Eagle Materials Inc (EXP) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the financial results for the first quarter fiscal year 2011 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 22, 2010.

I would now like to turn the conference over to Mr.

Steve Rowley, Chief Executive Officer, and President.

Please go ahead, sir.

Thank you, and welcome to Eagle Materials conference call for the first quarter fiscal year 2011.

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 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.

Demand for building materials, construction products remains at historic low levels.

Maximizing profitability by reducing costs has been and remains our primary focus, and in this business environment, this focus has never been more important.

For more distinguishing reading materials in terms of results, our focus on having the lowest variable costs and the lowest percentage of fixed costs of total operating costs give us important competitive advantage in an environment of fewer sales opportunities like the one we see today.

We continue to improve our competitive position by making every cent count and by investing the small cost reduction capital projects that have very high returns.

We also remain focused on serving our core market.

This core market focus not only makes strategic sense, but it supports our low cost intentions through the minimization of freight costs to the market.

Because of our low variable cost position and our low fixed cost in relation to total operating costs, pricing is more of a priority for us than volume in this business environment.

During the quarter, our wallboard operations successfully implemented another price increase and has announced plans for a further price increase at the end of August.

The increase in our quarterly wallboard and paperboard revenues reflects improved sales volumes in both businesses.

Wallboard sales opportunities are not expected to increase significantly in calendar 2010.

However, our paper mill is sold out for the year by supplying multiple grades of paper into alternative profitable markets.

The increase in Gypsum Wallboard and Paperboards' first quarter operating earnings is the result of a combination of lower wallboard production costs, improved wallboard sales volumes, and improved paper sales volumes and prices.

The 8% increase in quarterly cement sales volumes partially offset an 8% decline in our average net cement sales price, to keep quarterly cement revenues almost flat with the prior year.

The decline in our first quarter's net operating earnings when compared to last year's first quarter was primarily caused by the lower net sales prices, partially offset by lower per unit operating costs and improved sales volume.

Our Concrete and Aggregates first quarter operating earnings were down approximately 20% from the prior year due to lower ready mix and aggregate net sales prices and lower ready mix sales volumes during the quarter.

Business conditions remain extremely difficult, especially in Northern California.

Craig will now comment on Eagle's cash flow and capital structure.

Thanks, Steve.

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

We used our positive cash flow to delever the balance sheet and lower our overall financing costs.

We remain judicious with our capital spending and first quarter capital spending was approximately $2.6 million and we expect full year capital spending to be approximately $15 million.

The effective tax rate for the quarter was 28% and we expect our annual rate to remain in that same range.

This last slide reflects the continued deleveraging that has occurred at Eagle over the past several years, all during a very difficult time for the construction industry.

Our net debt to cap ratio declined to 39% at June 30, 2010 from 43% for the same time last year.

Thank you for attending today's call.

Savannah, we'll now move to the question and answer session.

Certainly.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Todd Grooms.

Please proceed with your question.

Hi, this is Trey Grooms, but hey, guys.

Hi, Trey.

Okay.

So, your reported wallboard prices, it looks like they're up nearly $12 sequentially, at least at the average for the quarter.

Can you tell us where they stood at the end of the quarter and then where they are currently?

They're -- the prices continued to improve throughout the quarter and in June our wallboard sales price was a little over $103, about $103.25 for the price.

Also, during that time period, freight also went up $1 to $2.

So, but still, we're reporting net, so $103.25, net of that increased freight as well.

Okay.

So, it sounds like as far as the increases are concerned from March and May, you realized about half of those increases, which continue to hold at this point, is that kind of how to think about it?

That's correct.

That's a very good way to think about it.

You know, there may -- as you have at any point in time when you're not (inaudible) further pricing and there were some pre-buying ahead of the March price increase.

All of that, as well as associated with some higher volumes in kind of mid-March through first part of May, with the home building credit.

So, what happened is after that, there was a slight reduction.

Kind of hit a little wall as inventories were reduced with sales, sales volumes came down a little bit.

But not enough to have a tremendous impact on pricing where that was at the end of the last price increase.

So, there had been some leakage, but at the end of that leakage, we still stood at that $103.25.

Okay.

And then Steve, what's your perspective on the August increase at this point?

With these most recent price increases that we have, many of our wallboard competitors still have negative cash flow.

All eight wallboard manufacturers are out with a price increase letter and I cannot think of a better reason or better incentive for further price increases than negative cash flow.

Okay.

That makes sense.

And then just shifting gears to cement, could you talk about what you're seeing in cement geographically, both from a demand standpoint and also from pricing?

Sure, and we also had a very strong mid-March through May volume as far as cement demand for different reasons.

We had a lot of bad weather in the early part of the year.

I think we talked about this in last call, there was some pent-up demand associated with how bad the winter weather was.

