Eagle Materials Inc (EXP) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2011 Eagle Materials Incorporated earnings conference call. My name is Jasmine and I'll be your operator for today. (Operator Instructions)I would now like to turn the conference over to your host, Mr. Steve Rowley, President and CEO. Please proceed.

Thank you, and welcome to Eagle Materials conference call for the third quarter of 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.

While demand for building materials and construction projects remains at low levels, our drive to reduce costs is at extraordinarily high levels. Additionally, our operations and sales teams continue to develop new products that add contribution. Our focus on having the lowest delivered variable cost to the market, our ability to minimize overhead and interest expense, gives us an important competitive advantage in an environment of low sales opportunities like we see today. Simply put, by being more competitive, we have more profitable sales opportunities.

Even in this challenging environment, we continue to improve our competitive position by investing in high returning capital projects. The 4% increase in our quarterly cement, concrete, and aggregate revenues primarily reflects improved sales volumes across each business line, offset slightly by lower net sales prices.

Third quarter operating earnings improvement was the result of lower maintenance costs, cost control initiatives, and improved sales volumes. As this chart reflects, cement sales prices have slowly trended down over the past several quarters. However, sales prices this quarter were flat when compared to last quarter. Wallboard and paper board segment revenues increased 2% over the quarter a year ago, driven primarily by higher paper board sales prices, partially offset by lower wallboard sales prices, and lower paper board sales volumes.

The third quarter operating loss was the result of lower wallboard net sales prices, lower paper board sales volumes, and higher fiber costs at our paper mill. As this chart reflects, wallboard sales price increased early in the fiscal year and have since waned back to where they were approximately a year ago. A wallboard price increase has been announced for early March. Craig?

Thanks, Steve. Our low cost producer position enabled Eagle to continue to generate meaningful cash flow from operations during the first nine months of the year and further improved our capital structure. Cash provided by operations was $61.8 million for the nine months. Interest expense was $4.7 million in the third quarter, an 18% decline associated with lower borrowing levels. We remain judicious with our capital spending and focused on cost reduction projects that further enhance our competitive position. We expect full year capital spending to range between $15 million to $20 million.

This last slide reflects the strength of Eagle's capital structure. Our net debt to cap ratio is 38% at December 31, 2010. Long-term debt of $290 million at the third quarter end was down $13 million from March 31, 2010. During the December quarter, Eagle refinanced its bank credit facility -- bank credit facility and extended it to December, 2015. The new facility supports the stability and flexibility of Eagle's capital structure. Thank you for attending today's call. Jasmine, we will now move to the question and answer session.

(Operator Instructions) And your first question comes from the line of Kathryn Thompson with Thompson Research Group. You may proceed.

Hi. Thank you for taking my questions today. First, you typically in previous quarters' calls were able to give the end of quarter pricing versus the average pricing for the quarter. Could you do that for wallboard and for cement?

Sure. It was effectively flat in the month of December with the quarterly numbers.

For both wallboard and cement?

For both wallboard and cement.

Also, could you just give an early read on the wallboard price increases? As you know, there are some price increases obviously you have out for March. There's some peers that have it out for February. Do you -- could you have any comment on the early read on this price increase?

It's -- it really is a little early to speculate on it. However, it appears that there's a greater tendency towards the March increase.

Okay. With the expectations that it would be fully accepted?

Really, it's way too early to speculate on that.

And, last question on wallboard, what is your projection, or do you have a projection for wallboard shipments for the industry in 2011? And what is coloring that projection?

So, our shipments, obviously, this year were at 17 billion, down from a peak of 36 billion. It's really a function of most everyone's view on home building, which has been very difficult to predict these days, but we don't see, certainly in the front half of the year much change in current demand for wallboard, or maybe a pickup in the back half of the year.

And what gives you -- we hear a lot about the back half of the year. What's driving that confidence that you see improvement in the back half of the year?

Again, we -- we really do not speculate and it's hard for us. So we're basing this on -- on home building analysts that have a tendency to, that's -- that's their projection.

