Eagle Materials Inc (EXP) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the financial results for the fourth quarter fiscal year 2010 conference call.

During the presentation, all participants will be in a listen-only mode.

And afterwards, we will conduct a question-and-answer session.

(Operator Instructions) As a reminder, this conference is being recorded Monday, April 26, 2010.

And I would now like to turn the conference over to Mr Steve Rowley, CEO and President.

Please go ahead.

Thank you.

And welcome to Eagle Materials conference call for fiscal year 2010.

Joining me today are Craig Kesler, our 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 that the first slide covers our cautionary disclosure regarding forward-looking statements made during this call.

These statements are subject to risk 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 our fiscal year 2010 results do not accurately reflect the earnings potential of Eagle Materials, they do reflect our relentless efforts at continuously improving our low cost producer position.

I'm proud to say, our year-over-year per unit operating costs were lower across all of our major business segments.

This is quite an achievement, considering the current low level of sales opportunity.

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 reduce costs and further increases Eagle's low cost advantage.

A perfect example are the operational improvements achieved at Mountain Cement during fiscal 2010.

In the past year we made a minor capital investment that allowed us to significantly expand our limestone reserves.

More importantly, the operational improvements that Mountain Cement achieved produced the majority of the cost savings associated with our planned modernization project.

Therefore, we've effectively eliminated the need for the large capital project.

The current plan is now well positioned for improved profitability when the market returns.

One additional outcome of that success was that we wrote off approximately $2.5 million associated with project development costs.

US wallboard industry capacity utilization remained about the same this past quarter, at around 50%.

And the downward trend in pricing continued during January and February.

However, in March, American Gypsum was successful in implementing a wallboard price increase and they have announced plans for another price increase in May.

While sales opportunities are not expected to increase significantly in calendar 2010, our expectation is for low single digit growth in wallboard demand during the first half of our fiscal year, gaining momentum, robust growth during the second half of the year and then increasing into the following year.

The decline in Gypsum Wallboard and Paperboard's fourth quarter operating earnings is a combination of lower wallboard prices and higher paper cost, partially offset by improved paper sales volumes and lower wallboard operating costs.

Recently, OCC prices have begun to retreat which will further help our wallboard and paperboard profitability.

I would like to commend our plants, our sales force, our logistics groups, performed exceptionally well this past year, allowing us to remain profitable during this difficult times.

Quite an accomplishment.

A 4% decrease in our quarterly cement sales volumes and a 12% 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 dramatically reduced our sales of purchase product from a high of 31% to less than 5% of our current sales volume.

We anticipate cements demand to increase during calendar 2010 from the impact of stimulus related infrastructure projects.

The decline in our fourth quarter cement operating earnings when compared to last year's fourth quarter was due to a combination of lower sales volumes and sales prices, and increased quarterly costs associated with temporary shutdowns at all of our cement facilities for maintenance and inventory control.

Our Concrete and Aggregates fourth quarter operating earnings were down approximately 47% from the prior year, due to lower ready mix and aggregate sales volumes and prices during the quarter.

Business conditions remained extremely difficult in Northern California and central Texas.

Craig will now go through Eagle's cash flow and capital structure.

Thank you, Steve.

As a result of our focus on further reducing costs and managing our working capital, cash flow from operations increased 18% versus the prior year.

As Steve mentioned, we were judicious with our capital spending in fiscal 2010 and we expect fiscal 2011 capital spending to remain in the same range.

In connection with our dispute with the IRS regarding certain deductions related to the acquisition of certain Republic Gypsum and Paperboard assets, during the fourth quarter we deposited with the IRS approximately $29 million related to the audit of our 2004 through 2006 tax returns.

This deposit was made to avoid the additional imposition of so called hot interest.

For the full year our effective tax rate was approximately 26% and we expect our fiscal 2011 effective tax rate to be approximately 31%.

From this last slide, you can see the deleveraging that has occurred at Eagle over the past several years all during a very difficult period for the construction industry.

Our net debt to cap ratio declined to 40% at March 31, 2010, down from 44% the same time last year.

Thank you for attending today's call.