As well as the fact that a lot of the stimulus projects had been bid a year ago and when the start of the spring construction season hit, those came online.

We had very strong sales certainly in the Midwest, Texas during that time period.

I think we still had a little foul weather going on in Colorado at that point in time.

Since that stopped, volumes have picked up a little bit in Colorado.

But the one market that still remains very difficult for us is the Northern California and Northern Nevada market.

How is Illinois fairing right now?

The Illinois market remains very good for us.

It's not that it's competitive.

We still have a lot of, a lot of competition going on there.

But the overall demand for us remains strong in that market for the current conditions.

And then it looks like pricing was about flat sequentially.

Is that kind of across the different geographies, that's what you're seeing?

Or is one place kind of standing out more than others?

Almost universally, pricing was flat sequentially, as well as in the last month.

In June, pricing essentially remained flat, in line with the quarterly numbers.

Okay, and then my last question is kind of on the tail of that.

Is -- you said mid-March through May cement demand was pretty good in most of your markets.

Have you seen a slowdown since that, since May?

In June, I know a lot of industries have seen a slowdown starting about that June timeframe.

Did you guys see something similar?

Yes, we had a little slowdown in the Texas market, but, again, that was kind of offset a little bit by increases in the Colorado market once weather got better in Colorado.

So -- but for us -- and then we also had some in June, we did have a fair amount of rain in the Chicago market.

And one other item that's going on, although our sales volume still remains strong for us in Illinois, and really somewhat surprised me that they had been able to stay this strong.

There is currently a strike occurring in that market with the ready mix producer.

And how do you think that will impact you guys?

Well, currently, it has not had a huge impact.

Our sales volumes are right on budget, right on plan.

They might be a little stronger if that was not occuring.

Okay, great.

Thanks a lot, guys.

Our next question comes from the line of Kathryn Thompson.

Please proceed with your question.

Hi, thanks.

Just following up on the wallboard price increase questions, you've had 14% sequential pricing, which implies there's additional pricing coming to flow through to Q2.

Could you clarify or make sure that we're understanding that there's additional price increasing going through?

And also, could you clarify how receptive your customers by segment have been on the price increase and the timing for those price increases by segment?

Or type of customer?

Okay, so, obviously price increases, price increases in this environment are difficult.

However, at the same time, selling a product below your cash costs to produce is just as difficult, if not more difficult.

So, you have some customers who just don't want to hear price increase.

You have other customers that realize this is not (inaudible).

If you continue to sell below cost, you're going to run out of business and when things turn, they'll be in a world of hurt.

So, you get mixed feelings when you go through that process, but in reality, over the long haul, you have to be able to at least cover your costs when you go to market.

So that's the real impetus for further price increase.

And you really don't have many big box customer mix?

It's a smaller portion of our mix, that's correct.

And how big are national home builders as your customer base?

We generally do not sell direct.

We sell through the distribution channels.

Okay, great.

On the wallboard margins, definitely ahead of our expectations.

Are these margins sustainable going forward?

Could you repeat that?

Are the wallboard margins sustainable going forward that were reported in the quarter?

So that's really just a function of the ability to have price and I'm very confident that all things being equal, as far as natural gas is concerned, that our costs are very sustainable.

That's easy enough to predict.

The marketplace is hard to predict.

And so, a margin will be a function of the two.

Okay, and speaking of industry, how far away do you think the industry as a whole is from cash costs of producing at break-even or cash costs of production?

That is -- that's, again, very difficult for me to predict.

I really just do not know my competitor's costs, but I have seen some of our competitors release public data that says there still is room for improvement.

Okay, and just to clarify on wallboard volumes, you made some comments earlier but understanding that there was a pull-forward in demand at the tax credit, how have volumes progressed in July?

Because you know that in June there was a pretty sharp drop-off for the industry.

Have you seen any improvement in overall demand for wallboard products in the month of July?

When you talk about small increments, you're really getting dangerous to predicting whether volumes are going one way or the other, but let me speak generally.

If we looked at the rate of volumes in the December, January, February time, when we -- when the March 15 price increase was announced, kind of in early March, you could see a rapid increase in sales volumes.

That was associated with the price increase and housing tax credit.

That bubble went through until about mid-May.

And then mid-May through mid-June kind of towards the end of June, we paid the price for the higher volumes earlier on.

Now coming out of it, it looks like we're back on about the same trajectory we were, which was an increase from December, January, February.

But not a tremendous increase.

So, we're kind of rocking along the bottom in the housing market and demand for wallboard is primarily driven by new home sales.

So, we have seen a slight increase in that trajectory if you look over a longer period of time, but you're still rocking along the bottom.

We don't anticipate sales much different than last year, or maybe slightly higher than the (inaudible) demand that the industry saw last year.

Okay.

