Eagle Materials Inc (EXP) 2012 Q2 法說會逐字稿

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

conference call.

My name is Stephanie and I will be your operator for today.

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

We will conduct a question-and-answer session toward the end of this conference.

(Operator Instructions) 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 second 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 lightweight building materials remains at historic levels, while demand for heavy side construction products has started to improve.

Eagle's second quarter revenues increased 2% year over year, primarily due to increased sales volumes of cement combined with higher paperboard sales prices.

However, inflationary cost pressures associated with gypsum wallboard production, namely raw materials, freight and recycled fibers, negatively impacted Eagle's operating earnings during the quarter.

With regard to the prior year comparisons, we would note that our prior year's net earnings include benefits of approximately $2.5 million or $0.06 per share related to tax and interest associated with a final assessment from the IRS last year.

With this in mind, the earnings per share year over year comparison would be $0.14 versus $0.16.

A 5% increase in cement sales volume was the primary driver of the increase in Eagle's quarterly comparative cement, concrete and aggregates revenue increase.

Volume improvement occurred in all four of our markets, as previously awarded bid work began to materialize.

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

Average net cement sales prices have remained relatively stable for the past year in all of our markets.

Cement price increases from $5 to $8 per ton have been announced in most of our markets for next year.

Increase in quarterly wallboard and paperboard revenues primarily reflects higher average paperboard sales prices associated with the higher cost of recycled fiber.

New residential construction and therefore wallboard sales opportunities remain weak, but are expected to modestly increase in the near term.

Our paper mill remains sold out for the year by supplying multiple grades of paper into our alternative profitable markets.

Operating earnings in our wallboard and paperboard business were negatively impacted by lower average net wallboard sales prices, inflationary cost pressure of raw materials and increased freight, both inbound and outbound.

Wallboard price increase attempts in the late summer and early fall were largely unsuccessful.

As a result of the increase in raw material costs, wallboard profitability remained depressed during the quarter.

Recently, we announced a two-pronged approach to improving the profitability of our gypsum wallboard business.

First, we have eliminated the practice of job quotes.

And second, we have announced a 35% increase on all of our products to all of our customers effective January 1.

With this effort, we anticipate a reduction of sales.

For American gypsum improved pricing is more important than volume.

All of our gypsum wallboard plants are scheduled to be shut down for maintenance for a two to three week period in late December.

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

Thank you, Steve.

Operating cash flow during the quarter was $26.4 million, with modest capital spending of approximately $3.7 million.

We used the majority of our free cash flow to pay off our bank credit facility.

Interest expense during the second quarter was $4.5 million.

Prior year's interest expense included a benefit of $1.5 million related to reduced IRS interest.

Excluding the one-time benefit, interest expense on borrowings was actually down slightly as a result of reduced borrowings.

The effective tax rate for the quarter was 22%.

Our highly competitive low cost position has allowed Eagle to generate meaningful cash flow from operations, which we have used to reduce debt and improve our financial flexibility.

Our net debt to cap ratio improved to 37% at September 30, 2011.

Thank you for attending today's call.

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

Stephanie?

(Operator Instructions) Trey Grooms with Stephens, Inc.

Steve, the letter that you just referenced there that you guys kind of led the way with this January price increase of 35%, and also this, what I think is a pretty new approach in the industry to no longer be giving individual job quotes.

Are most of your competitors -- it seems like most of them are on board with this.

Is that correct?

It is hard for me to speak to our competitors.

I could just tell you that some of our costs this last quarter that have increased are controllable; however, most of them really are not.

And we just cannot continue to absorb these higher costs of raw materials and freight.

So, there is a real need for a price increase.

In regards to the job quotes, we've turned -- job quotes have really turned into kind of a one-way liability.

And generally, the job quotes are fully honored by manufacturers, but if a customer can find a better price, they refuse to buy.

So, it just doesn't make any sense to continue this practice of job quotes.

So, what we've done is, we've announced one job quote for next year for all of our products priced up 35%.

And in your discussions with your customers, how has the reception been?

At first, shock, but I think they're starting to accept it.

Certainly, we've seen a tremendous amount of orders, orders that we're unable to fill, start for now, between now and the end of the year.

At today's prices, it doesn't make any sense for us to run overtime to try to increase inventories of wallboard in the marketplace.

So, I think there is certainly a real -- at least it seems a real sense that we're serious, and in fact, we are.

