Eagle Materials Inc (EXP) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fiscal year 2011 Eagle Materials Incorporated earnings conference call.

My name is Modesta, and I will be your coordinator for today.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn conference over to your host for today, Mr.

Steve Rowley, President and CEO.

Please proceed, sir.

Thank you.

Welcome to Eagle Materials' conference call for fiscal year 2011.

Joining me today are Craig Kessler, 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.

Demand for building materials and construction products remains at historic lows.

Sustaining operating profitability through this cycle by reducing cost has been and remains our primary focus.

Our focus on having the lowest delivered variable cost and the lowest percentage of fixed cost and total operating cost, gives us important competitive advantages in an environment of fewer sales opportunities like we see today.

While our fiscal 2011 results reflect the tough US construction environment, Eagle was also impacted by 3 non-operating events during the year, the first being a fourth quarter charge of approximately $9 million associated with our decision not to proceed with the modernization of Nevada Cement.

The second was a $5 million impact related to temporary idling of Illinois Cement during the fourth quarter; and earlier in the year we made a payment of approximately $100 million to the IRS associated with the 2001-2006 tax audit years.

On a positive note, price increases have been implemented this spring in both of our major businesses, cement and Wallboard.

And, our oil well cement business continues to be strong in Texas and the Rocky Mountain region, consistent with the expanding drilling activity in the US.

A 6% decline in our annual cement sales price more than offset the 3% increase in cement sales volumes and was the primary driver of the decline in Eagle's annual comparative of cement revenues and operating earnings.

In addition, inclement weather in the Midwest and the associated idling of our Illinois Cement facility impacted fourth quarter's operating earnings by approximately $5 million.

Looking forward, we anticipate cement demand to increase during calendar 2011 in all of our cement markets.

While Eagle's average net cement sales price was down $5 per ton this year, compared with the prior year, pricing throughout fiscal 2011 was essentially flat.

Unfortunately, this spring cement price increases have stuck in Texas and the Rocky Mountain region.

The 3% increase in Wallboard and paperboard annual comparative revenues is primarily related to higher Paperboard prices, slightly offset by lower Wallboard sales volumes.

New home building in the US remains at historic lows, and the US Wallboard industry capacity utilization remained near 50% during our fiscal year.

In this environment, Wallboard remained a highly competitive industry with pricing trending lower throughout the year.

However, in March, American Gypsum was successful in implementing a Wallboard price increase and has announced plans for another Wallboard price increase in late May.

This chart reflects the Wallboard industry competitive dynamics throughout our past fiscal year.

The gloves remained off and there were no winners in the entire value chain.

In March, we successfully implemented a Wallboard price increase and have announced another increase for late May.

Notwithstanding these small positives, mill nets are being adversely impacted by rising freight costs eroding some of the benefits of the increase in gross prices.

Now let me turn this over to Craig for more details on the financials.

Thank you, Steve.

Eagle continued to generate positive free cash flow throughout the fiscal year, even after considering the IRS payment made in the second quarter.

Capital spending remained focused on cost reduction projects that further enhance our competitive positions, and we continue to reduce outstanding borrowings.

As this next chart reflects, Eagle's financial position continued to improve during fiscal 2011.

Our net debt to cap ratio stood at 38% at March 31, 2011.

This last slide highlights certain financial items for fiscal 2011 as well as an outlook for those same items in fiscal 2012.

Consistent with fiscal 2011, we expect capital spending to remain in the $15 million to $20 million range for fiscal 2012.

Eagle's annual interest expense in fiscal 2011 was favorably impacted by state income tax refunds received throughout the year.

These refunds were received in connection with state administered amnesty programs.

We don't anticipate any further refunds in fiscal 2012; therefore, we expect or annual interest expense to be in the $18 million to $19 million range.

Excluding the benefits associated with paying the IRS, our effective tax rate for fiscal 2011 was 28%, and we expect our fiscal 2012 annual rate to also be 28%.

This concludes our prepared remarks.

Thank you for attending today's call.