So, would you say that getting mid-single digit volume increases is reasonable, if you include -- layer in the tax credit pull forward of demand?

That's reasonable.

Okay.

Also noticed that your paper board pricing is a little bit higher.

What was the driver for that?

Directly a function of the cost of fiber.

So fiber costs really year-over-year, are up over $100, $110.

And it's really when fiber prices go up, prices for all of our products go up.

You're passing that fiber cost through.

Okay.

My final question, I guess there was an article today on Bloomberg about potential acquisitions.

Think it might have been -- may have expanded a little bit too much on you potentially acquiring.

Could you talk about the acquisition market in general and what is Eagle's position in regards to acquisitions?

Our position has always been we are very patient with our capital.

Look for returns that are very favorable for our shareholders.

But it doesn't mean that you're not always out looking.

So, certainly we have the bloodhounds out sniffing, just like everybody else, to see if the right acquisition is there.

But we're going to remain very patient until we find something that makes sense for our shareholders.

Okay, great.

Thank you very much.

Our next question comes from the line of Jack Kasprzak.

Please proceed with your question.

Mr.

Kasprzak, please go ahead.

Your line is open.

Thanks, good afternoon.

Hi.

Have you guys seen any recent capacity closure announcements in cement or wallboard in any of your markets?

Not recently.

Not recently.

On the subject of acquisitions, I guess different angle on it.

We're bumping along the bottom here, as you guys say historically low levels of demand.

Stimulus has kind of come and gone.

Not too much impact there.

Do you sense any change on the part of companies who might sell their businesses who might be waiting for better times, whose patience might be running out given that, again, as you say, we're bumping along the bottom here?

I think this is a difficult time and typically you don't like to sell assets at the bottom of the cycle.

But sometimes people are forced to simply for cash flow reasons.

In those instances, that's when you find things that make sense to acquire.

Without that, sometimes it's really hard to put a deal together that is going to give the appropriate returns.

Okay.

Thanks very much, Steve.

Our next question comes from the line of Todd Vencil.

Please proceed with your question.

Thanks, good afternoon, guys.

Hi, Todd.

When I look at cement volumes being up 8% year-over-year in the quarter and concrete volumes down about 25, is the disconnect there primarily just related to where you have the geography of where the various operations are located, or is something else going on there?

No, that's correct.

We just have two ready mix markets which were very local.

Our cement markets are regional --

Yes.

much larger.

Got it.

And you mentioned that in the prepared remarks when you were discussing the reasons that profitability changed, you mentioned that costs were down.

By the way we're calculating, it looks like cash costs were down about $2 a ton, sequentially, and maybe a little over $5 year over year.

What are the big moving parts in the improvement in costs there in wallboard?

You're right, Todd.

It's about $5.50 in total cost change.

Fixed costs with volumes up, fixed costs were a big piece of that.

But we also had an improvement in our natural gas costs of about $3.50.

Got it.

And then when we think about -- and, again, I'm just trying to process and calibrate.

I think like everybody else your comments about the impact of pent-up demand coming out of the winter.

Obviously, in wallboard you also had the price increases that affected the timing of things.

If we take all that together, should we think about the September quarter in volumes and cement and wallboard being similar to the June quarter, or is it sort of tailing off?

Or is it growing?

Typically, this is our strongest quarter.

It is typically the strongest quarter in the construction cycle, with winter being equally as important.

So, you would anticipate this to be a little stronger quarter.

Got it.

Okay.

That's all I've got.

Thank you.

Our next question comes from the line of Mike Betts.

Please proceed with your question.

Yes, good afternoon.

Just a couple of questions for me, if I could the paperboard business, Steve, I think you said was operating now was sold out for the year.

Was that also the case in the quarter?

I mean, was it operating actually at capacity in the quarter as well, or was that subsequent to that period?

No, it has been operating at capacity this whole year.

And anticipated to operate at capacity for the full fiscal year.

Okay.

Thank you for that.

And maybe one for Craig.

The other item, Craig, in the operating earnings, the $717,000 I guess it is dollars, up quite a bit from last year, was there anything specific behind that?

Sure, Mike.

There was one minor land sale during the quarter, equated to a little under $500,000 pretax.

So, on an after-tax basis, less than a $0.01 a share.

Okay.

Thank you for that.

And then just a final one, back to you, Steve, I mean, we talked about price increases quite a bit, but just on cement, I mean, it's a two-part question really.

And I appreciate your ready mix business is relatively small, but we've kind of seen it from others as well.

There seems to be more price pressure in ready mix than maybe in cement.

I mean, I guess what I'm leading to is, at the end of the day, if cement price is really still under some downward pressure?

And as a follow-on from that, are there any signs of any price increases in the Texas market that have been announced?

Okay.

