Eagle Materials Inc (EXP) 2010 Q2 法說會逐字稿

Ladies and gentlemen thank you for standing by.

Welcome to the financial results for the second quarter fiscal year 2010.

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 today, Thursday October 22nd, 2009.

It is now my pleasure to introduce Steve Rowley, President and Chief Executive Officer.

You may go ahead, sir.

Thank you and welcome to Eagle Materials' conference call for the second quarter of fiscal year 2010.

Joining me today are Craig Kesler, our Executive Vice President, Finance Administration and Chief Financial Officer, and Bob Stewart, Executive Vice President Strategy, Corporate Development and Communications.

There will be a slide presentation made in connection with this call.

To access it go to www.EagleMaterials.com and click on the link to the webcast.

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

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

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

While business conditions remained difficult across all major construction segments, Eagle continues to generate meaningful profit and significant cash flow.

This year's second quarter results were impacted by continued lower sales volumes and prices across nearly all of our business loans.

However, we were able to substantially offset the volume in price declines with continued cost cutting at the operational level, and reduce financing costs as Eagle significantly delevered the balance sheet over the past 12 months.

Our financial flexibility has allowed us to wisely invest back into our businesses small scale capital that further reduces costs and increases Eagle's low cost advantage.

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 mill net wallboard sales price fell approximately $7 per MSF during this quarter.

While the decline in single family construction appears to have leveled off, the continuing waning of non residential construction has continued to put downward pressure on wallboard demand.

Our current estimate is less than 18 billion square foot of wallboard opportunity in the current calendar year.

The approximate $2 million increase in gypsum, wallboard and paperboard operating earnings is due to a combination of lower wallboard freight costs, lower energy costs, and lower OCC costs offset by lower wallboard prices.

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

A 5% decrease in our quarterly cement sales volume and an 11% decline in our average net cements sales price were the primary drivers of the decline in Eagle's quarterly comparative cement revenues.

As a result of the dramatic slowdown in US cement demand, we have substantially reduced our sales of purchased product from a high of 31% to less than 5% of our current sales volume.

We anticipate cement demand to increase next year once the impact from stimulus related infrastructure projects start in earnest.

The decline in our second quarter cement operating earnings when compared to last year's second 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 priced purchased product.

Our concrete and aggregate second quarter operating earnings were down approximately 79%, from the prior year, due to lower ready mix and aggregate sales volumes and prices during the quarter.

Business conditions remain extremely difficult in northern California and Austin with minimum new sales opportunities on the horizon.

Craig will now address cash flow for the quarter and our capital structure at the end of the quarter.

Thanks, Steve.

Cash flow from operations improved significantly relevant to last year's second quarter as a result of a decline in our working capital balances.

While we continue to minimize major capital spending we are keenly focused on minor capital projects that have both an immediate and long-term financial impact.

Also during the quarter we repaid all borrowings on a revolving bank credit facility and ended the quarter with approximately $4 million of cash.

This slide shows best how Eagle has performed over the last 12 difficult months, a testament to the performance of all Eagle materials employees.

Because we continue to generate meaningful cash flow from operations, our net debt to cap ratio declined to 40% at September 30th, 2009, down from 48% at the same time last year.

Thank you for attending today's call.

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

(Operator Instructions) Our first question comes from the line of Trey Grooms.

Please proceed sir.

Good afternoon, Steve and Craig.

First question, you guys have been talking for quite a while about how cement costs should start improving and it looks like that's definitely been the case.

And it looks like unit production cost of cement declined from the high $60 range or so last year to about $58 this past quarter.

Could you give us some color on, one, exactly what is driving that decline, and then secondly whether the current production costs are sustainable at this level.

Sure, about $4.50 of that is due to the lower cost of fuel and the lower cost of purchased cement.

We also had about $1.50 per ton decline in overhead.

All of that is real.

We did not have a lot of maintenance this quarter.

But, again, if you look at a rolling 12, we probably have another $4 or $5 advantages just in reduced maintenance cost that will hit over a normal sequence which is a major maintenance hitting about once every 12 months.

Okay.

That's very helpful.

Then on the cement volume it looks like wholly owned cement volume was actually up just a little bit.

Or maybe about 5% or so.

Can you guys give us some color on what volume was like in the quarter in each of your markets?

I know you touched on northern California and Austin a little bit.

But also, to the extent that you can, you touched on your expectation for volume to be up in 2010, in cement, but to the extent you can, could you quantify that at all or at least maybe give us an idea of what your thoughts are going into the slower winter months and into 2010?

The real uptick in our volumes really came out of the Midwest or out of our plant just Illinois cement.