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

(Operator Instructions).

Your first question today comes from the line of Trey Grooms with Stephens.

Please proceed.

Good afternoon, guys.

Good afternoon.

Okay, so the March increase of -- I think it was 25%; you said was successful.

Can you give us an idea of how much of that 25% you guys are realizing here?

I'm also -- I'm assuming that this didn't really have much of an impact on your 1 quarter or 1 fiscal fourth quarter -- I guess it would be -- pricing.

That's correct, Trey.

Slightly more than half of what ended up being a $20 per MMSF price increase has been implemented, and it varies from market to market, but for us about slightly more than half of it has been implemented on a gross price basis.

However, distribution freight costs have eaten a fair amount of that up.

So, for example, last year our average freight to market for Wallboard was about $30 per MMSF.

In April, it's going to be closer to $30, $35, $36.

Okay.

So, you might be still realizing, even net of freight, $4 or $5?

There or a little more.

Okay.

All right.

That's helpful.

And then on the cement price increases that were successful in Mountain and then in Texas, can you give us a little color on -- and remind us how much those were for and how much of that has stuck in those markets?

Sure.

In Texas, it was about $5, and supply and demand got very tight here in the February, March time frame.

A lot of the cement mills were shut down for annual maintenance, and then I think there were a couple of unexpected down times, so things got tight right ahead of the price increase.

And, that one really is very strong, and I think supply of cement in Texas is currently -- remains fairly tight.

There was a $5 price increase implemented April 1 and that looks very strong.

And in the Mountain region, it's $3 to $5, and that one on new businesses there, there's a fair amount of business that had been protected up in that market, so that one will take a little longer to realize the full amount, but it's strong.

The other thing of note in cement is as opposed to last year, our cement customers are reporting at least some backlog of work on their books versus a year ago.

They're all telling us there was virtually no backlog at this time of year, so that's pretty encouraging going forward for cement.

Okay.

And then sticking to the cement business for a minute, so the JV and then also Mountain Cement plants, they produce oil well cement, right?

And so, about how much of your capacity for these plants is oil well related cement?

From a manufactured capacity perspective, about a third.

Okay.

And then can you talk about the competitive landscape on that part of the business, and -- the reason I'm focusing there is it seems like with the Niobrara picking up, the Eagle Ford looks like it's continuing to do well, you should be able to benefit that, especially in mountain, I would think as that play starts to really heat up.

Am I thinking about this correctly?

Demand does continue to improve in both of those markets for the well cement and absolutely, I think the Niobrara is just starting to get going so it may be a while before you actually start consuming a lot of products, but they're starting to set up camps in anticipation of a lot of drilling in that area.

And on the competitive landscape on that particular type of product, it seems like -- and correct me if I'm wrong -- that the competition's pretty limited in those markets.

Is that right?

That's correct.

Okay.

Well, that's all very helpful.

Thanks, guys, and I'll jump back in queue.

Your next question comes from the line of Jack Kasprzak with BB&T Capital Markets.

Please proceed.

Thanks, good afternoon.

With regard to the Cement segment, in fiscal '11 you had a couple of issues in terms of maintenance and expense that impacted your profit in that segment for the year.

Looking at fiscal '12, can you say today whether you expect any down time or will it be a more normal operating year?

I think from a maintenance perspective, it will be a more normal operating year.

Now, the timing of when some of these outages occur might -- again, they have a tendency to shift from one quarter to another quarter, but on an annual basis, as we looked at our budget for next year, the maintenance costs are essentially flat year-over-year, so we don't see any change in maintenance.

When it comes to inventory control, again, things remain fairly weak in the Northern California area, as well as the Midwest, so both of those plants -- it's questionable whether we'll be operating those at full capacity.

So, probably are going to require some inventory outages as well at both those facilities.

Perhaps, not coincidentally, those are the 2 markets you did not mention when discussing cement price increases, Steve, so I suppose at this point there's no hope of a price increase in either of those markets or is that not the case?

That's correct.

Okay.

