Eagle Materials Inc (EXP) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2012 Eagle Materials Inc.

conference call.

My name is Carmen and I will be your coordinator for today/ At this time all participants are in a listen-only mode.

(Operator Instructions) Later we will conduct a question-and-answer session.

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

Steve Rowley, President and CEO.

Please proceed.

Thank you, and welcome to Eagle Materials conference call for the first quarter, fiscal year 2012.

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 and 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 or more distinguishing for Eagle in terms of results.

Year-over-year, wallboard pricing declines, combined with exceptionally wet weather in 2 of Eagle's most important cement markets, were the primary drivers of the quarterly earnings decline.

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

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

We also remain focused on serving our core markets.

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.

Inflationary cost pressures continued to impact all of Eagle.

Additionally, increased freight costs continued to negatively impact our wallboard company and our wallboard customers.

Pricing is more of a priority for us than volume in this business environment.

During the quarter, our wallboard operations were only partially successful in implementing a price increase.

It has not been enough to cover the cost of these inflationary pressures.

Our wallboard operations will implement a price increase next week, on August 1.

Planned major maintenance at our Texas cement facility, combined with a 4% decrease in our quarterly Cement sales volumes, were the primary drivers of the decline in Eagle's quarterly comparative of Cement earnings.

The volume decline was most noticeable in our Midwest markets, as they experienced an abnormally wet spring and early summer.

However, we remain confident that our backlog of bid work has only been delayed and will be completed before winter.

As you can see from our release, Texas cement volumes continued to be buoyed by strong demand from the energy sector, which we expect will continue.

The average net Cement sales prices have remained relatively stable for the past year in all of our markets And the spring price increases were partially successful in Texas and the Rocky Mountain region.

The decline in quarterly Wallboard and Paperboard revenues reflects lower sales volumes in both businesses and lower average net wallboard sales prices.

New residential construction, and therefore Wallboard sales opportunities, are not expected to increase in calendar 2011.

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

Operating earnings in our Wallboard and Paperboard businesses were negatively impacted by lower average net wallboard sales prices and the continued high price of recycled fiber.

The early spring wallboard price increase, while somewhat successful, was offset by higher freight costs.

The end result was a realization of approximately half of the benefit.

Next week, we will be implementing an August price increase.

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

Thank you, Steve.

Eagle remained judicious with its capital spending during the first quarter, and capital spending was approximately $3.8 million.

We expect full-year capital spending to remain in the range of $15 million.

Lower earnings and negative working capital adjustments were the primary drivers of the decline in operating cash flow during the quarter.

The effective tax rate for the quarter was 24%.

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

Our net debt to cap ratio remained constant at 39% at June 30, 2011.

Thank you for attending today's call.

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

(Operator Instructions)

Trey Grooms, Stephens.

Good afternoon.

First off, on cement, Steve, could you give us --I know you mentioned Midwest was pretty tough with weather, but could you give us an idea what the other cement markets look like?

An idea of shipments there?

Sure.

We were really impacted by -- mostly in the Midwest, but also we've had a lot of rain in the Rocky Mountain region and also the far West.

Demand is still fairly weak in the far West but, again, we've had a lot of projects delayed in northern Nevada associated with a lot of wet weather there, as well as, also it has also impacted our concrete and aggregate operations out West.

So, weather has had a huge impact.

The majority of that weather has hit that pattern from the northern California, northern Nevada right through the upper Midwest.

And those are the markets that have been impacted the most.

So, since weather has gotten better have you seen any cement shipments?

Have you seen any improvement there?

When the weather is good, we have.

We're still getting some spotty rain events.

For example, the other day we had 8 inches of rain at Chicago O'Hare, and we have a big job going on at Chicago O'Hare right now.

But, the nice thing is, when it is this warm, it dries out pretty quickly and you get back to work.

Got you, okay.

And, then, you mentioned the August price increase letter.

Are others out with that increase letter, as well?

There are a number of -- I think there are 6 of the 8 out with an August price letter.

And, I think there is another one that is out for September.

But, we believe that there truly is a need to cover a lot of the cost of the raw materials and these increased freight costs.

So, most importantly, as I mentioned before, for us, volume -- especially with our cost structure -- is just not as important as it is to cover these increased inflationary costs of raw materials and freight.

But, secondly, we also believe that we should behave in the most proactive way possible to improve our customers' profitability because we know that when our customers are successful, we are successful.

Great.