We will now move to the question and answer session.

Jennifer?

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

Please proceed with your question.

Hi, Steve and Craig.

Hi.

On wallboard pricing, could you quantify how much of the margin increase is holding at this point and then also any detail that you could share with us on the price increase that's been announced for May?

Sure.

Approximately two thirds has held so far, but takes a while to fully implement it, so two thirds and more should be fully realized with the March price increase.

It's somewhat amazing in very difficult periods that you would see price increase when sales opportunities are still fairly low relative 50% capacity utilization, but what happens over periods, a long period of declining demand, you naturally go through a lot of competitive territorial tactics that tend to result in poor business decisions.

After a prolonged period of these financial distress, business decisions that tend to change and American Gypsum did land the majority of this announced March 15 price increase and they plan on doing the same thing for May price increase.

Price improvements simply remain more important than increased sales volume.

It simply makes no sense to continue to sell product at today's low prices and continue to take the credit risk.

In fact, wallboard at current ridiculously low prices remains an absolute incredible value for covering walls and ceilings with a very versatile fire resistant barrier.

Also, you said that if I heard you right, you expect single digit volume increases in the first half and then improving from there in the second half of the year, and I'm assuming that's for your fiscal 2011?

That's correct.

Could you go into a little detail about where you expect that improvement to come from?

Is that mostly from residential or kind of if you could just give us some thoughts on your expectations for the end markets there that's behind this.

That would be mostly repair and remodel improvement and residential improvement.

Okay.

And so would that be -- and you're expecting commercial I guess a continued drag there?

It will be a drag and a drag for some time, because it takes a while for wallboard to go into a commercial building until we start building them.

We've got about a 12 to 18 month lag before we see wallboard on one of these projects.

Right.

Okay.

And then my last question is on the wholly owned cement volume, basically flat year-over-year, can you talk a little bit about how that progressed through the quarter and kind of what you're seeing in each of your cement markets in terms of demand?

Yes, we're -- it's taken a lot of effort and really a fight for every sale, but pretty pleased with the year-over-year flat sales in a very difficult declining cement market.

We started this quarter with very poor sales in January and February associated with the bad winter weather.

However, once March hit and the weather turned good, sales have been incredibly strong in all of our markets and remain strong really in April.

And is that pretty much across the board geographically or is there strength coming from one market more than others?

That really is across the board.

Okay.

And what do you think is behind that?

Is that mostly infrastructure-driven demand, do you think?

I think it's a combination of you had really lousy weather in January and February, so there was some pent-up demand that was unleashed.

And then some of these jobs and a lot of the bid work that was bid last year and wasn't able to start in the fall is now finally starting.

So yes, the impact of infrastructure, we're starting to feel its effects.

Okay.

Thanks and good quarter.

I'll jump back in queue.

Thank you.

And our next question comes from the line of Jack Kasprzak.

Please proceed with your question.

Thanks.

Good afternoon.

On the cement side, could you -- I guess prices in the quarter were down around 12%.

What are you seeing on cement prices?

Do you think we stabilize in the low 80s or should we expect some further softening?

That's, again, going to vary from market to market, and some markets I think have stabilized.

A couple of our markets have stabilized.

But it's not a wholesale reduction.

It's a kind of a one-off customer here and there and then a reaction and in the markets where we still have seen some decline.

I still believe that throughout the course of this year, there will be a moderate decline in cement prices, simply because of the supply-demand in a couple of the markets.

Do you -- Steve, do you think it still makes sense for the wallboard industry to consider closing capacity or put differently, do you still think there's capacity out there where it makes sense to be closed?

Just generally speaking, even given the recent price improvement.

Generally, if you have a very high cost plant, what happens is it just can't ship very far and it might be competitive in a fairly small radius around the plant, some plants may be only 50 to 75 miles, whereas as a low cost plant might be able to ship in the same pricing environment 400 to 500 miles.

So it just depends on how you want to run your business.

If you run a business with a high cost plant that you could effectively ship from a neighboring plant, you're going to end up with a high cost structure.

So it's really a question of how you want to operate your business.

