Eagle Materials Inc (EXP) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the financial results for the third 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, Wednesday, January 27, 2010.

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

Please go ahead, sir.

Thank you and welcome to Eagle Materials conference call for the third quarter 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, please go to www.eaglematerials.com and click on the link to the webcast.

While you're accessing the slides, please note 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.

Eagle Materials quarterly profits were about half of what they were for our fiscal third quarter a year ago, with revenues off by almost a quarter.

As disappointing as these results were, I view as no small accomplishment the fact that Eagle Materials is able to remain profitable in each of its two major segments, even in these extreme recession conditions for the construction industry.

We've responded to this environment by right-sizing our wallboard plant network, managing our presence in the marketplace, and focusing on core markets and opportunities that make financial sense.

Additionally, our low cost operations continue to provide us with meaningful cash flow that allows us to improve our financial flexibility.

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

As an example, our customers and our customer's customers continue to report dramatically reduced backlog.

We continue to adjust our operations to fit forecasted opportunities.

This difficult environment encourages all markets to remain extremely competitive.

At Eagle all of our companies remain focused on items that is are controllable, primarily cost reduction.

The unfavorable wallboard supply demand dynamics remained about the same this past quarter, with the US wallboard industry operating near 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 approximately $5 per MFS from the prior year.

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

Currently wallboard demand is trending at an annual pace of 17 billion square feet.

We're optimistic that demand will improve in the spring when construction activity typically picks up.

The approximate $6 million decrease in gypsum wallboard and paperboard operating earnings is due to a combination of lower sales volume and net sales prices experienced during the quarter.

In addition, as previously announced we closed one of our two wallboard plants near Albuquerque New Mexico.

Our plant, sales force, and logistics group continue to perform exceptionally well in this challenging environmental allowing us to remain profitable during these difficult times.

Now let's turn to cement.

A 17% decrease in our quarterly cement sales volume and a 12% decline in our average net cement sales price were the primary drivers of decline in Eagle's quarterly comparative cement revenues.

As a result of the slowdown in US cement demand, we have dramatically reduced our sales of purchase product from a high of 31% to less than 1% of our current sales volume.

We anticipate cement demand to increase this year with the impact from the stimulus related infrastructure projects.

Cement, concrete and aggregates third quarter operating earnings were lower than last year due to a combination of lower sales volumes and lower prices somewhat offset by lower operating costs.

Craig will now go over third quarter cash flow analysis and our capital structure.

Thanks, Steve.

We continue to generate meaningful cash flow from operations in spite of the difficult business environment.

We remain focused on cost containment, carefully managing working capital, and capital spending.

Our estimated tax rate for the first nine months of fiscal 2010 was approximately 28% and we expect a full year rate to also be 28%.

This is compared to 30% for the prior year.

This next slide shows best how Eagle has performed over the last twelve difficult months.

Because we continue to generate meaningful cash flow from operations, our net debt-to-cap ratio was 38% at December 31, 2009, down from 45% 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 is from the line of Trey Grooms.

Please proceed with your question.

This is actually Will Green on for Trey.

My first question is on wallboard volumes.

It looked like the trend you guys saw there was a little bit better than the industry during the quarter as well as the comp, the other comp that reported today, so I wondered if you could just give a little bit more color on what's driving that, are you taking share?

Is it due to geographic locations, is it -- just if you could just add any color there, it would be helpful?

We're really seeing wallboard volumes at typical low winter seasonality, so in fact it is a struggle out there in the marketplace to find sales opportunities.

In fact, we have actually seen a little less opportunity and have given up a little bit of market share during this period.

In terms of price; it obviously came down a little bit from last quarter.

I wonder if you can talk about where that price is today, how its trended since the end of the quarter.

Sure.

With the amount of excess wallboard supply available in the market, especially doubled demand, it is really very easy to understand the current and very competitive nature in the wallboard industry.

The wallboard industry during this winter period has got a little more difficult.