And then, lastly, on M&A, can you talk about your appetite for M&A at this point?

And any color you could give us on direction there?

We remain very active in trying to find ways to grow Eagle Materials.

And, while I think -- you always think you're pretty close, you're never close until something is finally done.

We continue to look at a lot of opportunities to grow this Company in ways that make sense and that are not risky.

Just high level on the direction, would you tend to think that you would be looking more towards more residential type, more heavy type stuff?

Can you give us any idea there?

Sure.

Our focus, and I've mentioned it in the past, is more towards the heavy side and more towards the energy sector.

Okay, perfect.

Thanks, guys.

Garik Shmois, Longbow Research.

Hi, thanks.

Good afternoon.

First question is, just on the wallboard prices.

Recognizing that there were 2 price increases announced prior to the August one.

In your numbers, is it mainly the March increase that has been reflected in the $5 sequential improvement in price?

Or was there some benefit from the May increase, knowing that one would take some time to implement?

When those 2 price increases -- it kind of all melds into one.

But, again, the net effect of that, again, was about a $5 price increase.

I can tell you that where we ended up going out in June, our June price was a little over $91.

So, you did get a little bit of the second one that happened later on.

Okay, that's helpful.

So, you ended the quarter at $91?

That's correct.

Okay.

And then, just switching to cement real quick, how much maintenance was in the quarter and how did that compare to the maintenance that occurred a year ago?

I think you had a Wyoming plant down.

Actually, it was our Texas Lehigh, it was the joint venture plant that was down.

Right.

We went down for, what we call, our annual maintenance outage.

A year or so ago, we got to where we decided that we would maybe do an outage and not quite a complete one.

So, we did a 6-month one, and then we did another one, and then the next 6 months.

But, we wanted to get back on our normal routine, which is just 1 major outage.

This plant sold out, it is doing very well.

And so, we plan to do what we would normally consider an annual maintenance outage, which is about 14 days to turn a plant completely around, inspect everything, and repair everything, and get along with the process of making cement.

When we got into the part of the routine as early on -- as we do some preventative maintenance, nondestructive testing -- we found a potential problem with one of the main support tires for the kiln.

And decided, while it might have lasted another campaign, we simply just do not like to take those kinds of risks.

So, therefore, we extended the outage another 7 days so we could change that tire in the kiln section out, and assure that we have this 1 year solid run on the kiln.

So, to show how effective that outage was, this all occurred in May and we started up the kiln in the latter part of May, and it has run ever since.

So, a good, solid maintenance program is critical to your success.

What was the total cost impact?

That was in the $3 million range.

And, then, just a question on your cement backlogs.

You had indicated that you were seeing growth in all of your markets earlier this year.

Just wondering how that's progressed as we've moved in through the spring, if you are still seeing year-over-year growth in your backlog.

We are.

And we remain -- while it's competitive, the general construction market remains very competitive, but we still have good margins.

And we continue to go for the jobs that are in our core markets and make sense for us to be competitive on.

Okay.

And then, just lastly, on cement prices, I believe that there is cement price increases announced for the fall in Texas.

At least 1 manufacturer is out nationwide with a price increase.

You've said previously you've gotten success on your Texas and Rocky Mountain price increases.

Are you out with a second letter or another attempt this year?

If you could update us on the additional cement price increases that would be great.

The general construction market in Texas remains very competitive.

So, really, there is not much of an appetite for a further price increase in Texas.

Great.

Thank you very much.

Operator, do we have any further questions?

Kathryn Thompson.

Thank you very much.

You gave, earlier in the call, what pricing was for wallboard at the end of the quarter.

What was it for cement?

About the same.

About the same.

Yes, there was not much change during the quarter in pricing.

You seem fairly skeptical about the August price increase that is out by a couple of your peers, is that correct?

Yes, I see a couple of the other peers actually aggressively going after volume right now.

Have you seen a more aggressive pick up over the past 30 to 60 days or is this the same aggression that you've seen throughout the quarter?

More aggressive over the last 30 to 60 days.

And, why do you think -- what is triggering that aggression now?

I am not sure, I just know that not all cement plants are as fortunate as Texas Lehigh to be sold out.

Okay.

What is your projection for wallboard industry shipments in 2011 -- calendar 2011, that is -- given where shipments are today?

We think shipments are going to remain about flat, the last half of the year, with the front half of the year.

Okay.

And, with -- given your comments earlier about having a more regular maintenance interest in that plant, how should we think about planning for that going forward?