We've chosen not to want to run businesses that way, whether it's cement, concrete, aggregates or wallboard.

So we have always taken the position that the only way you're really going to be effective and produce solid results is by being the lowest cost producer in every market.

And to do that you have to drive cost out of all your operations.

Third question is CapEx for fiscal 2011?

Be about the same as this year, fairly minimal.

Okay.

Great.

Thanks very much.

Thank you.

Our next question comes from the line of Kathryn Thompson.

Please proceed with your question.

Hi, thank you so much.

I know you talked a little bit about pricing during the quarter for cement and wallboard.

And gave a little bit of color after.

Dig a little bit deeper and talk about trends and overall cement pricing since the end of the quarter versus the average, and the same for wallboard and what are your expectations going forward for cement?

I think we have a little bit better idea with wallboard, but a little bit more with cement pricing trends.

Thank you.

Kind of the March pricing and what we've seen so far in April is fairly flat with cement.

Doesn't mean that it's not competitive.

Sometimes you have some product mix that will impact your pricing.

We may have some specialty products that the volumes are a little higher so, therefore, it will bring up pricing a little bit.

But in general, I would say that pricing is relatively unchanged from the quarter to the present in cement.

Wallboard, that's not the case.

Wallboard pricing is up dramatically and we are anticipating further improvement in wallboard pricing next month.

And do you think those trends in cement are sustainable?

For the most part, you've gotten to the point where over the course of a year or two, once most of the imports were removed from the market, that all the competitors realized how far you can go with freight and when you leave your primary or core market to go to a secondary market, the impact of freight and how you can price cement in the neighboring market.

I think most of that has been realized.

Doesn't mean that you won't have some one-off shots across the bough that come at you, but for the most part I think we're close to stabilization.

Also taking a shot at looking at volumes since the quarter end, what's the trajectory of the volume trends?

I would say that your wallboard and cement volumes were a little bit better than what we expected.

If you could talk a little bit about those segments.

Well, the cement improvement really had to do with the weather in March and April.

So it just -- and the combination of some big jobs, some construction jobs starting for us.

With wallboard, we did have a very nice increase in the last half of March and April in wallboard demand.

I'm not convinced that downstream is where all the wallboard is going.

I think some intermediate inventories have swelled and at some point in time you can only swell volumes so much.

So eventually, we're going to have to see both repair and remodel and new residential construction improve to maintain some improvement in wallboard volume.

Is that inventory increase due to prebuying?

It certainly is due to prebuying ahead of these price increases.

How much of the increase do you think is due to prebuying, if you had to guess?

Yes, that's a hard number.

I really -- it's a tough guess.

Okay.

And granted OCC pricing has rolled over, but you did have a pretty sharp increase in the early part of this year, calendar this year.

How much of mid-march price increase mitigates that -- offsets that waste paper pricing?

I'll have to follow that all the way through to wallboard, but it mitigates a fair amount of it.

More than mitigates a fair mitigates a fair amount of it.

The increase is really more reflective of very poor wallboard margins and not so much the fact that you also had some increase in cost associated with paper.

Now, don't get me wrong, we had 137% increase in OCC prices.

Went up over $100 a ton.

So that is a huge impact.

But when you follow that through to wallboard, we're looking at announced $20 price increase and realizing about two-thirds of that, my guess is the paper impact was maybe a third of what was realized.

Okay.

Great.

And are you currently -- any updates on hedges?

Yes, we're about -- for the next 12 months, we're about 15% hedged at a little under 4.5, maybe 440.

Okay.

Great.

Thank you so much.

Thank you.

Our next question comes from the line of Garik Shmois.

Please proceed with your question.

This is Josh Borstein in for Garik Shmois.

I was just wondering, before the current March wallboard crisis, it had been pretty difficult to pass along any increase let alone the magnitude you have gotten.

Can you discuss a little why you think the March price increase was so successful?

Are there any dynamics at play right now that didn't exist previously?

I think one of the dynamics is not only did the manufacturers announce a price increase, so did the gypsum specialty dealers, the distribution companies.

They also, at the same time, announced a price increase.