Okay, okay. Moving to cement, I know that the quarter benefit is from demand from well grade cement for the oil industry. How sustainable was this demand for well grade cement for calendar 2011 in light of what we view as overall rise in commodity prices, including oil-based products?

So demand was up quite a bit this year versus 2010.FY '11 will be a much higher demand for our oil products, and continuing to go up into next year. So demand remains strong and we're very happy to be servicing that business.

How much visibility do you have for that product? I mean, is it quarter or month or -- how much visibility in that [force] do you have?

We clearly have reasonable visibility with our customers and their needs, and currently the comments we hear is things are getting very busy, don't let us down.

Okay, and my final question for today, could you walk through your maintenance costs last year versus this year on a total dollars basis? I have some sense on a per tonnage basis, but if you could maybe translate that into what it meant on a just total cost basis?

Yes, we have it. Just a second. On a -- on a total cost basis, there was -- last year we had a couple of large outages, so about $6 million, $6.5 million difference in spend last year, greater last year than this year.

Okay, great. Thank you. Are there any -- that's all my questions, so I'll just get back in the queue. Thank you very much.

Your next question comes from the line of Todd Vencil with Davenport & Company. You may proceed.

Good afternoon, guys.

Good afternoon.

Following up on the last question, where do you guys stand in terms of your capacity to continue producing more drilling cement?

So it's -- really, we have the ability to do it, in the case of Texas, if we increase sales to that sector, it would require us to purchase product to meet our other sales needs. So the answer is, we have an underutilized terminal in Houston that we could always bring product in, or we could also purchase product from some of our competitors, either in Texas or nearby states, whatever seems to make sense for either material.

But you do have room -- ample room, I guess you could purchase construction grade and then ramp up the oil well products?

That's correct.

Okay, great. Aggregates business, obviously volumes were very robust and prices were low. Can you talk about -- or low relative to our expectations anyway -- can you talk about any mix issues that came into the aggregates business?

Yes, that really is one of the new products we developed. It may not be a real high priced product, but we've developed a new -- a new fill sand product, and that has been very well accepted in the marketplace. So it really is a mix issue and dramatically increasing the sale of this one new product in the marketplace.

Lower than average price product, then?

Lower than average price product.

Got it. Any planned maintenance in the cement business in the May quarter, either of the next two quarters?

Just minor in the May quarter. However, because we've had such a very good operations this last quarter, that combined with some very bad weather and a somewhat difficult marketplace in Illinois really has required us to go into an extended inventory control outage at Illinois Cement. That will last the majority of this current quarter.

Okay. And I'm sorry, I meant -- I meant March. I think the March quarter, I think that's what you meant as well.

Yes.

On wallboard, you guys -- just comparing your volumes with the industry trends, it looks like you've been pretty steadily just picking up market share, not a huge amount of market share quarter by quarter, but picking up pretty steadily. Can you talk about what you've got going on there and whether you think that's a geographic issue or some kind of service issue or price issue?

You know, I think we're -- as you are -- as we mentioned, when you are a very low cost deliverer to a marketplace, you have a competitive advantage and over time that will grow. So we haven't been shipping product any great distances away from our plants. But we do have the ability to do that and still have some contribution, but, really, it's a function of our low cost position that has allowed us to increase our market share.

Great. Okay. Thanks a lot.

Your next question comes from the line of Trey Grooms with Stephens. Please proceed.

Hey, guys. Good afternoon. Just a couple of questions. First of all, and forgive me, my phone disconnected, so if I -- if I hit something that's already been addressed, just let me know. On the cement, it looks like you had some margin improvement there. Can you guys talk about it, and I'm sure that it had a lot to do with the improved volume that you saw there on that side of the business. Can you talk a little bit about the incremental margins that you guys -- where you kind of think about incremental margins on the cement side of the business as you see these volumes improve?

