Eagle Materials Inc (EXP) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the financial results for the first quarter of fiscal year 2010 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, Thursday July 23, 2009.

I will 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 of fiscal year 2010.

Joining me today are Bill Devlin, Vice President, Controller, 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 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.

In spite of the continued severe housing depression and waning commercial construction in the first quarter, Eagle Materials managed to improve profitability year-over-year and we continue to improve our financial flexibility through cash flow generation.

Our first quarter results reflect this cost conscience focus.

Additionally, not only are we remaining focused on the day-to-day running of our low cost operations, but our financial flexibility has allowed us to wisely invest back into our businesses small scale capital that reduced costs and further increases Eagle's low cost advantage.

General business conditions and the near-term outlook for the construction industry remain very difficult.

As an example, our customers and our customers' customers continue to report dramatically reduced backlog and remain very concerned about the current business environment.

And we continue to adjust our operations to fit the forecasted opportunities.

The unfavorable wallboard supply demand dynamics remained about the same this past quarter, with the US wallboard industry operating at about 50% capacity utilization.

Lower wallboard sales opportunities, lower natural gas prices, and lower freight prices created a very competitive marketplace and our net wallboard sales price fell nearly $10 per MSF during the quarter.

While the decline in single family construction appears to have leveled off, the continued waning of nonresidential construction will continue to put downward pressure on wallboard demand.

Our current estimate is 17.5 billion square foot of wallboard opportunity in this calendar year.

The $10 million plus increase in gypsum wallboard and paperboard quarterly comparative operating earnings is due to a combination of higher wallboard sales prices, lower freight costs, lower energy costs and lower OCC costs.

Our plants, our sales force, and our logistic group continue to perform exceptionally well in this challenging environment allowing us to remain profitable during these difficult times.

When compared to fiscal 2009's fourth quarter, our wallboard profitability per unit deteriorated because the decline in our wallboard net sales price exceeded the reduction in our wallboard production costs.

A 22% decrease in our quarterly cement sales volume and a 9% decline in our average net cement sales price were the primary drivers of the decline in Eagle's quarterly comparative cement revenue.

As a result of this slowdown in US cement demand, we have dramatically reduced our sales of purchase product from a high of over 30% to less than 5% of our current sales volume.

Currently demand for cement continues to soften in all of our markets.

However, we anticipate cement demand to increase next year when the impact from stimulus related infrastructure projects that were not shovel ready start construction.

The decline in our first quarter cement operating earnings, when compared to last year's first quarter, was due to a combination of lower sales volumes and prices, somewhat offset by lower operating costs.

The lower operating costs were achieved by reduced outside maintenance spending, burning less expensive fuels and reducing our reliance on high price purchase product.

Our concrete and aggregates' first quarter operating earnings were down approximately 29% from the prior year due to lower ready-mix and aggregate sales volume and prices during the quarter.

Business conditions remain extremely difficult in northern California, with minimal new opportunities on the horizon.

Because of Eagle's improved quarterly earnings, cash flow from operations improved significantly relative to last year's first quarter.

While we continue to minimize major CapEx spending, we are keenly focused on implementing cost reduction projects that have immediate and long-term financial impact.

Our first quarter tax rate was approximately 31% and we expect the full-year tax rate to be approximately 31% as well.

This -- this slide shows best how Eagle has performed over the last 12 difficult months, an amazing testament of the performance of all of Eagle Material's employees.

Because we continue to generate meaningful cash flow from operations, our net debt to cap ratio declined to 43% at June 30th, down from 49% at the same time last year.

Thank you for attending today's call, we will now move to the question-and-answer session.

Erica?

(Operator Instructions).

Our first question comes from the line of Trey Grooms.

Please go ahead.

Good afternoon, gentlemen.

Good afternoon.

Steve, could you talk about the wallboard price trends kind of intraquarter in the first quarter there.

And then if you could also talk about the pricing and how it is trending in July with wallboard?

Sure.

Pricing currently is down another $2 per MSF relative to the quarter.

However, costs are also down about the same amount.

Which costs specifically, I mean it sounds like that some of the paper costs might be on the rise.

Is there other costs that are kind of offsetting that?

Yeah.