Whereas in the past, we had not had the downstream distributors fully supporting a wallboard price increase.

It was very difficult to realize one with the combination of both manufacturers and the distribution companies announcing price increases.

That really was what the difference was this time.

Okay.

And you mentioned you had seen some prebuying ahead of the March price increase.

Are you seeing any similar trends with the upcoming May price increase?

Yes, but it's a shallower -- it's a little increase, but not as large as the pre-buy ahead of the March.

Okay.

And just lastly, turning to cement, you talked a little bit about the year-over-year volume trends.

Could you talk a little bit about the quarter-over-quarter volume trends and the difference you saw in volumes between the wholly owned and the joint venture.

Cement is very seasonal and once you hit the winter, it's hard to talk about sequential quarters.

I guess we could talk about last year's winter versus this, but then you're talking about how bad was last year's winter versus this year's winter.

That's a tough question.

Okay.

Thank you very much.

Thank you.

Our next question comes from the line of Mike Fitch.

Please proceed with your question.

Yes, hi.

I actually just had two or three financial questions, if I could.

The first one related to the interest cost which dropped in Q4.

Was that anything to do with the payment of the money over to the IRS or was there anything else behind that?

It's been running at $5.6 million a quarter.

It dropped to $4.5 million.

So the drop was over $1 million.

That's my first question.

My second one was just on the tax.

Maybe you could explain why the tax credit in Q4, Craig, and then also the expectation of 31% in 2011.

Is that just being conservative or were there more one-offs than maybe I realized in 2010?

And then finally, the $2.5 million provision for project development costs written off, was that in Q4 in the cement line in operating costs?

Thank you.

Okay, Mike.

I'll try to get through your four questions.

Thanks.

Your first one, going back, why was interest expense down.

Predominantly it does have somewhat to do with the payment that was made in the fourth quarter.

As you know, we've been booking what we call FIN 48 interest on a quarterly basis and with that payment of the $29 million, that did reduce the amount of interest going forward.

In addition, that is an estimate that you make during the year as far as the amount of tax interest, and so that was just trued-up in the fourth quarter.

The second question relates to the tax benefit and again, that's really a true-up of our year-end provision and we reorganized some certain states during the year for tax purposes and so that led us to recording benefits at the state level.

So it's really a state tax benefit pick-up that we're showing through there, and you make all these adjustments here in the fourth quarter.

And then as it relates to the 31% in FY 2011, you certainly have statutory tax rate of 35%, but depletion deduction has a bigger impact at these earning levels and then not anticipating those state benefits in FY 2011.

And then the $2.5 million in deferred project costs that we wrote off, that was actually as we put in the 8-K with the press release, that was written off in the second quarter.

So you'll see in the footnote to our 10-K that we'll make an adjustment to pretax earnings and after-tax earnings of obviously pretax $2.5 million, and about $1.7 million after-tax for another $0.04 per share.

Okay.

So that we already heard about that in the second quarter results, had we, Craig?

I missed that.

That was earlier in the year?

No, this is -- yes, it occurred -- we actually, as Steve mentioned, we realized the majority of the benefits, cost benefits that we were expecting from the larger modernization project that we talked about a few years ago and we essentially pulled our permit back in September and so that's why those costs are being reflected in the second quarter.

That's great.

Thank you very much.

Our next question comes from the line of Glen Wortman.

Please proceed with your question.

Good afternoon.

On the Wyoming expansion, can you just give us a sense of what your production capacity is there today, and is there demand for that increased capacity?

We are not fully utilized at that plant.

We're nearly fully utilized.

So we might -- 85% to 90% utilization of that facility.

And our current capacity is in the 700,000 plus tons per year range.

Okay.

Maybe I misunderstood what you were talking about earlier, because you had some planned expansions in Wyoming and Nevada at one point.

Is the expansion at Wyoming off the table now?

That's correct.

What about Nevada?

Nevada is still planned go-ahead when the market improves.

Okay.

And then on the cement prices, are there any planned price increases in any of your markets?

They're currently -- I think there were a few price increases announced last fall for kind of this April time frame and none of them helped.

