus anticipate our capital expenses -- capital expenditures to be $10 million to $15 million range.

So you will want to add depreciation to that.

Okay.

Any thoughts on interest expense?

Interest expense, Craig, our latest forecast range.

Sure Todd.

This is Craig.

We got about $300 million on the senior notes outstanding at a little under 6% interest rate.

And then as you saw at the end of the quarter, we had about $55 million on the revolver.

Interest rates have been very low around 2% for the last quarter.

Depending upon how much that's outstanding for the rest of the year, that might change interest a little bit.

Plus you have about a $1million a quarter for the non-cash IRS interest each quarter, this would put you roughly somewhere between to $5 million to $5.5 million in the quarter.

Okay.

Thanks, appreciate it, guys.

Our next question comes from the line of Michael Schecter with Mentor.

Please proceed with your question.

I was curious if you would ever imported any wallboard.

I see the news sort of going through the industry, if you had done any and if not what you are hearing through the industry?

Repeat that.

I was wondering if you would ever imported any wallboard?

No, we have not.

And what are you hearing in the southern areas, in terms of liability?

I assume you have not been sued at all.

No.

We have not been sued.

No, just what everyone else has read in either on the internet or in the newspaper.

Thank you.

Mr.

Rowley, there are no further questions at this time.

I will now turn the call back to you.

Thank you.

And we are looking forward to a exciting fiscal 2010.

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.