And, how should we think about just normalized cement EBIT margins?

We typically like to get into this pattern of 1 a year.

And, certainly, when you are in a sold-out condition, you schedule that so you can make sure that you have plenty of product available for your customers, without any surprises.

So, in Texas, it became very critical for us to get back into that pattern.

Now, our other cement mills are not sold out, so then it becomes a function of when inventory becomes an issue as to when you would take the plants down for maintenance.

Okay, great.

Thank you very much.

Todd Vencil, Davenport.

Thanks a lot.

Steve, you mentioned in the press release -- given the weak demand we continue to right-size our operations to respond to lower levels of construction activity.

Is there anything new in that statement?

Are you guys doing anything different in terms of right-sizing?

Yes, we are careful about overtime and the shifts we work.

Unfortunately, when you have an inventory swell you are going to have to take some unplanned downtime.

So, you do that, and you maximize what you can do with your employees about taking vacation and what-not.

That occurred at our paper mill this last quarter.

Illinois cement, with all that rain -- we finished the winter full of inventory and thought we were going to be able to start up and run the whole campaign, and then all the rain hit in May and we had to have another little outage there.

All that stuff impacts you, but you manage around as best you can.

But, we have not shut any other capacity down -- wallboard, or cement, or anything.

Just more on how you manage inventory control, how you manage some of your shifts.

Got it, so more tactical changes than major programs.

That's correct.

Okay, good.

On the gypsum side, you guys surprised me, pleasantly, on cash cost per MSF, at least the way I look at it.

It looks like it was, by my math, down about $5.50 from the level it had been the last 3 quarters in a row.

Can you tell me, did anything go on in gypsum business that made it a little cheaper to make wallboard?

You know how hard we continually work at implementing cost reduction projects and improving efficiencies.

It is not easy.

And I can tell you there are still inflationary costs that keep coming.

But, we keep working very hard to control these costs.

Got it.

On the cement business, you referenced a couple times that the Texas plant still sold out.

Are you still seeing basically strong demand from the oil well product?

That's correct.

And, Steve, I don't know if you can do this, but you talked about weather in a couple of the other regions.

Do you have any feel for how much of a hit weather might have caused you in the quarter in cement?

It is really more on a volume basis.

And, it's probably impacted our sales, I'm guessing 70,000 to 75,000 tons.

So, if you look out -- and you said you think you'll be able to recover what you delayed by the end of the winter, so as you look out at the next couple of quarters, how are you feeling about cement volumes relative to last year?

I believe that we will get the bid work that really does need to be completed before winter hits.

And so, it will be compressed, but I don't think there is so much work that we can't get it done unless these weather patterns continue.

So, it could be a relatively nice couple of quarters if the weather holds?

Absolutely.

Okay.

Final couple for me.

You had a nice sequential increase, 9% or so in the aggregates price, I think.

Is there anything to that?

Or is that mix?

That's just mix.

Are you seeing any mid-year price increases in rocks?

I have not seen anything currently.

It's still, again, pretty weak demand there.

Yes.

Okay, final one for me.

On the paper, you guys are sold out, so is this about the level of -- you mentioned that you are sold out for the rest of the year, so should we be looking for about a similar amount of shipments going forward, quarter by quarter?

Or is there some variability around the level of shipments?

I don't think we were sold out this quarter, but going forward for the rest of the year we are sold out, so they should be a little bit higher.

Okay, perfect.

Thanks a lot.

Paul [Betts], BB&T Capital Markets.

Hi, good afternoon.

That $3 million of maintenance expense, that impacts your equity in joint venture, is that correct?

That is correct.

So, the profit decline in your wholly owned cement business -- that was down, I think, 53% year over year -- that is all lower volume?

That is that huge impact to volumes we just discussed.

Okay.

And, your concrete volumes have been pretty good.

You mentioned rain impacting the region, but they were still up 16%.

Is anything going on there?

Yes, that was a continuation of some bid work that we had in central Texas, but, pretty low margin bid work.

Okay.

And, you mentioned your CapEx guidance, you've given BD&A and G&A and interest expense before -- any changes to that?

No changes to those, Paul.

Okay, great.

Thank you very much.

Rodny Nacier, KeyBanc.

Hello, everyone.

You mentioned earlier about some peers aggressively going after volume.

Was that in cement or wallboard?

Primarily, actually, what I was referring to there was cement in Texas.

Okay.