The reason for that, a year ago we had a major customer that was purchased by a competitor, so we had, for a period, a lot lower opportunity.

This year and going into the year when we lined out business, we had not assumed that so this year we knew that was the case, and so we knew there was a lot of bid work out there and we were pretty aggressive going after bid work in that marketplace.

Even though the demand in that market has come down, we have a very low cost plant there that is able to compete very competitively when it comes to bid work.

That's the primary reason for the increase in volumes this quarter.

If we want to talk about looking forward next year, I could almost say uniformly sales opportunities for all of Eagles businesses are currently at historically low levels.

With winter seasonality starting to arrive early, sales do not appear to be improving.

From a volume perspective, the next six months will be very tough sledding.

Beyond that, I truly believe that the impact of the stimulus will occur, but we are almost into next fiscal year before we will see any meaningful increase in volumes associated with the stimulus package.

So can you give us an idea in the quarter what volumes looked like at the northern Nevada plant and in Texas, and in Wyoming, as well.

Can you give us a sense of where those volumes shook out for the last quarter?

Sure.

Volumes in the northern Nevada market, in northern California, we are almost flat.

Maybe up just slightly, but those volumes are at very low levels.

As you know, we had to shut a kiln down because the volumes are very low levels and a lot of our competitors have shut kilns down us because they're at very low levels.

We hit bottom almost a year ago in that market.

Demand in Texas, I think you can see in our release, is off 25% to 30%, and about the same amount in the mountain region.

Which is pretty typical with where the demands have been off for those markets according to PCA.

Some markets may feel a little bit greater than that but that's typical for what is going on in all of US and all cement markets.

I have one more question on cement and I'll jump back on queue.

The cement pricing being down 11% year-over-year, this is the biggest drop we've seen yet in cement pricing for you guys.

Are cement players getting more aggressive across the board or is the price weakness isolated to a specific market more than another?

And then also as a follow up to that, do you think that there is any price stability on the horizon for cement or do you think it could a little worse before it finds a bottom?

It continues to slowly-- it's not dropping fast.

It leaks slowly.

Some of it, though, is associated with being aggressive on bid work.

But for example, our quarterly average was about $86.

The September pricing was about $85.50.

So we are off a little bit.

But not a tremendous amount.

But when it comes to work going forward, especially bid work, all bid work including stimulus work is extremely competitive with generally more than double the typical number of contractors participating in the bid lettings.

You can imagine that going forward in the near term we may pick up some volumes but it will be very competitive at very low prices.

Thanks for the color.

Our next question is from the line of Jack Kasprzak, please proceed.

Thanks, good afternoon.

First question is just a review of capex budget for this fiscal year.

It's, again, very low.

We anticipate somewhere between $10 million and $15 million of capex.

We did have one major capex spend this year that was not anticipated and we were able to dramatically increase the limestone reserves for our Laramie, Wyoming plant and we purchased the property for about $4.5 million.

That was our big capex this year probably, that $4.5 million spend on some limestone reserves.

I realize it's still the middle of this fiscal year, but looking out to calendar 2010, beyond the end of fiscal 2010, do you have any major capex needs that are looming on the horizon at all?

We fully plan to modernize our plant in northern Nevada.

So yes, that is on the horizon and we know that demand is very weak in northern Nevada, northern California but we know that's not going to last forever and we know it takes a couple of years to build one of these plants.

We definitely plan to go forward, modernize that plant and slightly expand it.

Similar to your comments you just made about cement, I was going to ask about wallboard prices which are down near that $92 or so level.

You guys have a small profit in wallboard.

Obviously pretty close to breakeven here, more or less competitive market, low utilization rates.

Would you think this is the floor for wallboard prices, given you guys are probably the low cost producer and a lot of the industry is obviously still struggling?

I think it's starting to get a little more regional.

And we are starting to see pockets with that are quite a bit lower than other areas, but we are careful.

If it's in a core market we will be competitive.

If it's in a somewhat distant market we will be a little more careful about how we go to market.

For example I think our quarterly average was $92.70 or about, and in September we were about $1 less than that.

And so far in October we are about $1 off that.

Again some slight leakage continues in there.

We continue to be profitable.

And not only for the quarter but every month we remain profitable.

So with some of the reduced pricing also has been some continued reduced costs.

The price of gas continues to go down for us, and currently for this quarter we're about 65% hedged at about $4.75, and for the next 12 months we are about 20% hedged at $4.85.

We feel we've got some nice hedges in place and that will help us going forward.

Great.

Thanks a lot, Steve.

Our next question from the line of Todd Vencil, please proceed.

Thanks very much.

Steve, I may have missed it.

Did you give what the volume comparison was this year in the Illinois cement business?