Natural gas costs for us has continued to come down as some of the hedges that we placed last year when energy was really high are starting to continue to come off.

So, primarily natural gas costs are coming down.

Okay.

And you think that should offset some of these higher paper costs that seem to be rolling through?

That's correct, it takes a little while for that paper on an inventory flow basis to -- it is going to take almost a quarter to really see those changes, but OCC costs have definitely come up dramatically and really from the beginning of the year to now probably over $50 per ton.

Okay.

Thanks for clearing that up.

Can you talk about what you guys are seeing both just in general demand and pricing trends in your different cement markets?

Generally demand remains weak in all markets and it is continuing to -- to weaken.

So, the answer on the demand side is less and less and, as I mentioned, when we talk to our customers and their customers, they all say their backlog is at best three to six months and many of them are saying they have no backlog left.

So the general trend is for less and less demand in all of our markets.

Probably the weakest is still the northern California and northern Nevada market for us.

And then pricing seemed like it had softened up a little bit.

Is -- is there one market particular that is getting softer than others with price or is it all kind of across the board.

I think it is still across the board and it is hit and miss.

It is not uniform in a market.

It is you just react to one price at a time, one customer at a time.

And the net result though is that prices have continued to trend down.

Okay.

And then just one other question on JV, those were down, the volumes there on the JV were down quite a bit.

Can you give us kind of an idea how this impacts pricing and costs or unit costs overall on the cement business?

For us on the JV we appropriately are going to shed the purchase product very quickly in this market.

So that is -- the volumes that have come down in this market has been a lot of purchase product that we had kind of built up over the years just in case this type of market occurred, which makes it easier for us to continue to operate our plant and minimize the impact to earnings and shed the very lower, much lower margin purchase products.

So that is -- that is kind of the general plan that was put in place many years ago and that is exactly how it is playing out.

Okay.

And is there any -- is there any price difference really or wide price difference in kind of JV sales versus wholly owned sales price in cement?

Cement is really a -- a regional basis, a regional market.

So it really varies from market to market and it really depends on the competition and the cost of the competition getting to the exact marketplace, because there's a fair amount of freight.

Not every cement plant is located in the middle of a metropolitan area.

So it is really a function of all of the -- all of the cement plants that compete in that market and the amount of freight to get there.

And so it really does vary from market to market.

Okay.

Thanks.

That's very helpful.

I will jump back in queue.

Our next question comes from the line of Jack Kasprzak.

Please go ahead.

Thanks.

Good afternoon, Steve.

Good afternoon.

With regard to wallboard in your forecast for just over 17 billion square feet of demand for this year, industry utilization rates at 50%, maybe even going a little lower, would you think that that is a painful enough situation where we would start to see only plant closures, generally speaking, in the industry?

And do you think that's a necessary prerequisite to a healthier wallboard market in the future?

Well, clearly it is the latter is absolutely true.

It is a precursor to an improved wallboard industry in the near-term.

And I can't speak for my competition, I just look at what's the most cost effective way for American Gypsum to get to the marketplace and does it make sense to run all of our plants at fewer shifts or should I jockey things around and run another plant a little fuller and the other plants less and does that maximize my profitability by shuttering one of the plants?

And every time we go through the analysis, the analysis says because of the freight to the marketplace, you are better to run the way you are currently operating.

Okay.

With regard to cement and the price softness that you saw in the quarter, is that a -- is this a situation where you know what sort of projects were on going have rolled off and any new work that's out there is just sort of prices are gravitating a little lower because it is somewhat more competitive or is it a situation where it's, I guess, more dynamic and literally week to week it is more uncertain and people are getting desperate?

Is there a way to maybe qualitatively describe the action or behavior out there.

As I mentioned earlier, it is really on a regional basis, though in some -- in some markets we kind of went through that irrational behavior maybe last year, last few quarters or even a year ago.

Currently, I am not seeing a lot of that desperation type of pricing in the marketplaces, but clearly bid work is extremely competitive.

And everybody is bidding the bid work and the price that people are willing to go for bid work is much, much lower than the average price in the marketplace.

And your wallboard, I'm sorry, your aggregates price in the quarter, $6.71 a ton.

That was down almost 8%.