Yes, we did. The volume improved, that impacted our fixed costs by about a $1.75 to $2.00 per ton. We also had some fuel efficiencies that improved our costs by about another $1.00 a ton. So those things helped on that side. On the negative side, we had some extra freight to our terminals, so we shipped cement a little further. That extra freight amounted to about $1.50 per ton reduction in our net sales price. Well, the gross price was up so really our -- the sales price that we show is flat. If you look at it or over that period, it would have had a $1.50 impact of the change year-over-year was just an impact of freight as we -- as we pushed more market -- more product through our terminals at more distant markets. That was the impact of that and then the other big impact, as mentioned earlier, was the fact that the previous year we had a couple of large maintenance outages. This year, we did not have them.

Right, and also, and thanks for that color on that, Steve, but looking forward, when you think about incremental margins on that business, as volume starts to improve there, when you think about it, do you have an incremental margin range that you think about what you could look for realizing on that side of the business, assuming other costs don't -- input costs, energy and so forth don't move around too much? Do you have something you think of there?

Well, clearly there is a much -- as you've already covered all your fixed costs -- combination of fixed costs that are -- that you spend cash on an ongoing basis, with your employees, you also have the depreciation of the non-cash items. So, it's a big amount, but it's hard unless we -- if we tried to tell you, if we went back to -- up to full capacity we could calculate the impact of where we were, once we're operating in our plants wide open. But I'd have to pencil that out here, but effectively that has a -- that has a big impact. I'll throw out a range of $15.00 plus or minus.

Okay, all right. Well, that's real helpful. And then, on the pricing of cement, it looks like that stabilized sequentially and is that something that's continued to through the -- I guess into this quarter, that stabilization on cement prices? Have you continued to see that mostly, or have you seen it pull off? Can you talk about what's going on there?

So, some of that is mix, with a greater amount of oil well sales, so that's kind of helped us. Bid work is still very, very competitive and I don't know that it's going down a lot. I can just tell you that the bid work is substantially lower than our average prices. So if you get more bid work, you have a greater impact to the negative, depending on how much project work you put in the backlog. As far as the ongoing day-to-day price, in general, that's stabilized in most markets. We haven't seen that dropping off much, so we had somewhat of a steady decline over the last three years. That really has slowed down. It's very, it's a very -- there are still a few in a few markets, a few minor changes where you are going to have to meet a competitive price, but it's not as dramatic as it was in the last couple of years.

Okay, and my last question is on wallboard pricing, the average price of about $86.00, just under $87.00 I guess. Can you tell us how that -- how that looked as the quarter progressed? And then also, has it stabilized at a level now, if you could give us some color on that.

And the answer is, it was really flat for the whole quarter, ended the same, started the same, ended the same, was about that same price throughout the whole quarter.

Okay. Good. So it sounds like it is stabilizing then at just under $87.00 level then?

That's correct.

Okay, great. Well thanks for the color on all this, and I thought you guys put up a great quarter.

Thank you.

Your next question comes from the line of Jack Kasprzak with BB&T. Please proceed.

Thanks. Good afternoon. Do you guys have any cement price increase announcements out for the spring?

There are price increases announcements out in most markets. I believe it's pretty strong. I think everyone has announced a price increase in the mountain region. I think everyone has announced a price increase in the Texas region. I'm not sure that everyone has come out in either the Midwest or the far west, but there's certainly two markets it seems that there has been complete support. Two markets a little -- I don't believe everybody's out with a price increase.

Are those all in the $5.00 to $5.50 a ton kind of range?

That's correct.

Okay. You guys mentioned in your presentation that you paid down a little debt. Would that -- will that be the preferred use of free cash flow during calendar 2011 as well?

Not necessarily. I think we're looking at some growth -- some growth projects and initiatives. We really aren't ready to announce them, but some of them are with our traditional businesses and some of them are near, but adjacent, and we're pretty excited about pursuing those opportunities.

Have you guys -- are you guys at a point yet where you've started shipping any of your pozzolan product into the market or if not, will you -- are you near a point where you can do that?

We are very close now. We've just passed a regulatory hurdle this week with the BLM, and I think we just have one or two minor, minor things to get behind us and we will start moving forward with that, realizing, however, that the majority of this product is going to a very weak marketplace in Northern Nevada and Northern California.

Okay. Speaking of Northern California, can you give us an update on your aggregates facility and the expan- -- or the rail spur there, or where we stand with that, if any change?