Yes, it's dramatically improved.

And it's up almost 100,000 tons, I think, for the quarter.

How much of an impact, if you've given this before I forget, but how much of an impact does the loss of that customer last year have, and over what period do you think?

It was really from it started in the May-June time period and the impact of that would have been negative a couple of hundred thousand tons.

Okay.

Thanks for that.

And on the northern Nevada plant, are you still looking at, I think you talked about what the spend on that would be before, but what are you looking at now?

Is it significantly cheaper to modernize that plant now than it would have been previously?

Have you gotten that deep into the process?

We clearly are, we have been, I still believe it's around $175 million, we haven't finished negotiating that.

Maybe we can negotiate that down a little bit.

But I think it's pretty well defined but I think it's in the $175 million range.

When do you think you might start that?

We still have a little bit of work to do, just finalizing the project, but it would be nice to see at least a turn in the marketplace in northern Nevada, northern California and then we know it's a couple of years before this comes on line.

I think it's a little early to start simply because business is just abysmal in that part of the world.

Next question from the line of Kathryn Thompson, please proceed.

Just first, to be clear from your previous comments, it looks like there has been pricing slippage in both wallboard and cement since the end of the quarter.

Yes, that's correct.

A little bit in cement, maybe $1 a month in wallboard.

Your aggregate pricing weakness in the quarter, little bit more than we would have thought, is this a representation of pricing in the market or is mix an issue?

This is just product mix.

The majority of our sales this past quarter were base sales.

First of all, if I can get your real skinny on what is a true demand for the wallboard market now.

We are hearing 17 and then also conflicting 18 to 18.5.

What do you think is the real demand in the market right now?

What will it take for the industry to take out capacity?

If you look at the demand for the month of September, the run rate, if you multiplied that times 12, would be 18.5.

If you looked at where we believe that we are going to end up for this calendar year, it should be slightly under the 18 billion-foot level.

If you believe that winter is going be difficult , if you look at where starts and permits have been for the last couple of months, you probably believe that the front half of next year is going to be not much different than where we are now.

Roughly the 18 billion run rate, maybe slightly less than that.

But the back half of calendar year 2010 should improve and should bring that up somewhat so that calendar year 2010 should be somewhat higher than this

Last quarter you talked about energy being a contributor to improved margin upside in cement.

Could you talk a little about that for the quarter just reported, how much was energy a contributor, and also taking it a step further do you think that the overall margins in the cement segment are sustainable going forward the remainder of this year?

The energy cost were about $2.50, just that piece of it.

And as far as we are going into winter months where you have a huge impact through much lower sales to the fixed part for cement going forward.

The answer is the margins become difficult to sustain when your volumes go down because of seasonality.

Any color on potential weather impact in the current quarter to try to give us a handle on how much wet weather is or isn't impacting?

In Texas it's been huge.

September has been very very wet.

Now also in October we've had a pretty wet October.

So we've had a lot of water in Texas.

In a state that tends to be dry a lot of times you count your blessings when it comes but it does impact business.

Other than that, weather has played a little role coming a little early to the northern part of the country, and it's had some impact in Illinois, and it really is just a function of how cold does it get before construction almost completely comes to a stop up there.

But there is still a month, month and a half of warm weather, and as long as it stays reasonably warm some of the work that may have been slow earlier this month would be picked up in November.

Okay.

Final question, capacity utilization for both wallboard and cement plants.

Wallboard, still about the 50%, a little bit under 50%, it depends on whose number you pick for capacity.

And cement plants, you're starting to get into that 85% to 90% range and again that depends on how you count which plants might be mothballed or shuttered or which ones are just down for maintenance control.

Great, thanks very much.

Our next question coming from the line of Garik Shmois, please proceed.

Thanks for taking my questions.

First one is, sorry if I missed it as a follow up for prior call, cement prices by region, just wondering if you can walk us through and mainly how much of the 11% down year-over-year was really contributed by the aggressive bidding that you engaged in in the Illinois market.

Not a lot.

The price in Illinois had really been down a year ago, as well.

Which is one of the reasons for the buying a customer and shifting things around.

It had become, the volumes were down and pricing was already pretty low there.

So where we seen the decline in pricing has predominantly been in Texas and the mountain region.

Okay.

Fairly even?

Fairly even.

I notice don the balance sheet your inventories were down about $10 million sequentially.

Was that destocking in a particular segment or can you provide some color in there?

It was really planned and it primarily has to do with cement and clinker inventories.

We saw this coming about this time last year so we went into the budget period, said we are going to try to get our inventories at the end of fiscal year 2010 to normal levels.