We have to accept lower volumes, we will accept lower volumes, but we're going to increase the price.

That makes sense.

Just one other thing on just sticking with price here.

The pricing at the end of the quarter, was it about the same as the average both in wallboard and cement?

Yes.

And then my last question -- you mentioned costs and the costs per MSF were higher than we've seen in a while, and of course, raw material costs and everything was up, was there anything else going on there to increase costs in the quarter?

Well, we will talk about kind of everything in general, and of course, freight -- freight is easy to pick out on the net sales price.

There was about a $4 increase in freight, which reduced our mill [nets], but the cost of freights weren't just on the outbound, it was also on the inbound side.

So, freight is one of the reasons why some of these other costs are up, and not only in wallboard, but also it had an impact to our other businesses -- paperboard, cement, concrete and aggregates.

But OCC, the cost of paper, it is up 20% year over year.

Specialty paper for specialty products, mold and light rock, the cost to produce that paper also impacted us.

Ore costs, they're up because of diesel costs.

Starch, biocide, emulsion, retarder, dextrose, vermiculite, fiberglass, et cetera, et cetera, all of these are up.

Our suppliers continue to raise prices, and we just can't afford not to -- to absorb these -- we just can't afford to absorb them.

We have to pass these prices on.

Additionally, this was not, as far as operating performance, this quarter was not our most stellar operating performance.

Waste and the cost of waste was up dramatically, as we introduced greater amounts of these specialty products in the marketplace; we can and we will perform better.

SG&A was up higher than planned.

It is readily controllable.

A bright spot for operations was that energy consumption and energy costs were down this quarter.

But the majority of what I've discussed are costs that our suppliers have just raised to us, and we just can no longer absorb those costs.

But just kind of looking into the next quarter, should we think about cash costs coming down a little bit, with some of this waste and cost of waste kind of improving?

Is that how we should think about it?

And also with OCC improving just a little bit, could we see cash costs maybe coming down just a bit?

We have yet to see OCC.

We're hoping maybe by the end of this month to see OCC come down, but by the time that rolls through, that probably won't hit until next quarter.

But certainly from an efficiency perspective, yes, we're already operating better and at lower waste.

So, we should see some improvement associated with better operation.

Okay.

Thanks.

I will jump back in queue.

Kathryn Thompson with Thompson Research Group.

Is it two- to three-week maintenance downtime, just talk about with wallboard in December.

Is it unusual for all of your plants to be down at the same time?

During the holiday season typically is when wallboard, when the wallboard demand is the lowest, primarily for the drywall contractors that are installing it.

They tend to like to take a nice break during the holiday period.

So, if you're going to plan outages, you're going to plan them around that time period, because we want to have a minimal impact in the marketplace.

So, we plan these outages for a while, and are planning to go forward with them.

So, every year you have a two- to three-week maintenance for all of your wallboard plants?

Maybe not every year.

But this year, in advance, we decided this was the time to take care of some maintenance that we need to perform.

Is this one way to control volumes as we prepare for the new year with a new pricing structure for the industry?

I'm sure there's plenty of wallboard available if somebody needs it.

But what we're trying to do is have the minimal impact by having our downtime associated with the minimal demand period for wallboard.

As far as the double digit revenue increase in your cement with your JV, you referenced obviously that you've seen very good demand for well grade cement and that is driving those revenues.

A question to you is -- are the double digit increases going forward still feasible, based on what you are seeing in the market?

Cement really is starting to turn out to be a real bright spot for Eagle.

Pricing, we did get pricing increases in Texas in the mountain regions this Spring.

They held.

We got a price increase in northern California this Summer.

It held.

Oil well sales volumes remain very strong, and actually are improving in both Texas and the mountain region.

It required us to increase our purchases this year.

Our cement purchases year over year this quarter are up 111%.

Our prices year over year are on average up $1.20.

Our cement manufacturing costs associated with the better operations are down $8 this quarter.

The average cost of sales for the quarter is relatively flat, or just slightly improved.

That is associated, not with manufacturing costs, but increased purchase product costs.

So, the one area that remains very difficult for us is the Midwest.

Pricing remains very depressed in that market, as we continue to digest new capacity from all of the major expansions on the river system.

Pricing in the Midwest is approximately 22% lower than the average of Eagle's other operations.