And, just sticking with cement, just on the weather-related impacts, as we look out into the next few quarters, would you expect some of that demand to come back?

And also, with any weather-related damage, your thoughts on how that might benefit volumes in the coming quarters?

Do not know about any damage associated in the markets that we are in.

But, the projects are in place and the projects really need to be finished before winter.

So, it just means that you will work a little harder to get the projects finished on time.

Okay.

And, just switching to wallboard.

At the distributor level, are you guys getting any feedback about distributors?

You have the price increases out there, but they are in a position where they are keeping pricing steady and their customers go on with basically the same prices that they had last quarter.

Any color you could provide around that?

It is difficult for us to discuss that.

Okay, thank you.

Todd Vencil, Davenport.

A quick follow-up to Paul's question, actually.

The $3 million at Texas Lehigh, is that $3 million your share of the impact?

That is correct.

And that is a combination of maintenance and, because the downtime was so long, we had to go out and buy some purchased product.

And so, we bought some cement from some of our competitors, and those are at very low margins.

So, you've replaced some manufactured sales with purchased, so that is the combination of all of that.

Now, we do feel that we will sell all our manufactured product out the remainder of the year.

So, we'll actually get a little extra margin by the end of the year.

Excellent, thanks a lot.

Scott Levine, JPMorgan.

Hi, good afternoon, guys.

Just hoping for a little bit more color regarding your thoughts on the market's receptivity to price increases, really in cement versus wallboard.

Including regional details and maybe any difference in terms of receptivity versus what your initial expectations were prior to implementation?

I think what happened at Texas, what we discussed last quarter was that there was a $5 price increase in Texas.

And, essentially, that helped.

We also talked about a $3 price increase in Rocky Mountain region, and that's holding on, on new business but there's a lot of protection for some business that was bid in advance.

That is the color for the cement price increases.

There were no price increases announced in the Midwest or the far West.

And, then, wallboard, as we mentioned, we had some -- a couple of different price increases that melded together in March and May.

We've seen some of that come through, but not a lot.

Got it.

And then, following on the question on concrete volumes earlier, and the bid work, is that expected to continue for another quarter or 2?

Maybe another quarter, but our backlog of bid work for concrete in Austin is starting to slow down a little bit.

Got it.

And then, maybe lastly on the oil well cement, is the opportunity there expected to accelerate from here?

Is early signs in drilling activity consistent with what your expectations were over the last couple quarters?

How do you expect that to play out over the next few?

So, drilling continues to increase and we're fortunate to be enjoying a fair amount of market share in that arena.

Got it.

Thank you.

Jim Barrett, CL King and Associates.

Hi, everyone.

Steve, could you talk about your lightweight wallboard and that sub category?

Are you getting more enthusiastic, less enthusiastic, is it gaining traction at all?

Yes, it is become -- yes, we are selling more and more.

We produce it at all our facilities.

And it is certainly something that is almost turning out to be a requirement of the big boxes.

So, volumes are going up because of the requirement that this is a product that is -- effectively is being demanded to be sold to the big boxes.

Okay.

And on a related note, do you see much demand for the product outside of the big boxes?

It has been spotty at best.

Spotty at best, okay.

Thank you very much.

Todd Vencil, Davenport.

Sorry, guys, I keep doing this to you.

A couple of them.

Steve, do you have more -- any additional major maintenance plans for any of the cement plants in the next couple of quarters?

We should have a fairly large maintenance outage at Mountain cement, and it's probably on the cusp of the second and third quarter.

So, we are talking end of September, early October time frame.

Got it.

Any guidance or history on how much that tends to run?

Less than -- much less than we had at Texas Lehigh this time.

But, if we were going to say the maintenance side of Texas Lehigh was $3 million, this is about half of that.

Okay, got it.

And, I think one of your competitors either has opened a new wallboard plant in the Southeast or that was coming on, can you -- am I correct in that?

I think there is one under construction.

Okay.

But nothing has been opened.

Have you started to see any pre-activity in the market from that?

Not really.

Okay.

Great, thanks very much.

Justin Lacey, Gate Capital Markets.

Thanks.

Your operating cash flow was down a bit this quarter, year over year.

Do you expect to recapture most of that in the next quarter?

Or was it just due to weather and temporary issues?

Weather, temporary issues, some inventory builds and some receivable builds.

And so, should that work itself back out in the next quarter or might it take longer?

It should.

And then, can you give your perspective on the impact, if any, of the Lafarge asset sales in South America and Europe?