So we knew we were going to shut a kiln down in Illinois for a period of time, we were going to shut a kiln down in Nevada for a period of time, and we have done that, and by doing that we got inventory levels back to where we would normally have them for this time of the year.

Was there a cost headwind you could quantify that that impacted?

It wasn't really a cost headwind.

It just is a real pain to have that much material outside that you have to double handle and then it gets wet and it's hard to get it back in and it may take not just one year or two years, it may take four or five years to just slowly bleed that back into the process.

And it actually costs you more money to handle those type of inventories.

And with last year at this time, looking at the anticipated sales volumes for this year, we just said the volumes aren't going to be there, why are we going to build massive amounts of inventory.

As a follow on, if you can quantify it, did that impact your cost per ton for the quarter?

I'd have to look quarter over quarter, clinker production.

Craig, do you have that?

Clinker was about flat.

We were about equal.

So the answer is in the Q to Q no, for the year, yes.

Lastly, on wallboard, prices, if you could talk maybe about what you are hearing from your customers.

You certainly have been competitive in the market, your low cost position has held out, but we are seeing some consolidation on the distribution level.

Are you seeing any stabilization in pricing that you mentioned that's coming down a little bit, but would you anticipate that pricing will be stable because the distribution bases would be consolidating?

I don't know that I've seen a tremendous amount.

I think we've seen a lot of the customers close facilities.

I don't know that the number of GSDs has dramatically declined.

Pricing in this environment is going to be difficult.

And the best thing you can do is do what we've always done, we have a rule that no matter what the market is, quality and customer service comes first in the marketplace.

We only sell number one board.

We only produce number one board.

We try to minimize that waste because it's a huge cost disadvantage if you produce a lot of waste.

Then we deliver our board on time in exactly what was ordered.

Those are the things that get you a reputation in the market where somebody will come back and want to buy your product versus the next guy.

If somebody has a product that is not a number one quality board it gets somewhat disruptive because they have to disrupt that into the marketplace.

But sooner or later the distributor just gets tired of handling that board that has soft edges or cracked edges and they will come back to the guy that has the highest quality.

First and foremost is quality for us in the marketplace, and we are very proud of the product we produce, not at any one facility but at each and every facility that we have.

Great, thanks.

Our next question from the line of Michael Corelli, you may proceed.

Good afternoon.

When you say that the wallboard prices dropped about $1a month recently and you remain profitable, are you talking about wallboard alone excluding the paperboard?

That's correct, wallboard alone excluding the paperboard.

Did you say you're 65% hedged at $4.75 this quarter?

That's correct.

Then 20% hedged at $4.85 for what period?

Next 12 months.

Okay.

One of the things that's helped you here despite declining prices has clearly been the lower energy and freight costs.

There are some signs that those may start to move in the wrong direction here with oil and natural gas prices moving up.

Does that mean that as we head into the winter months and demand remains difficult, and you get past this period where you are mostly hedged, that maybe gets harder to maintain that profitability on wallboard?

We are not married to market share.

If all of a sudden logistics cost go up we are going to pull back closer to the plant.

The answer is, we are pretty happy we increased market share and remain profitable.

But if it's a choice of profitability over market share we are going to choose profitability.

As far as the natural gas hedging does that affect both your wallboard and your cement or is that basically at the wallboard?

That's really at the wallboard and paperboard.

We do not use any natural gas to speak of or very minimal in the cement plant.

Our next question from the line of Mike Betts, you may proceed.

Good morning.

I have two questions if I could, Steve and Craig.

First one, Steve, given that the inventories are now at a reasonable level, will you not be doing what a number of other companies are doing where they're taking out capacity for a big chunk of the winter period?

A number of companies have announced closures through February.

Do you not need to do that?

The answer to that is no we do not need to do that.

Okay, and the second question was, and maybe I'm answering the question as I ask it, but in terms of your wallboard volumes, it's down about half what the USG reported yesterday, minus 16 versus minus 32.

Have you gained market share or is that regional or would probably the fair answer would be I shouldn't read too much into one quarter?

We gained a little, not a lot.

We may be up a couple of tenths of a percent of market share, just a smidgen.

Have you seen the Gypsum Association numbers for Q3 yet?

Do you know what they were?

Yes, we did.

For Q3 they were just shy of 4.7 billion square feet.

How did that compare with a year ago, Craig?

They were down 25%.

Okay.

That's it for me, thank you very much.

Thank you, our next question is from the line of Glen Wortman, you may proceed.

Good afternoon.

In Illinois do you anticipate holding onto those recent share gains and do you think additional share gains there are possible?

This is really a function of how competitive you are in the marketplace.

We have an extremely low cost plant up there.