So, certainly in some markets you will see competition, especially where there is a lot of downstream integration and the competition as opposed to being in the cement market is in the concrete market and you can see that especially in markets that have a tremendous amount of downstream integration.

I have not seen as much of that, although I've seen what you're mentioning.

I know that it goes on to a certain extent.

Has not really impacted us simply because we don't compete in that other market.

And then the other area where cement pricing is highly competitive is in the bid work, the infrastructure bid projects remain extremely competitive in pricing.

And we do participate in that.

Texas, yes, there have been cement prices announced.

I think I mentioned on the last call that it's difficult to get a price increase in, certainly in the cement business in the kind of middle, towards the end of a construction cycle.

Typically, you will see price increases ahead of a construction cycle, which would be in the springtime.

Okay.

That's great.

Thank you very much.

Our next question comes from the line of Garik Shmois.

Please proceed with your question.

Hi.

Thank you.

Most of my questions have been answered, but just wanted to follow up on the capex for the year.

Does that include any costs associated with the plant expansion?

I believe it was in the Wyoming plant that you had alluded to that you were going to be resuming over the next few quarters.

The capex, I think we talked in the past about our maintenance capex being in the $16 million range.

That is just maintenance capex.

And at some point in time when the California market looks like it's going to turn around, we certainly plan to proceed with the project in Nevada.

Okay.

That would be the next one on the docket?

Yes.

Okay, all right.

Thanks.

That's all I had.

Our next question comes from the line of Glen Wortman.

Please proceed with your question.

Yes, the August wallboard price increase, is that scheduled for the beginning of the month or end of the month, and is that also for 20--

End.

I'm sorry?

It's the very end of the month.

End, okay.

And is it also for 20%?

Yes, it is.

Okay, and then, let's see here.

Looking at the joint venture margins, which were about 35% in the quarter, is that a good number to use going forward if pricing stays stable here?

I believe that's a very good number.

Okay, and then the same question on the paperboard margins.

I think it was about 20% in the quarter.

Is that a good number to use?

Paperboard margins are a little more complicated because there's this function of the -- with fiber costs change up or down and there's a little delay as that goes through.

As well as we have a huge difference in the pricing for them for the various products that we have.

So, product mix can have -- and the margins on the product, that's a little more difficult to product.

Okay, and then finally, do you guys have any major maintenance shutdowns planned in any of your cement plants?

We're going to go through two pretty extensive maintenance outages this quarter.

Okay.

Do you have an EBIT impact that you can provide us on that?

I haven't really given that, but Craig, you can--

Glen, we'll, typically what we'll do is update you on the next call once the maintenance programs are completed.

Okay.

All right.

Thank you very much.

Our next question comes from the line of John Baugh.

Please proceed with your question.

Hello, good afternoon.

Could you talk a little bit about maybe market share of wallboard within the territories that you participate or that you think you gain share or held share?

Because it would seem that your overall numbers were higher than the industry.

Yes, I'm not -- if you look at, if you look at the market at least for us we may have slightly gained a little bit of share and we're a little over 10% for the quarter.

I still think that we have the ability and the way our plants are set up, that our market share should be a couple percentage higher than that.

That that would fit within our structure of our system to be able to service our customers within a reasonable radius around the -- around our plants, and, but in this environment we think it's best to be a little cautious as we go to the marketplace.

And, Steve, I'm not expecting you to divulge your plans on the conference call per se, but just curious how you think about -- you're obviously well above cash break-even in wallboard.

You're making money.

It would seem to me a wonderful time to try to get some market share and yet it's still profitable for you, maybe go along with pricing, but not go up as much as competitors.

Is that anything you would care to discuss or add your two cents to?

We're -- we like to go to the market in a way that makes sense for all parts of the value chain, and if you get too aggressive in it where it may help one out and in reality it may drive some other pieces down, that ultimately creates more problems for other pieces, at least some intermediate pieces in the value chain, which we think are very important to the industry.

Kind of losing you there.

So, while it sounds great, if you drive prices down, the margins as you go further down on the value chain, shrink even worse than they are for you.

And so it makes it even more difficult for your customers to make money at a lower price than at a higher price.

Okay, so translated, you're supportive of the pricing to the extent that others lead it, would that be a fair statement?

That would be a very fair statement.

Great.

Thank you for that color.

(Operator Instructions) And the next question comes from the line of Michael Correlli.

Please proceed with your question.

Hi.

Just had a question about aggregates.

You said in the quarter that your sales volume was up 9%, but your pricing was actually down 10%.

So, is that mix, or have you seen some deterioration in the price of aggregates also?

That really was product mix this quarter.

Okay, thank you.

And there are no further questions at this time.

Please continue with your presentation or closing remarks.

Thank you, everybody.

Look forward to having this discussion in the next quarter.

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

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

Have a great day, everyone.