Some other building related companies have talked about a little bit of improvement in repair, remodel activity, commercial, for example, repair remodel.

Have you guys noticed any of that in any of your businesses, perhaps Wallboard?

It's really hard to track.

I can tell you, it's pretty easy to track new residential construction, which is at absolute historic lows, and if you look at that versus the Wallboard demand, you start to wonder where the Wallboard's going because it's certainly not going into new homes, so the assumption is it's going to into -- whether it's commercial or repair and remodel commercial might be, about that's all it would be would be an assumption as to where the Wallboard demand is going.

Okay.

That's helpful.

Thanks.

That does it for me.

Thanks, again.

Next question comes from the line of Rodney [Napier] with KeyBanc Capital Markets.

Please proceed.

Hi, good afternoon, everyone.

Good afternoon.

Thanks for taking my questions.

In the cement business, were the -- for the Nevada modernization plans, were the regulators evaluating your expansion and modernization plans against the metrics required for an existing plant or a new plant, and how does that impact your thoughts about Eagle's growth in cement and adjacent businesses, respectively?

So, what occurred to us there is we had received a permit to modernize that plant, 2 to 2.5 years ago and had not started construction, and when these new rules were promulgated for NESHAPs last August, if you had not poured any concrete or put any rebar in the ground, poured concrete, it would not have been considered started and so, therefore, that rule became for us a new plant versus an existing plant.

So, we would have had to meet the levels for NESHAPs not for the regular PSD requirements, which was fine, at the lower level.

The levels for compliance for new plants, new plant construction under NESHAPs, are extremely tight and current technology would be hard for any plant to be built.

And in terms of capital planning and growth, how does that impact your thoughts on the competitive landscape in your markets going forward?

The answer is we think, clearly, demand is going to come back in the US in cement, and there will be a shortage of cement in the US that will have to be supplied from plants outside of the US.

Okay.

And in the Paperboard business, you had some good margin improvement in the quarter versus last year.

Can you provide some color on perhaps some of the impacts of Paperboard and energy costs on the bottom line versus last year.

Rodney, this is Craig.

Our average net sales price was up a little over almost $64 a ton and margins were up slightly as well, about $10 a ton, but with OCC prices remaining elevated, those have certainly cut into any margin improvement that we've had in the Paperboard business.

Okay.

Thank you guys.

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

Please proceed.

Thank you.

The first question is, Steve, you talked about your expectations about volume improvement in cement in your key markets.

I was wondering if you could walk us through by end market what you're assuming and where you would expect growth to occur?

We really don't, other than talking to our customers that tell us that their backlogs are much stronger, we really have not broken that down any further.

Okay.

And how about on the Wallboard side, if you could talk a little bit, and obviously, volumes are at very low levels, but if you could help us frame some of your demand expectations for fiscal '12, that would be helpful.

I still think Wallboard, if you want to quantify it, pretty reasonable rule of thumb, roughly 10,000-foot of Wallboard per home and if you look at the total starts, that's going to get you pretty close to the demand from the new residential construction side.

The rest is hard to come by.

There's a small amount from manufactured housing but that's very small, which is quantifiable, but then the commercial or the repair, remodel commercial or repair and remodel in general, residential, they are already almost subtractions every time you get those numbers.

Okay.

And can you talk a little bit about inventory levels that you're seeing, the distribution for Wallboard?

Recognizing there is somewhat of a pre-buy ahead of the March price increase, are you seeing inventories elevated ahead of the May increase, or if you think the inventories of distribution are at relatively normal levels here now, and may be able to absorb these higher prices going forward?

Yes, it, I think there -- certainly there was some pre-buying ahead of the March, then it may have slowed down a little bit, March, early April.

Looks like things are picking up a little bit now, ahead of the May increase.

Okay.

And just lastly, Craig, SG&A looks like it ticked up a little bit, compared to last year.

Just wondering what those drivers were and if you have an outlook for fiscal '12?

Sure.