There was a price increase announced, but typically these days, these price increases actually end up creating competitiveness as it has this time, and pricing currently has dropped another $2 to $3 from the quarterly average.

Okay.

So around $87 currently then?

Somewhere in that neighborhood?

Yeah, somewhere in that neighborhood, $86, $87.

Okay.

At that level, I guess to just kind of follow on, at that level we think that most in the industry are below break even.

Are you starting to see any stabilization there, or do you think we could have further to go?

What are your thoughts there?

I really don't really comment about what my competitor is doing.

I just know what I need to do, and we continue -- we actually find this environment somewhat invigorating, so we continue to optimized our cost structure.

That's one of the reasons why we shut down the plant that gave us a little more flexibility in the way we ran our operations and reduced costs, but the things that we have been able to achieve have effectively mitigated this current price reduction, so as things get a little more difficult, we're going to continue to find ways to drive costs down and we have, and so we -- looking forward we think where we are on a margin basis is about the same as we were this past quarter.

So we'll -- I can't tell you what's going to happen next month but I can tell you so far we have been able to offset most of these declines.

Now, there are a few headwinds, paper prices are going up.

We try to inventory ahead, so the cost of OCC doesn't impact us as severely in the front end, but OCC is going up significantly right now, and we know that's something that we will realize a couple months down the road.

All right.

I appreciate the color.

That's all I had.

Our next question comes from the line of Todd Vencil.

Please proceed with your question.

Hey, guys, how are you?

Very good.

Looks like your cash costs, if I am estimating right, on the DD&A in the quarter, looks like cash costs in the gypsum segment was up about $2.5 sequentially per thousand.

Am I thinking about that right, and if I am, is there anything in particular going on there?

That does seem about right.

Really that's a function of primarily of lower volumes, and we did have a one-time hit for shutting down the Bernalillo plant.

How much was that hit?

Oh, just $1 or $2.

Okay.

What do you guys looking at on gas at this point in terms of hedging relative to how -- amount you're covered and costs?

We have chosen to minimize that as we have talked over the last couple of quarters, but currently we were about 10% hedged, just slightly over $5 for the next twelve months.

Okay.

We feel pretty good that's a good place to be right now.

Okay.

Other than OCC, and then I guess what we can all look at on gas, is there anything else moving in terms of what wallboard costs we should think about?

Not that we can -- no.

Switching over to cement a little bit higher, is that again sort of lower loading in that fixed cash portion there?

That's correct, but if you look at -- if I really look cement is hard to look quarter to quarter.

Have you to think on a rolling twelve the way you handle maintenance.

As you look at the first nine months, our costs are really down, our variable costs portions are down $4 to $5, and the fixed is only up about a $1, $1.5.

We made a lot of improvements in the cement side as well.

If you take into effect the purchase product, our cost of sales is down a little over $6.

Okay.

I wasn't thinking about the purchase product.

Thanks for that.

On the cement side what are your prices continue to -- I think the term I heard you use before is leakage in the price.

Is that basically still a good way to think about what's going on, competitively there?

In a couple of markets they have stabilized, and you finally get down to a point where that's about your competitive position in the market and freight from the next guy gets into the market you know you kind of get to the point where you just can't go any lower.

In a couple of our markets we kind of achieved that, and so those were in markets where little or no sales opportunities right now.

In a couple of our markets though there is still a little one-off price competitiveness and you just handle it one customer at a time and you work through those issues as they come up.

Can I get your last thing -- go ahead.

I am sorry.

So our price in December, however, was not that much different than the price for the quarter, essentially about $84 price in our December market.

That's helpful.

Last thing, would you mind telling me which of the markets have stabilized and which ones are still more competitive?

The far western one, that's California, Nevada.

You've heard me talk about that just being very, very difficult marketplace.

That's stable.

Okay.

The mountain region has been fairly stable for us.

The Illinois had been stable.

With all of this new capacity that is just come up, you're starting to have some competitiveness in that market again.