Would you describe that as a true representation of pricing in the market or, and I realize it is really local for you guys, or is there something in -- with regard to mix that could explain the decline.

We really have two markets, one in Texas and one in California, and I would not say that this price decline had much to do with a shift in mix.

It is just the overall softening of prices in both those markets.

Got it.

Okay.

Thanks very much.

Our next question comes from the line of Katherine Thompson.

Please go ahead.

Hi, thank you.

Do the kind of same exercise you did with wallboard.

Just to clarify, you said that wallboard pricing since the quarter end is down about $2 and then also moving to cement, how does cement pricing at the end of the quarter compare to your average pricing during the quarter.

Although it is trending down a little bit, but it is not very much.

So on an average basis, it is -- we might say that it is flat at the end of the quarter.

Okay.

As far as your wallboard pricing goes, I know there's an August price increase that's being put through in the market.

What's your expectation of how successful that wallboard price will be.

Well, it is still very early to tell, but as we've mentioned before, for pricing -- for prices to really hold it has to hold all the way through to where it is delivered and stocked on the job.

And that requires support, not only from the wallboard manufacturers, but from the gypsum specialty dealers as well.

Okay..

So unless you have complete support throughout the value chain to where it is stocked on the job, it is very difficult to get a price increase.

Okay.

In light of the fairly competitive market and going to the seasonally slow period, just from a strategic standpoint, how do you project your position on -- in terms of gaining -- trying to maintain your market share or gain market share going into the fall months, particularly if we face a situation where capacity needs to be taken out.

We are -- we are very keen on keeping our customers competitive in the marketplace, so our pricing is really associated with how do we partner with our customers so that they remain competitive with gypsum wallboard stock on the job site.

So we are going to continue to price our wallboard to make sure our customers are competitive in the arena that really matters and that's the price of the job.

And given the overall decline in energy prices, I know that there's been a change in your breakeven point and your wallboard group.

Where is that right now in terms of pricing?

Right now we are still making a few dollars, but as -- we have two things that are moving, costs have come down, they will continue to come down a little bit for the next quarter or so, as some of our higher priced gas hedges move off.

But then, we have some other factors, paper will come up a little bit.

And freight has come up minimally.

I think the fuel surcharge has gone up about $0.20 to $0.25, not anywhere near the $0.70 plus it was a year ago, but we are also getting some pressure to increase the base rates from the transportation group.

So you have those pressures that are occuring at the same time, so there's still a fair amount of moving parts.

But I would say right now as we speak, are margins are about the same today as they were last quarter.

Okay.

And you still expect to maintain some profitability with that segment going forward, at least for the next couple of quarters?

Yes, we do.

Okay.

Could you remind us where your update on your natural gas hedges?

Yes.

We are currently about 30% hedged now.

We've hedged a little more through the winter because the winter can -- gas prices can go up.

So we are about 30% hedged for the rest of fiscal year at slightly under $5.50.

Also, moving to cements, had some pretty descent upside on cement margin.

assumed the primary driver is energy.

If you could clarify a little bit more on your cement margins in particular.

Yeah, the energy and reduced maintenance, primarily performing our maintenance with our own maintenance crews as opposed to using outside contractors.

Those have been the main drivers, as well as reduced the energy consumption and burning lower cost fuels as opposed to the higher cost fuels we had burned last year.

Okay.

How sustainable do you think the cement margins that you reported just in the quarter are going -- going forward?

Particularly in the face of perhaps more challenging volumes?

Our volumes -- I am comfortable with where the volumes are now and where our projections are for volumes for the rest of the year.

So I am comfortable that these margins are reasonable at -- at current prices.

As prices leak a little bit, however much price leaks that's -- that's what the margins will leak.

Okay.

That's helpful.

Thank you so much.

Our next question comes from the line of Todd Vencil.

Please go ahead.

Thanks a lot.

Afternoon to you.

Good afternoon.

In the wallboard business, do you guys feel like you are picking up share in the past few months?

Well, as you can see, our share has come up approaching 10% and over the last couple of years it has, but we also invested a fair amount of capital in a new plant in the southeast.

And so really the share gain is associated with us entering a new market with that new plant.

Okay.