And price in the Midwest is also 3% lower this year than last.

So, our modern low cost facility is generating a lot of cash flow even at these depressed prices, but very difficult marketplace in the Midwest.

What is your projection for wallboard industry shipments as we look into 2012 -- calendar 2012, that is.

That is a tough number.

We can tell you that this year we're going to be slightly better than $16 billion, we hope.

It looks like if there is increased sales this quarter, it will be just slightly above the $16 billion.

Really hard to predict next year.

We just don't have a feel for what is going to happen with new residential construction.

We saw from some of the home builders today, their orders are up -- up significantly.

That is a very positive sign potentially for next year.

And my final question, once again related to wallboard, you had indicated you have seen an increase in order rate, in part in preparation perhaps what we're going to see next year.

What controls do you have in place, or how much will you allow any type of pre-buy activity?

So, what we have told our customers is that we are going to supply wallboard on the same basis as we've supplied in the past, and really to -- really when it is profitable.

We will back away from, because freight is such an issue now, from the long distance sales.

But as far as volumes, we certainly will -- because customers tend to be national in scope, we will live up to the same amount of volume that we've sold in the past, but closer to our plants.

Okay, great.

Thank you.

Scott Levine with JPMorgan.

I was hoping you could provide maybe a little bit more color.

It sounded like the demand growth in cement volumes was broad-based geographically, but if maybe you could rank order across your regions?

And also maybe to give a little bit of sense in terms of the growth you're seeing in Portland versus the oil well cement, additional color on the volume breakdowns would be helpful.

Texas is very strong, predominantly driven by oil well, which just continues to increase dramatically.

So, our oil well sales year over year are going to be up 30%, 40%, 50%.

And they look stronger for next year.

So, that really is the brightest spot.

Oil well cement sales are also strong in the mountain region.

In the other regions, this year we've been a little more aggressive chasing some bid work, and we were successful getting those bids.

So, for us, the growth in the other markets have been jobs that we bid, they were delayed a little bit with some weather in the Spring, but they've really moved forward for us.

And our backlog going into next year is strong, as far as volumes.

I know you only produce the oil well cement at a couple of your facilities, but could you rough out what percentage of your total cement business that would account for?

It is going to be somewhere between 10% to 15% as you look across all of Eagle's four cement plants.

And then with regard to your capital investment plans, I think you talked a while ago about focusing on cement for growth, and I know you, I think, scrapped plans for investment in one of your western facilities.

Could you provide an update with regard to what your investment plans are there, and whether anything has changed?

Our investment plans remain to stay focused on the heavy side, that is both the cement side and the aggregate side.

And when we're pursuing some opportunities, as we speak.

One last one, maybe for Craig.

I don't know if you gave this during the comments, I may have missed it, did you provide any color on the low tax rate or maybe any update with regard to what we should be thinking about using for modeling purposes going forward on tax?

For the quarter, we were at 22% effective tax rate, and I think for the six months ended at about 23%, and that is a pretty good tax rate to use for the rest of the year.

And that's just associated with the low level of earnings and some of the other deductions that you have that at these low levels of earnings have a bigger impact.

Great.

Thank you.

Jack Kasprzak with BB&T.

With regard to the wallboard plant downtime in the quarter, so, all else equal, the price increase doesn't go into effect until January, sounds like wallboard performance for the segment in the December quarter should be worse than the September quarter?

Is that basically the summary?

I don't really believe that will be the case.

We may have a little higher maintenance costs, but in general, not excessively high.

We're going to do our maintenance on straight time, not on overtime.

And in regards to the costs, our costs to produce wallboard are primarily variable, not fixed costs.

So, a little less production at the end of the quarter should not have a very large impact.

On the cement price increases you mentioned, Steve, for next year, $5 to $8 a ton -- two questions on that.

Are most or all of your competitors also out with those kinds of increases, and is it a similar increase in the Midwest as well?

Most of our competitors are out with increases in most of these markets, that's correct.

Also in the midwest, okay.

And also in the Midwest.

Switching gears a little, can you update us on your pozzolan project?

What is the status of ramping that up?

We have now opened the mine, and have started bringing the raw material in and producing it.

We were selling a lot of this product in northern Nevada, and have just started marketing in northern California.

And you guys look at your capital structure, you have a slide on that, and where you stand, and you're obviously in a good financial position with the balance sheet and generating free cash flow, have you given any thought or would you give any thought to something like a dividend increase?