Although the competition has a tremendous amount of transportation freight to get there, so it is not a full-fledged attack, but they certainly are nibbling around the edges.

In Texas, we have also seen just right around the first of the year or middle of December some price reduction in the southern part of the state as as well as the northern part of the state.

And final clarification there, in Illinois you talked about the new competition, is that the big plant on the river?

That's correct.

Thanks a lot.

Our next question comes from the line of Katherine Thompson.

Please proceed with your question.

Hi.

Just going back to your cement, just to clarify, so your cement pricing at the end of the quarter of $84 is still -- that's a good number to focus on and looking forward to modeling?

It is.

There will be again it is still competitive, and there will be the one off for price adjustments made throughout the quarter, but it is not across the marketplace decline in price.

Okay.

And in terms of momentum of pricing, are you seeing more stabilization in that market or do you still see some pricing pullback for cement?

I would still say that it is not only that one big plant.

There really are two other plants that came online within the last year, year-and-a-half, so you really have three plants that have come online.

They are to the Chicago market quite aways away.

They're much closer to the St.

Louis market, so the more difficult market would be St.

Louis, and a secondary implication would be the further markets and when you're on the river, not only can you go to Chicago, you can go to Minneapolis, you can even go to Pittsburgh, and you can go down south as well, and even end up in Nashville if you wanted.

So there is a lot of places to go on the river, and eventually the river pricing will settle out, but when we started this process, the Chicago marketplace was one of the lowest priced markets on the river, so you would anticipate that it would have less leakage than some of the other markets.

Okay.

What's your current capacity utilization for wallboard and cement?

Our current capacity utilization?

In the 80% range.

For cement?

For cement.

And for wallboard?

Wallboard about 50%.

Okay.

About industry average.

Can you give a little bit more color on the OCC head wind and we assume it is potentially harder versus the energy head wind that we're facing and just a little bit more color about the dynamics and what you're doing to mitigate that impact?

OCC prices first of the year went up about $30.

Anticipated to go up another $20 next month, and $10 the following month.

That's the general lay of the land for OCC.

As I mentioned before, we try to build inventory ahead of that which helped somewhat.

We do have the ability to pass some of those costs through both to our gypsum company as well as we implemented a $40 price increase in the container board marketplace.

We're sticking to it.

We get the price increase or we lose the volume, but that's the way that we look at that part of the business.

So the January wallboard price increases, the January wallboard price increase resoundingly failed, and some of the feedback we were getting from the field is that really there is going to be another attempt, it will be later this spring, but the thought is with higher energy prices it will be somewhat easier to pass on price increases.

What's your opinion on that statement and then does the OCC situation complicate matters somewhat?

That's a little difficult to talk about, but what I can say is this price increase attempted in a declining volume and when you have a seasonality period, where you're still chasing customers and your customers are losing share, you don't know whether you're losing share, your customer is losing share.

It is an extremely difficult time to time to even attempt a price increase.

In the spring, things should be different.

You should see that volumes are picking up with seasonality, and that is at least a better environment to attempt to put a price increase letter on.

Okay.

Also, finally, I know it is difficult to pinpoint, but wet weather was obviously an impact on the quarter.

How much of weather impact really had an effect of pushing sales into the current quarter?

We really -- we had some wet weather in Texas, really wet weather in Texas in September/October, so that spanned a couple of quarters for us with the wet weather that we had here.

Once it stopped raining, the volumes pick back up in Texas, so we're pretty happy with the volumes in Texas, right now.

Very little impact I would say on average on the quarter.

As far as going from the quarter it seems you would there in Texas right have sales pushed into the quarter we're currently in, is that a fair assessment?

If you were in the southern half of the US, where the weather isn't an iceberg.

Correct, outside of the Illinois market.

Or even in the Wyoming or Denver market, it is tough to pour concrete when it gets cold, and even the Reno market is fairly cold in the wintertime, so it is hard to push that stuff forward into a cold marketplace.