Okay.

And then finally, are you comfortable with your present inventory levels or do you plan on trying to bring those down some?

We actually brought them down this year, a little bit, so we are very comfortable with our inventory levels.

Okay.

All right.

Thank you very much.

(Operator Instructions) Our next question comes from the line of Todd Vencil.

Please proceed with your question.

Your line is open.

Good afternoon.

Good afternoon.

Steve or Craig, can you talk a bit about how we ought to think about leverage to volumes in the wallboard business?

Because I've got to say, I was impressed with the EBITDA per thousand in wallboard in the quarter.

Looks like it picked up from the December quarter.

Am I reading that right?

That's correct.

That's correct.

So how should we think about volume leverage?

Was that primarily the result of volumes?

There is some help for covering some fixed overhead.

When you're running at 50% utilization, there's just a certain amount of fixed charges that are going to bury you, especially if you just finished building a new plant and you've got a lot of depreciation associated with it.

There's a certain impact, may not be a cash impact, but there's a certain impact associated with higher volumes.

But as I mentioned earlier, it's not the volume that you're really after right now, it's really pricing.

Because the average price of wallboard that remains extremely low.

Okay.

Was there anything besides kind of a volume impact, if you think sequentially from December -- the December quarter into the March quarter, because it does look like your cash margins picked up pretty nicely there, even though your prices were down on average almost $3.

So was there anything in there that -- other than volume, that explains the increase in cash margin?

It's always a lot of little things, so we did -- our waste was, again, very low, in the low 1% level.

We continued to enjoy very nice natural gas prices.

That remains very helpful.

Power costs have been okay.

Paper costs for us, we have a long-term supply agreement and the impact of increased OCC has about a three month lag, so we really didn't see that to our wallboard operations, as we'll see that maybe a little bit in this next quarter.

So combination of those.

Okay.

Switching to aggregates, your price was down pretty significantly sequentially and year-over-year on an average price basis.

Anything special going on there or is that straight -- a straight decline in sort of product pricing?

How should we think about that?

I think that is really a mix issue.

Okay.

We're selling more of the lower priced products.

Is that base that you're selling into infrastructure that's starting to get going due to the stimulus work?

Yes, base and a new product that we're selling.

We're screening another product.

It's kind of a fill material.

So I think it's a combination of base and this new product that we're producing.

What's that fill used for, Steve if I can ask?

Just fill in under a slab on a home, for example.

And what we're doing is we're saving the good aggregates and we're watching them, building some aggregate inventories of good, high priced washed aggregates while we're kind of moving this lower cost material.

Fair to say that the bidding on that material is pretty aggressive?

Yes.

Pressure on that lower end material?

That's correct.

Okay.

You mentioned that cement volumes really picked up nicely in March once the weather broke and in April.

Can you kind of give us a feel for what the run rate of the year-over-year change has been in that sort of more active period?

Are we up 10% year-over-year?

What's it look like.

When you see this monthly change in volume, it's really hard to project that into an annual basis.

I know PCAs out there with volume increases of about 5%.

When you have bid work and all of a sudden the weather breaks and you start a job that you bid, well that bid job might only last a couple of months.

So it's kind of hard to quantify a one-off, one or two month and project that out.

We still think that our volumes will be up year-over-year in cement and our best assumption, we're not economists, is very closely in line with PCA.

Got it.

And the final question, you mentioned that cement prices were stable in some markets and other markets were a little more competitive.

Can you kind of break out which of your markets fall into which of those buckets?

Sure.

We had some pricing pressure in Texas, kind of around the first of the year.

That has died off a little bit here lately as volumes have improved.

Probably the same in the Midwest.

I think the other markets were a little more stable.

Got it.

So even your markets that were maybe under a little more pressure early in the quarter have kind of come more in line more recently?

Volumes helped.

Got it.

Okay.

Thanks a lot.

Thank you.

Mr Rowley, there are no further questions at this time.

I'll now turn the call back to you.

Please continue with your presentation or closing remarks.

Thank you very much.

And look forward to having another discussion in about a quarter.

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

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