What is your view of that?

We really think now is the time to really husband your capital, and look for opportunities, because we have not seen opportunities for many, many years, certainly in the heavy side of the business.

It has been a little bit difficult for a little while on the heavy side, and we think it makes sense to husband our capital for some growth opportunities.

So, growth opportunities, Steve, would that include M&A?

We hear, it's public record that some of the larger players are trying to pursue asset sales.

Is that in part what you're referring to?

That's correct.

As well as some other opportunities that we're finding.

Okay.

Great.

Thanks a lot.

Michael Corelli with Barry Vogel and Associates.

Just a question regarding the wallboard shutdowns.

I would imagine that there will be some pre-buying in the market, since, to date, a number of competitors sound like they're going to be going along with this elimination of job quotes, and significant increase in prices for the new year.

So, with you shutting down some capacity for maintenance downtime, do you think you might miss out on some volume here that competitors will continue to go after, even though you're deciding not to, and possibly could you lose some market share as a result of that here in the quarter?

At current pricing, we're willing to accept that outcome.

I mean, you would -- it seems to make logical sense that there would be pre-buying ahead of -- even though the history of the last few years is it is one step forward and one step back on price increases, and that obviously is a risk that could happen again.

But I would imagine that it would be logical to expect some pre-buying in this quarter.

Wouldn't you expect that?

We would expect that, and as I mentioned earlier, if they're profitable and close to the plant, we will take a look at it.

Nonprofitable sales shipped some distance from the plant really makes no sense for us to try to fill those orders.

And then as far as the magnitude of the price increase, I mean I understand that this is a price that you kind of promising people for a full year basis, and your costs have gone up, 35% is a pretty huge number.

How did you come to conclude that that was kind of a logical number to use for the price increase?

This was really well thought out by our wallboard sales department.

And it was not thought out overnight.

And I know when I first heard it, I had the exact same -- gee, that seems like a big number.

When they walked me through the process, I said -- no, you're right; it needs to be at least that much.

All right.

Thank you.

Garik Shmois with Longbow Research.

My first question is -- I believe on the last call, Steve, you mentioned that you were seeing some near-term price competition in cement, particularly in Texas.

With demand being strong here, have some of those concerns regarding the competitive environment subsided?

Yes, they have.

And just moving on to concrete, the prices continue to move up, but with diesel coming off of recent highs, is there any concerns that concrete prices may start to erode again?

Well, diesel prices have come up.

It is a really tough business right now for both of our companies.

We don't have a lot of room to drop prices anymore.

The only thing that I can tell you that I really see as a bright spot is that we are starting to see the heavy side demand improve, not only cement, but as well as for concrete and aggregates.

And if I want to just talk in general, the economy in Austin is starting to improve, unemployment dropped this quarter from 7.6% to 7.3%.

Apartment occupancy rate is at 96% in Austin.

They've started construction of a formula one racetrack.

So, you're starting to see things improve in one of our large markets.

And things are actually improving as well, as far as some bid work in northern California.

So, we're starting to see a pick up in construction activity associated with our concrete and aggregate operations.

I think across the heavy side business, going back a couple quarters, you were indicating that looking out to calendar year 2011 your backlogs were up year over year.

Is some of this optimism working through projects in backlog, or are you also seeing an increase in backlog right now relative to where you were earlier this year.

We are also seeing an increase in backlog.

And then just a housekeeping question.

On the cement maintenance, I think last quarter you indicated there was going to be an outage at the Mountain Cement plant in September/October.

Did that occur?

And if so, what was the cost impact?

It did occur at Mountain Cement.

And I think if you want to compare quarter over quarter, last year we had an outage at Texas Lehigh.

This year we had the major outage at Mountain Cement and a minor one at Illinois Cement, so it is almost a wash as far as the quarter-to-quarter comparison.

So, that was for the second quarter?

For the second quarter.

And nothing planned for the third quarter in cement?

Nothing planned for the third quarter in cement.

Okay, great.

Thank you very much.

Brent Thielman with DA Davidson.

I think you mentioned you hadn't seen OCC costs fall quite yet for you, and I'm just trying to get a sense.

I guess if you do begin to see that, will paperboard prices tend to follow as rapidly, or is there typically a lag?

How should we think about that?

There is a one-quarter lag.