Great.

Thank you very much.

(Operator Instructions).

Our next question comes from the line of Garik Shmois.

Please proceed with your question.

Thank you.

Can you talk about your volume expectations for wallboard for this year?

You mentioned you hope to see it pick up seasonably when we get to the middle of the year, but right now we're at about 17 billion square foot run rate.

Competitor earlier today suggested a forecast of about 19 billion square feet implying about 5% increase.

Where do you stand on that and does that seem reasonable to you?

We're rocking along a very low bottom.

I can tell you that I don't think home builder goes any lower.

You're sitting at very minimal starts, so there really is only upside from there.

The commercial market is off, but it has been waning down and we're approaching the bottom of the commercial construction as well, so it is near this area.

Don't anticipate a big uptick in commercial construction, so it is really your feel or your take on what's going to happen in the homebuilding industry, and that's really a function of how much support the homebuilding industry is going to continue to get out of Washington.

Okay.

Do you have a view on repair and remodel?

Repair and remodel, you know, unfortunately for the wallboard industry, that is the number that after you take hard facts you subtract and guess what's left.

That is a really difficult number to take a swing at.

Okay.

Fair enough.

And can you talk a little bit about industry capacity and maybe try to project a little bit?

Both the industry and maybe your behavior with costs on the rise, you mentioned OCC, obviously, and natural gas and diesel creeping up and other than your capacity reduction in 2009 there is very little movement.

Would you think that higher energy costs would lead to a meaningful shutdown in industry capacity this year?

And secondly, we just saw you close down the one of the New Mexico plants.

Could you theoretically take down more capacity during the downturn should these cost trends continue?

If you look at our plant structure, we had to decide what's the best way to balance the plants that we have with the opportunities that are available, and so the real reason is we're sitting in New Mexico with two individual plants, both running about 50% capacity utilization.

We knew we could lower our costs by running one plant at 100% capacity utilization and have no impact on the marketplace.

They're about the same size plants so you're feeding the market with same volume that you were except for now you have lower costs because you're only running one facility.

That's the primary reason for it.

The secondary reason is it gives us more system flexibility, so that plant you ship out of a plant 360 degrees in the middle of the country not on a coast where you might have a semi circle that you can ship from, so it allows then us to take advantage of -- the lowest cost of wallboard plants in the nation by far is our Duke, Oklahoma plant, so allows us to use that for any flexible opportunities that take place in the marketplace.

So the market gets better.

We'll ship more from our Oklahoma plant back to the West, and then we'll ship more of the Albuquerque plant further back to the West, so it just gives us a much more flexible system to operate and in a lower cost system to operate.

Okay.

And just lastly, on the last call you talked about your plans to move forward with the Nevada cement plant modernization.

Is that still on track?

It still is on track, and as I mentioned earlier in this call, that marketplace is just very, very difficult, so we do need to see some improvement, at least the start of improvement in California and northern Nevada, but we are absolutely committed to and ready to move forward with that project.

Thank you very much.

Our next question comes from the line of John Baugh.

Please proceed with your question.

Thank you.

First on cement, I think you made a comment that you believe that the cement demand will be up in 2010 versus '09, and that was relating to stimulus.

First of all, did I hear that right?

And take me through the pluses there and how you see the offsets, on the both the private residential and private commercial side?

Okay.

So the pluses are primarily related to the infrastructure which is a function of the stimulus, so the real pluses there are we are going to see a little increase in residential.

I am not going to predict how much.

We will see some increase in residential construction, so there is a little plus there.

Commercial construction that is private in nature is next to nothing, but we have already seen the waning of that ahead of here.

While a lot of people look at commercial construction they just look at the dollars spent, and they still see dollars coming down, but that's concrete that they've poured almost two years ago, so as far as the concrete and cement goes into commercial construction, we've kind of hit the bottom of that five or six months ago, so we shouldn't see much more decline as far as cement demand on a commercial piece.