And overall, what kind of capacity utilization are you guys running in your wallboard business.

We are less than 50%.

And if I think about it would the South Carolina plant be kind of the lower capacity utilization in the system and then the others are above 50?

You know, I think they're all about the same.

Okay, okay.

You mentioned that you had lower cement costs in the quarter in cement because you are using your own manpower, probably less over time and things like that.

Can you -- do you have a number that you could put around the benefit of -- of lower cement -- lower maintenance costs?

About $5 a ton.

In the quarter.

In the quarter.

Fantastic.

And then just to get a handle around the Texas cement market.

Where do you feel like overall in the state supply and demand are and what is the dollar price sort of look like in that market for you guys?

The supply and demand in the state is we finally got to a point where we are over supplied.

So, --.

Okay.

Many years here we would enjoy the -- a market that was undersupplied.

But during this last year, the last couple of quarters we are now at a point where we are over supplied.

And some of our competitors expanded capacity over the last five to ten years, we didn't add capacity.

We added imports.

So it is a little easier for us to take imports out.

So that creates a little more dynamic pricing scenario for the State of the Texas.

Right.

Remind me, where is the -- where is the -- the production capacity level in the state right now.

About 13 million-tons per year.

Okay.

Okay, that's what I have got right now.

Thanks a lot.

Our next question comes from the line of Garik Shmois.

Please go head.

Hi, thank you.

Good afternoon.

Just the first question on wallboard shipments, didn't see much seasonality the first quarter here.

You guys were pretty flat, but I think the industry was down somewhere around 7% in the June quarter versus March.

Can you just talk about, I know it is a little early, but maybe what you are seeing as we are going into the summer months.

Are you seeing any of -- off of a low base, any seasonality coming back in wallboard relative to last quarter?

That's difficult.

Maybe we are seeing a little bit of a summer surge.

That would be in the last week or two.

But relative to that, it has really been very slow and slow relative to a year ago.

Okay.

And just to follow-up a little bit on a question I thank that Jack answered -- asked earlier, about the maybe if you can quantify the percent of cement that you sell that goes into projects that are up for bid, more longer term projects as opposed to spot, maybe to give us an idea of how -- how much of your cement is exposed to these more competitive environments.

That really is constantly moving and I will be honest, right now I can't give you a good answer.

Okay.

Is it historically half or more than half?

Historically it is fairly low.

We've chosen not to participate in that market.

So historically, the less than 5% to 10%.

Okay.

And just last question on your liquidity, can you give us an update.

I think you ended the quarter at about $1 million in cash.

Can you just talk about what other facilities you have that you've tapped and how much is left under your revolver.

What we did is we paid down our debt to a point where it would lower.

Again we are watching all our pennies, nickels and dimes and by lowering the debt down it moved us down one grid on our revolving credit.

So that's why we took cash down to the point we -- that we took it.

Okay.

And that will allow us to have some little lower borrowing costs on the revolver piece.

Do you expect any change in your interest expense.

Pardon.

Do you expect any change in your interest expense.

It will be down slightly, just slightly from that.

The real change, as we continue to delever with the cash flow, that will -- where the biggest benefit will come from as we continue to pay down debt is -- is we are not spending a lot of CapEx and all the cash flow is going to reduce debt.

Okay.

Great.

Thank you very much.

Our next question comes from the line of Glenn Wortman.

Please go ahead.

Yes.

Good afternoon.

With Texas cement demand still falling do you think you run the risk of underselling your domestic capacity there?

No.

No, we are -- we are very comfortable that we have got a lot of flexibility in the way that we go to market in Texas.

And we are planning to fully utilize this asset.

Okay.

And then just secondly, on wallboard pricing, it looks like your prices deteriorated more than USG.

Is there any particular that we can point to for that?

It is really hard for me to talk about where -- why USG's prices are where they are.

All I can say is that we have priced our product so our customers can be competitive, as I mentioned before, stock on the job.

So the pricing -- the reason the prices have come down is that's the price it has to be so our customers can be competitive.

Okay, thank you.

And then finally in the Illinois cement market, I know there were some competitors shut down as late last year, can you just talk about what your performance is like in that market and the impact of those competitor shut downs.