It's kind of the same thing, where we've been continuing to make steady progress and believe that we're going to get that across the goal line. However, the real issue remains, again, there just is not a lot of demand. To put things in perspective, I think demand's gone from in the 6 million-ton range in Northern California to the 2.5 million to 2.6 million-ton range, a dramatic reduction in the need for construction products in Northern California.

All right, and lastly, there's a lot of back and forth about the highway bill, or lack thereof, and what's going to happen or not happen with reauthorization. From your guys' perspective, if we just clip along at the current rate of $41 billion or so in federal funding without a highway bill, with these continuing resolutions, will that have any impact on -- discernible impact on your business, do you think, going forward?

You know, it really feels on our side of the business that we've really kind of bottomed out. Now, I'm not so sure for some of the other contractors, but when it comes to the amount of work that's needed for road projects and whatnot and the small amount that's going on, certain pieces have to be -- have to use cement or concrete a la an overpass or something, or an abutment. So I think it appears that on the cement side things have bottomed, and we'll see how things progress going forward. However, at a certain point in time, there is a need to improve our infrastructure and that will have to be addressed one way or the other.

Sure, okay. That's it for me. Thank you very much.

Your next question comes from the line of John Baugh from Stifel Nicolaus. Please proceed.

Good afternoon, Steve, Craig. Quickly, a lot of questions are already asked, but could you comment on how any inflating raw materials in any of your businesses, particularly the paper side, if there is any, are impacting you and the expectation going forward there?

Yes, in paper, if you didn't notice, there was quite a difference in our earnings this year versus last year. The majority of that was fiber costs, and about a $75.00 swing in higher fiber costs. That was somewhat offset by higher sales price, but, you know, the sales price was up maybe $62.00. So there's a $13.00 swing there. And then in addition to that, some of the chemicals that we buy were up about $10.00 as well. We had a, say a $23.00, $24.00 swing on 47,000, 48,000 tons. That's the $1 million swing that we're looking at here in earnings for paper.

And how does that look prospectively, Steve?

As we go forward, we're -- paper is sold on a monthly basis. And it's also a function of competing with the virgin supply that's out there and how much recycled is available. It's very hard for me to speculate on the fiber price. I think we're doing a better job on the chemicals side. We're also doing a better job -- we had 10 days of inventory control, as some of our non-gypsum liner business was down. We see that coming back. But we do see a trend to getting some of our non-gypsum products sales volumes back up -- sales volumes down a little bit this quarter as well. So we see some improvement going forward, it's just hard for us to predict fiber prices.

And then, on the wallboard side, if there's any bright spot, and there aren't many, in the demand front, it would seem that some of the office remodeling, whether it's office furnishings or floor coverings, that market seemed to get better in the second half of '10 at least, less bad, if not better. Is there any demand you can see on the commercial repair and remodel side helping wallboard demand, or it's just not really measurable?

Generally there is, and when you start to see vacancy rates go down, when somebody moves in to an existing space, generally they don't like the layout, and they will make either minor modifications or they will rip all the -- everything out of the floor and completely redesign the floor. So you do get some volume of all of these products, whether you're talking ceilings or flooring or steel studs, everything that goes into remodeling an office, that occurs as you see a changeover with new renters coming into existing space.

Great. Thanks for answering my questions.

Your next question comes from the line of Garik Shmois from Longbow Research. Please proceed.

Thanks. It's Garik Shmois. I have a question on wallboard, lost a couple million dollars in the quarter. You've mentioned that you're willing to take some market share here, leverage your low cost position. I was just wondering if you could talk about as you look out over the next couple of quarters, it looks like volumes are still going to be difficult. How willing are you to continue to pick up market share at the expense of potentially short-term profitability?

You know, every sale has cash contribution. So -- and maybe in the past we haven't been as aggressive at looking at the cash contribution. We're sharpening our pencil a little bit, but every time we sell wallboard, it puts money in the piggy bank.