I think their US business was supposed to be part of that package, but wasn't.

Would you expect any closures as a result of that in the US?

We really don't have any opinion.

All right, thank you.

Michael Corelli, Barry Vogel & Associates.

Hi, good afternoon.

Just a question about the wallboard price increase.

I believe your largest competitor has not gone along with that price increase.

In the past, has the industry had much success in price increases when some of the larger competitors have not gone along?

That is a difficult question to answer.

But, we're -- sometimes you are surprised as to what happens.

We are convinced that it really make sense to have a price increase, especially with these raw material costs and freight costs accelerating.

And, as far as capacity in the wallboard industry, I believe utilization rates are still down 50%-ish, or maybe even south of that.

Is there any other announcements or any rumors about any other capacity coming out of the industry at this point?

Have not heard of any.

Okay, thank you.

Stanley Elliott, Stifel Nicolaus.

Thank you guys for taking my call.

Quick question for you, is there any update on either the pozzolan cement or the industrial sand product, I believe?

The pozzolan project continues.

We do have all of our permits in place and we have started to open up the mine.

And so, it is really in the initial stages of developing that operation.

And, what about -- there was a new sand product, as well?

I am not sure what you are referring --

Okay, my bad.

Thank you.

Ivan Marcuse, Northcoast Research.

Thanks for taking my question.

Most of them have been answered, but I just have a quick one on paper.

Should that pricing with -- is that pricing going to stabilize or it's going to continue to rise over the next couple of quarters?

You're talking about the OCC pricing?

Yes.

Or our sales price?

Both.

It's very high.

It is hard to predict.

If anybody follows OCC pricing, it's 1 man in a black box that calls around and spits out a number.

So, it is a tough one to figure.

It doesn't seem like it should be as high as it is right now.

So, that is a very difficult question for us to answer.

And, for us, then, on our paper prices, it's really a function of mix; so, again, that's a little more difficult.

Our mix is going to be changing a little bit.

So, my guess is, with the mix, our price may come -- or the actual selling price may come down, but our margins may improve.

Got you.

Thank you.

Mike Betts, Jefferies.

Yes, thank you.

First question, if I could, is really just a follow up on that paper question.

You said, I think, earlier, that you are sold out now for paper for the year.

If the OCC price comes down, do you keep the benefit of that, or does that automatically reduce the selling price on your non-wallboards -- or your non-liner paper business?

While it's not automatic, it closely follows in both directions.

So, generally, if you see a movement in the price of OCC, one way or the other, within a month or so you going to see a movement in the pricing.

Okay, thank you for that.

Just, then, returning to cement pricing, it seems that your markets Was that mainly because volume was weak there or basically is that a continuation of declining underlying prices in those other markets?

I think it is more a function of the mix of bid work.

So, the bid work is very competitive and at much lower prices than the day-to-day pricing.

So, if you have sales in one of those markets, and now you are doing more bid work than ordinary business, then you are going to have a greater impact.

But, in general, the price in the marketplace is stable.

Okay, thank you very much.

And then, just the last question which is probably for Craig, or you, alternatively, Steve.

You talked about potentially looking at acquisitions.

What sort of leverage are you prepared to put on the balance sheet?

So, Mike, a year ago, maybe 9 months ago, we put in a new $300 million, 5-year term credit facility.

And, the balance -- so we have that available to us, very little drawn upon it.

Each acquisition opportunity will be looked at separately and independent of each other.

You know us, and we've been fairly conservative with our capital structure over time, and we will continue to be pretty conservative with the way that we look at these acquisitions and the amount of debt that we will be willing to put on them.

Associated with the amount of earnings that come with the acquisition.

Understood.

Thank you very much.

Jeff Matthews, Ram Partners.

Hi, thanks very much.

I just wondered -- you mentioned the raw material cost price pressures that you're facing.

I wonder how they compare going into the second half of 2011 versus what you saw in the first half in general?

I think the pressure is still on; so, we are still seeing, in almost all of our businesses, some increase whether it is a chemical, or some other raw material that we are using.

Diesel was up, went down a little bit, is coming back up again.

We still see a lot of pricing pressure.

Thanks very much.

And we have no further questions at this time.

I would now like to turn the call back over to Mr.

Steve Rowley.

Please proceed.

Thank you very much.

I look forward to our call at the end of the second quarter.

This concludes the presentation for today.

Ladies and gentlemen, you may now disconnect.

Have a wonderful day.