As we put on that last slide, actually expect corporate and general and administrative expenses to be at about the same range for fiscal 2012, $16 million to $18 million.

We are at $16.7 million for FY '11.

If you recall, and as we talked last quarter, FY '10 there was no stock-based compensation in the prior year, so that was really the only minor change that occurred in this year.

Okay.

Got it.

And just actually one more question on the maintenance, is there any maintenance at your cement plants here in this upcoming quarter that we should be aware of?

Yes, I think we will have -- we're in the middle of a major maintenance at our Texas facility right now.

Was there maintenance in any of your facilities in the year-ago period?

Yes, there was, I think, in Laramie.

Great.

Thank you very much.

Your next question comes from the line of Kathryn Thompson with Thompson Research Group.

Please proceed.

Good afternoon, this is Jamie Baskin on the line forKathryn.

Most of my questions have been answered, but in regards to Wallboard pricing, I know you guys -- you said roughly half of the March increase.

Say you get half of the May?

Do you feel pretty confident that the industry would need to pass on an additional price increase the early part of the second half of the year?

I still think that pricing in Wallboard is below where it needs to be for the industry to cover its costs, so I think there is still plenty of upward pressure just for the industry to get to a point where it's comfortable that they're covering at least their cash costs.

And, for the second half of the year, do you think that volumes will be stronger to help support another increase?

If you can predict new residential construction -- there's a lot of people saying that new residential construction's going to pick up the latter half of the year.

If that's the case, then volumes will pick up.

If new residential construction remains where it is or flat today, demand for Wallboard probably will not pick up.

Okay.

Well, thank you for answering my questions.

That's all I had.

Your next question comes from the line of Scott Levine with JPMorgan.

Please proceed.

Hi.

It's actually Rodney Clayton here for Scott.

Good afternoon.

Good afternoon.

First question, just to be clear, your cement plant in Illinois, that is back up at this point; is that correct?

That's correct.

Okay.

Thanks.

Free cash flow, obviously, you're still in positive territory here, despite some of the macro pressure that you're seeing.

What are your thoughts in terms of your uses of cash going forward?

Is debt repayment still going to be a priority or you might see some opportunities for investment or M&A on the cement side where you're looking to grow?

We clearly are looking for investment.

We think our balance sheet's in good working order right now, so with the cash that we have, we would be looking for investing certainly in the heavy side of the business.

Okay.

And finally, is there any way you can quantify the growth that you're seeing for your oil well cement there?

Obviously, there's a lot of drilling going on around the country.

Is there any way you can quantify the type of growth you see and whether or not that's accelerating.

I can certainly tell you it's accelerating.

To put a percentage on it, I really don't have that.

That kind of changes pretty rapidly.

But we can tell you that relative to last year, we're up maybe 10%, and it appears to be getting stronger every month.

Okay.

That's helpful.

Thanks a lot.

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

Please proceed.

Hi.

Thanks for taking my questions.

Most of them have been asked.

I just have a couple quick ones.

First one is in Wallboard, if demand was the up tick, how much volume would you be able to take on -- you can define it any way you want -- before any significant incremental costs you would have to incur?

Really, we're operating at a place where we can bring volume on very easily and I would assume so can the competitors, so maybe originally you might use a little bit of overtime.

However, the labor costs are a fairly minor component to produce Wallboard.

So, I think there's plenty of room for any growth without any real change in cost structure.

All right.

Great.

Thanks.

And then my second question is, in the Paperboard business -- I realize that these are pretty small numbers, relative, but is volume going to track at where it's been?

First half of for your fiscal '11, it was significantly higher than it was in the second half, so is the second half more indicative of what it will look like going forward or do you expect that to up tick?

That's a good question.

Actually, I think we've turned the corner there, and our projection is for higher Paperboard volumes this entire year.

So, we found some new markets, different markets from the gypsum liner board to grow into and that's helping us quite a bit.

All right.

Thank you for taking my question.

Your next question comes from the line of Brent Thielman with D.A.

Davidson.

Please proceed.

Hi, guys.