The answer to that is we are going to be very competitive bidding the work in the marketplace.

Okay.

Just looking at the Texas joint venture, was the margin deterioration there all due to the lower prices or something else going on?

No, it's really just pricing.

Okay.

And are you guys still selling out your capacity down there?

Yes we are.

Finally, in cement are you expecting major maintenance charges or expenses in the next several quarters?

No.

Some small ones.

You get into mill maintenance in the winter time.

We will have some what we would call normal routine finished mill maintenance but nothing unexpected.

Thank you very much.

(Operator Instructions) We do have a follow-up question, from the line of Jack Kasprzak.

You may proceed, sir.

Thanks, small matter but for modeling purposes, can you give us some guidance on what tax rate you think would be appropriate?

Sure , Jack, this is Craig.

Tax rate for the first six months of the year, about 31%.

That's a good rate to use for the rest of the

Okay.

Thank you.

Our next question is also a follow-up question from the line of Trey Grooms, please proceed.

You talked a bout being 25% hedged for the next 12 months at $4.85, I think was the number.

With gas creeping up, Steve, do you see yourself increasing that hedge at all or what's your thoughts on that?

We are going to watch it closely.

It depends on the time you buy these strips and so obviously the stuff that we bought for the next 12 months we bought some time ago.

But we will watch it carefully.

If it starts to really get out of whack we will add a little bit but we are going to be careful with it.

Okay.

That's it.

Thanks.

Our next question from the line of Andrew Fineman, please proceed.

Thanks.

Last year your net debt declined $44 million, about $1 a share, and so far in the first half of this year your net debt is down $41 million.

So can you say what you think we will see in the second half, some idea where you might end the year?

We have been pretty careful here lately not to give guidance and that gets into giving guidance.

I'd just tell you typically we generate cash the first three quarters of our fiscal year and the last quarter is generally a neutral quarter for us for cash flow purposes.

I can just tell you that's historical over the last ten years.

Maybe when you have a really good year maybe not so much in the fourth quarter but typically that's the way the cash flow works.

Okay.

I came in a couple of minutes late, but can you update us on your permitting for your pozzolanic mine and can you say at all what that might contribute to your earnings next year?

We have applied for our permits and we've received our air permit, and we have applied (this is on some BLM property) for a permit to mine from the BLM.

And believe that that is somewhere within the next six months.

When we went through the application we didn't find anything unexpected and think it should just be a routine matter to get that permitted.

This is a big opportunity for Eagle to supply a pozzolanic fly ash type material to both northern Nevada and northern California, as something that is a replacement material, that is not a product of any type of combustion so it is a very green product and should have very good margins for Eagle Materials.

Okay, thank you.

Next question is from the line of John Bau, you may proceed.

Thank you.

Steve, just curious as to your view on USG's comment the other day that in order to get 80% utilization of wallboard we would need, say, a 5 billion increase in demand and a 5 billion decrease in capacity.

What do you think the industry's going to do assuming 5 billion in demand is really slow to come?

Do you really see the industry shutting down 5 billion in capacity?

It seems like if anybody is going to do it they are going to do it soon or now or over the winter months.

Just curious as to how you think about -- are we just going to have to wait until we get 10 billion square feet of demand to get to 805 Curious as to how you think it might shake out.

It really depends on how difficult the marketplace is, but I can tell you in older high cost plants, that die is much harder than everybody normally anticipates.

But they do die and the tougher the climate, the tougher the pricing, then slowly these things become uncompetitive.

And when the horizon, both near and even intermediate term, is you are going to lose a lot of cash to continue to operate, then you will shut the plant down.

and when things get really bad you will shut the plant down and exit the market.

A lot of our competitors have a lot of overlap of capacity which would allow them to shutdown capacity and not have to exit the market.

So that becomes a pretty simple decision, when you get to the point where the plant is a negative cash flow plant.

As long as things remain tough and the near term outlook remains tough, then you get tired of reaching into your back pocket and putting cash on every sheet of wallboard that goes out the door.

But these things die hard.

You obviously don't have everybody's P&L, but is it your sense that maybe 1 billion of the industry capacity is losing cash out there or 5 billion of it is losing cash or 10 billion is currently losing cash?

I really don't have any thoughts there.

I know by basic structure which plants tend to be higher cost than others.

I can tell you I think there's about 3 billion-foot of capacity that should be pretty easy to take out.

Thank you for that color.

Speakers, we have no further questions at this time, you may resume with your presentation or closing remarks.

Thank you very much.

I look forward to the next call in January-February time frame.

Ladies and gentlemen, this does conclude the conference call for today.

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

Have a great day everyone.