So, the uptick really then comes from a little bit of residential, not much less in commercial, because we've already hit bottom there, and an uptick in infrastructure once the stimulus starts to kick in, once the weather warms up a little bit.

Okay.

And then, Craig, could you help us with some cash flow assumptions?

D&A this coming year, if revenues were down X percent, generate how much in working capital of your CapEx lines, etc.?

Sure.

Briefly for this quarter $12.8 million for DD&A, which will put us at a run rate for FY10 of about $51 million.

I don't expect that to change materially in FY11, and that's why I left it to remain $50 to $51 million for FY11.

Capital spending you will see for the nine months we've spent $12.2 million in FY10.

I think FY10 should come in the same $10 million to $15 million range for all of FY11.

And then working capital we've done a good job of managing our inventories, certainly finished goods and receivables and payables, we've done a good job managing those working capital items, so over a year that certainly fluctuates program on the inventory as well you build cement inventory through the December and March quarters and then you will see inventory work itself down typically in June and September (inaudible), but on the whole you might call working capital neutral from the end of that FY10 to the end of FY 11.

Great.

Thank you.

Our next question comes from the line of Glenn Wortman.

Please proceed with your question.

Good afternoon, guys.

Looks like the operating margin for your joint venture was up pretty significantly sequentially.

Can you just tell us what went on there and is that 39% -- 38%, 39% a good number to use going forward?

Yes.

The improvement was primarily due to maintenance that occurred in the prior quarter relative to this one.

Okay.

Your second question I didn't quite hear.

I was going to ask if that 38%, 39% margin number would be a good number to use going forward?

I think as Steve talked about before, you have quarterly fluctuations because of the maintenance work that happens at a cement plant on annual basis.

The Texas plant continues to operate very well and is still very good margin plant for us.

Okay.

And then secondly on the paperboard margins, where do you see that trending over the next couple of quarters?

We see those to be, even though the paper costs are going up, we see, and in fact we have been able to go out and find some gypsum demand is obviously down, we have found some other markets to play in that have pretty decent margins, but we really see that being pretty flat going forward even with those you see going up as we're able to sell into markets other than gypsum liner board market.

Okay.

Thank you very much.

Our next question comes from the line of Justin [Blazzo].

Please proceed with your question.

I was wondering if you could talk a little bit more about your inventory levels?

It looks like inventory on the balance sheet was down about 2% on a 24% decline sales year-over-year.

What's behind that and where would you expect that inventory to trend over the next twelve months?

Thanks.

We really made a concerted effort this year not to build too much inventory.

So we knew that it was going to be a difficult year.

We started last year and we really made a very concerted effort to reduce the amount of what we call materials and progress and cement inventories.

You can get a lot of money tied up into both of those items.

We also knew that we should have a very difficult winter, so we just didn't want to build a lot of inventory that you're going to have to double handle, and when you double handle it when you put it back outside and take it back inside, it raises your costs just every time you handle the stuff, so we just made an effort really throughout for about the last year-and-a-half to try to manage those inventories and not let them get out of control.

Would you say these are levels you feel comfortable at?

Or you wouldn't necessarily expect those to go down in other words?

These are reasonable levels.

What will happen is here is the dead of winter so they're going to swell a little bit because you always build a little bit of inventory in the winter, and then the spring shipping sales season starts, and you deplete them down.

Typically, if we were in a normal market by Thanksgiving you're essentially empty, and that's the way you would normally run the business.

Unfortunately with the market off 30% this year, by Thanksgiving we weren't empty, and year before we had an issue with a customer up in Illinois and that created a swell from the year before, but typically you would actually have lower inventories than this, this time of year.

Got it.

Thanks.

Mr.

Rowley, there appears to be no further questions at this time.

I will turn the call back to you.

Please continue with your presentation or closing remarks.

Thank you for calling and look forward to talking to you at the end of our fiscal year.

Ladies and gentlemen, that does conclude today's conference call.

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