And does that trickle down to your wallboard business?

It does.

About a quarter as well?

Yes.

Okay, perfect.

Thank you.

Jim Barrett with CL King and Associates.

Steve, on your -- in terms of wallboard, is there any reason or cause for optimism if the industry assets that are either for sale or possibly put up for sale due to acquisition activity in the space?

Are those assets -- would you characterize them as more or less rational in terms of pricing relative to industry norms?

It is hard for me to speak about how a competitor behaves in the marketplace.

What would be nice to see is if there were maybe one or two less competitors, if they were sold to an existing player.

That would -- then you would have some cause for some positive --.

In other words, you view it as more positive if they were sold to one of your competitors, as opposed to someone new to the wallboard business?

Exactly.

Okay.

I can see why that would be the case.

Okay.

Well, thank you very much.

Justin Boisseau with Gates Capital Management.

On your outlook for this price increase sticking, I know you talked about several increases recently that have not stuck, do you have a different perspective on the likelihood of this one holding, and if so, what is the reason behind that?

I mean, it seems like the supply/demand imbalance hasn't necessarily changed, so is it just different behavior by your competitors or something else?

We are -- as I've mentioned earlier, we're really serious about this.

We are willing to accept lower volumes.

And expect that our sales volumes in wallboard will be lower as we move forward with this price increase.

I really can't speak for my competitors.

I can just tell you that we're willing to -- we are willing to have lower sales volumes in wallboard.

It is much more important to get the price increase.

Okay.

Thank you.

Richard Baruch with Janney.

The other day the Chief Executive Officer of Eaton Manufacturing made a statement that their division involved with nonresidential building for the first time has seen a significant pick up in that category.

Are you seeing that as well, or could you comment on that?

As we mentioned, we're starting to see the heavy side, and that would be the first part of construction is the foundations and the concrete that go in.

So, we are starting to see a pick up in the heavy side of our business.

So, that would follow that as well.

Good.

Thanks very much.

[Jared West] with Stifel Nicolaus.

Going back to the well grade cement, curious of what type of margin differential is in that type of cement versus other products.

Obviously, I'm sure it's -- we know it is more, but wondering if you could give us any type of quantification as to how much more?

We really haven't discussed that in the past, but we're very happy with that business.

And then lastly, there was, it was probably about a month ago, two months ago, there was a lot of discussion about various cement legislation in terms of duct filtration and regulation regarding that.

If you guys -- if any of that were to go through, what would be sort of the impact with you maybe in regards to just the competitive landscape?

Well, there might be -- currently the Portland Cement Association estimates that there will be a number of cement plants closed without this legislation.

So, if the legislation were to get -- were to pass both houses, and be signed by the President, you might have fewer cement plants closed.

Okay.

Great.

Thanks, guys.

Mike Betts with Jefferies.

Two questions from me, if I could.

First one, to be successful with the cement price increase in 2012, the ready mix producers probably also have to get a price increase through.

Are you hearing anything from them in terms of what their intent is, and whether they believe that they are likely be able to achieve that?

And also on cement, my second question -- I think I read that Ash Grove or somebody was thinking of doing extended shutdowns again over the Winter period in cement.

You didn't mention it in cement, although you mentioned it in wallboard.

I presume that you have no excess inventory, but the industry as a whole, is the talk of greater shutdowns over the Winter again like it has been the last couple of years?

I think in certain markets that's the case.

And for us, where we have a lot of seasonality, particularly in the Midwest, that will probably be the case for us again this year as far as a Winter outage.

And on ready mix price increases for next year, not from your markets but more your customers, what they're talking about.

In general, we're hearing that they're planning to have price increase announcements out.

Of what sort of magnitude?

That varies.

That's really a local business, and it varies a lot by locality.

But in general, there seems to be a need, and as we mentioned before, the ready mix business has probably been harder even than the cement or wallboard business.

So, there is a need for a price increase in ready mix.

I don't want to push you too hard on this, and this will be my last question, but the Midwest, for example, the toughest market, are you hearing if ready mix price increases next year?

That, I'm not sure.

Okay.

Thank you very much.

That concludes the question-and-answer session.

I will now like to turn the call over to Mr.

Steve Rowley for any closing remarks.

Please proceed.

Again, thank you, everybody, for listening in.

And look forward to our call next quarter.

Thank you very much.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.