Okay, and can you talk a little bit about sales here in the -- volumes in the first quarter and in particular, first quarter of the calendar year, if you're seeing any pre buy ahead of the March price increase in wallboard, and if you could talk about distributor inventory levels and how willing distribution might be to pick up some inventory here, going into the peak selling season?

Volumes are definitely up so far in the month of January versus December, and we'll see where that ends up. Like I say, there is a price increase just around the corner. But I also think that part of it was in December, volumes were brought down to very low levels, just to do the -- minimize your inventory and working capital at the end of a lot of fiscal years 12/31. So you start at January 1 with very low inventories. I think they're picking them back up for those two reasons. One, low inventories to begin with and the prospects of a price increase around the corner.

Okay. That's helpful. Just switching gears real quick on cement, you mentioned potential inventory adjustment at the Illinois facility. Is there any costs that are going to be associated with that in the March quarter?

Yes, there will be some stuff. When you take a facility down, there's an accounting standard that Craig would know it a little bit better than I, 151, which will have some impact. There's some other fixed cost impacts just associated with that long of a shutdown, so there will be an impact.

Is it too early to say how much it's going to be?

It will be fairly significant, but I haven't calculated exactly.

Okay, and just one more question maybe for Craig. The tax rate of 17%, I believe for the current quarter, can you provide maybe some guidance on what that should look like going forward?

No, you're right. It was 17% for the quarter, and really the low effective rate relative to the statutory rate is just a function of increased depletion deductions, so I would anticipate going forward its remaining well below the statutory rate of in the mid-20s.

Okay, great. Thank you very much.

Your next question comes from the line of Ivan Marcuse from Northcoast Research. Please proceed.

Hey, guys. Most of my questions have been answered. Couple of quick ones. Interest expense going forward, with the new revolver, is it going to be around $4.7 million, or do you think it will be a little bit lower?

No, it will be the same level. Our $285 million of the senior notes are fixed rate notes, so we should remain about the same level, $4.7 million.

Okay, great. And then another -- on paper board volumes, they declined sequentially and year-over-year. Was that more of a function of the gypsum board -- less gypsum board shipments, or was there -- could you give a little more detail--

That really had a function to do with some of our other products that we were selling, -- a couple --I think our medium sales were a little bit low and our bag liners were lower, although I do think that's going to improve as we go forward.

Okay, and then last question, you mentioned weather is impacting the Midwest. Is there any other -- weather's pretty bad I guess throughout most of the US. Is there any other areas or specific businesses that you would think -- that could most likely be impacted this quarter due to the bad weather that should be considered?

So while we've had a little bit of weather here and there, it's not unusual the amount of weather that we would be having in the mountain region, not unusual the amount of weather we've been having in Texas, although the last quarter we had very, very dry weather. So that actually helped us in a positive way. But, as far as the only impact that I know of where weather has been exceptionally difficult this quarter is in the Midwest.

Okay, great. Thanks for taking my questions.

Your next question comes from the line of Vince Gilman with DA Davidson. Please proceed.

Yes, hi, just a clarification in cement. In Q4 of last year, can you remind me, were there any major outages or maintenance expenses should consider compared to Q4 of this year?

No, there were none.

Okay, great. Thanks, guys.

(Operator Instructions) Your next question comes from the line of Michael Corelli with Barry Vogel & Associates. Please proceed.

Hi, good afternoon. Just two questions. One, on the wallboard pricing, it seemed mostly in the past, the industry had been together as far as the timing of price increases. Seems like now there's been some disparate type timing as far as different companies and different pricing. Could you kind of talk about why you think that's the case and what we should expect maybe going forward?

Typically things will line up together and it appears that it is starting to line up more towards the latter date rather than the early date.

All right. So you're saying that the March increase might be more likely than the February one at this point?

It looks like that.

Okay, and Craig, just a question about corporate expense. It was up a reasonable amount. Could you talk about that?

Sure. It was primarily a function in the prior year. We had no stock-based compensation.

Okay. All right. Thanks a lot.

At this time, there are no further questions. I will turn the call back to Mr. Steve Rowley for any closing remarks.

Thank you. I look forward to our year-end call sometime in late April, early May.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.