That market we have picked up some volume.

A lot of that has been some bid work that typically we hadn't chased in the past.

[Sowaven] intermodal job that is currently under construction up there.

A couple of road jobs that are under construction.

So we have picked up some work that normally we would not chase in that market, especially after last year.

We have a -- had a very large customer that was purchased kind of in the beginning quarter, which really impacted our sales and marketing plan for last year.

So we were scrambling for the rest of the year.

But this year we were able to go out early on and try to market some of those tons that we had lost last year.

Okay.

I thank you very much.

Our next question comes from the line of Michael Corelli.

Please go ahead.

Hi, good afternoon.

Good afternoon.

What -- do you know approximately what the capacity is in the wallboard industry now.

You're -- that's a kind of a moving target.

Most people are saying around 36 billion square foot of capacity.

There has been some plants that have been shut down, some plants that you maybe only have a line mothballed.

So it is kind of hard to tell the difference between a permanent closure and a mothballed plant, but the number that I typically hear is about 36 billion.

Okay.

And then I just had a question about your capital structure.

I mean you don't have a significant amount of leverage here, but you do have a little bit of leverage and obviously business conditions are somewhat soft and your stock price has performed very well.

It is around three times book value, maybe 29, 30 times this year's earnings depending, 28 whatever it is, how the things shake out.

Have you considered at all, since they have been pretty popular with a lot of companies lately, doing an equity offering to potentially help you to deleverage even more with your stock at a attractive price here?

Not at all.

We are very comfortable with the capital structure and really we don't feel the need at all to try to raise some equity.

Okay.

Thank you.

Our next question comes from the line of John Emrich.

Please go ahead.

Thanks.

A couple unrelated questions if I could ask them separately.

The -- if you combine the two businesses, what is the overall Company's mix of nonresidential new construction, residential construction, and call it infrastructure, just order of magnitude, not exactly.

Order of magnitude, let's say new residential construction is going to be, at these current levels, maybe 20% of the demand.

Yes.

Commercial construction, that level or a little less.

Public infrastructure then is going to be 40ish and then I know the rest is repair and remodel.

Okay.

So following that line of logic, if you will, if residential kind of stabilizes in this level between 500,000 and 600,000 new homes, or whatever it is a year, going into next year, but nonresidential construction based on information that's coming out from analysts and the -- implied by the ABI is down double digits, 11%, 15% whatever it might be, does -- is 2010 then another down year for you all?

Certainly the demand for wallboard would be, again, another -- another step down from this year, not as dramatic but it will be less than this year.

Okay.

And do you have depreciation, amortization in the quarter.

Yes.

Bill?

It was at $12.8 million for the quarter.

Okay.

And your run rate of CapEx, do you think, for demands for this year and next.

For the rest of this year is going to be pretty similar to where we were last year.

So '09 will look like '08 or just you're talking about the second half.

Fiscal '09, yes.

Okay.

And lastly what was -- you have cash flow from operations for the quarter.

Yeah.

It was -- .

$20 million.

Roughly $19 million, $20 million.

Great, thank you.

And we have a follow-up question from the line Kathryn Thompson.

Please go ahead.

Do you have the JV lever in future quarters if volumes decline further?

Explain what you mean by lever.

Well, you talked a little bit earlier in the quarter about how you are able to lever your JV operations.

Basically structurally the way it is set up is to help you deal with like the same type of situation we are dealing with Texas and the overall economy and it allows some cushion.

In -- in the most recent quarter I was wanting to know is this the type of scene we could expect going forward in the face of continued volume declines should that happen in Texas.

Well, the answer is, it is a delicate dance, but we do have some room left.

Okay.

Is it a type of thing that -- I mean I assume it would be a type of thing that would have somewhat of a limited life cycle, but -- and I am just trying to understand is the type of thing that could be done over a six month period or is this something that really kind of helps you weather through a full year of tough volume trend.

If you do it delicately, you just slowly do it over a period of time and -- and minimize the impact.

Okay.

That's helpful.

Thank you.

And there are no further questions at this time, sir.

Thank you very much.

Ladies and gentlemen, that concludes your conference call for today.

We thank you for your participation and we ask that you please disconnect your lines.