Just a follow-up on Paperboard, just wanted to get your sense of pricing heading into the first quarter.

You know, the pricing should remain about flat, Q4 versus Q1, as far as Wallboard pricing or Paperboard pricing.

And is that -- the fact that it's flattened out, is that an impediment to implementing price increases on the Wallboard side in May?

No, I don't think so.

Those are 2 different issues and I can tell you that I think the impact of increased paper costs were about $2 to our production costs in Wallboard, $2 to $3 last year, so I don't think it's a huge issue there.

And with OCC prices, unfortunately settling out at high levels, that impacts the price of the paper that we sell into the gypsum business.

Okay.

Thanks, guys.

Your next question comes from the line of Russell Pierce with the Cleveland Research Company.

Please proceed.

Good afternoon, Steve and Craig.

Good afternoon.

I just had a few questions.

First, on the Wallboard price increase, is there any way that you could break it down regionally or state -- states that might be holding the increase better than others and others that might not be holding it as well?

It's a little hard to do.

I can tell you, for one, it's always on a percentage basis and the price in one market might be a little higher than the price in another market, so some of this might be leveling out of some prices, so it just gets hard to get into that kind of detail.

Okay.

And on the job protection, where you didn't realize any of the price increase during this quarter, have most of those jobs been worked off where you are now realizing that $4 to $5 on average that might be holding or is there still some progress needed to be made on those jobs before you really start to realize the increase?

So, the answer is the numbers that I talked about earlier, that's where we are today and that's how much we've netted out today.

So about half of that, a little more than half of that $20 and then -- which is $11 to $12 -- and then $4 to $5 of that's been eaten up by freight, so that's kind of what we've netted.

But, as you go forward, there's a chance that you improve towards that $10 to $12.

Now, with another price increase happening at the end of the month, it all gets mixed up, so it's kind of hard to keep track of it throughout a couple of price increases back to back.

Okay.

And on the commercial side, the new commercial construction market, have you noticed, is there visibility out there, I guess, that you're starting to see better bid activity, better lettings or -- I guess there's no lettings, but better bid activity on the new commercial side.

I think the new commercial side is flat to slightly better, but at very low levels.

And, on oil well cement, has it gotten to the point where you have filled out the oil well cement manufacturing capacity and are starting to move and having to import for your construction grade material customers?

So, the answer is we're flexible there, and we'll continue to produce more and more oil well cement product as it's needed.

We do have a -- we're part of a joint venture in Port Terminal in Houston, which allows us the flexibility then to bring other product into the market as we need it for the regular type 1, type 2 cement customers.

Got you.

That's all.

Thanks a lot, guys.

Your final question today comes from the line of Keith Johnson with Morgan Keegan.

Please proceed.

Good afternoon.

Just a couple questions.

Maybe first off, just as a point of clarification, you referenced the $5 million for the Illinois Cement down time.

Was that a combination of maintenance expense as well as negative fixed cost absorption for the down time or was it just straight maintenance?

No, that's a combination of both.

Okay.

And then you mentioned earlier that your maintenance budget for fiscal 2012 is in line with fiscal 2011.

What was the total amount that you guys would attribute for maintenance costs in fiscal 2011 in cement?

We were $25 million, $26 million of annual maintenance costs for the cement business.

And then, you mentioned Illinois or the weather patterns affecting the Midwest and Illinois Cement.

Were weather patterns a factor across any of your other segments as you came through the March quarter?

There's always weather in Northern California this time of year as well, so that would be the other place.

Okay.

And then, just final question real quick on concrete, maybe a little color around price trends in the concrete markets you guys are seeing.

Concrete is flat, but still at pretty low levels in both markets, Northern California and Austin.

And then, any price increase in the market in Austin?

None, right now.

Okay.

Great.

Thanks a lot.

Ladies and gentlemen, this concludes our Q&A portion of the call.

I would now like to turn it back over to Steve Rowley for closing remarks.

Thank you, and look forward to talking to you at the end of our first quarter.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.