Eagle Materials Inc (EXP) 2012 Q3 法說會逐字稿

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

earnings conference call.

My name is Deana and I'll be the operator for today.

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

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

(Operator Instructions) I would now like to turn the conference over to your host for today, Mr.

Steve Rowley, President and CEO.

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

Joining me today are Craig Kesler, our Chief Financial Officer, and Bob Stewart, Executive Vice President Strategy Corporate Development and Communication.

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 US construction activity remains at historically low levels, we are beginning to see initial signs of improvement across all of our major business lines.

As highlighted in today's press release, our third quarter results were impacted by several non-routine items.

Excluding those items, Eagle performed well during the third quarter.

Increased sales volumes in our cement, wallboard, and paperboard businesses, and higher wallboard and paperboard sales prices drove a 19% increase in revenues, and a 19% increase in our segment operating earnings.

Excluding the non-routine items in the earnings per share, year-over-year comparison would have been a very favorable $0.20 versus $0.12.

With regard to the non-routine items, first, we incurred a large arbitrational loss that was totally unexpected.

This ruling does not impact our ongoing operations and we continue to pursue our growth strategy with regard to our California aggregates business.

Second, the transaction costs associated with the debt repurchase have a payback of less than one year and further improve our financial flexibility.

Third, the interest and tax benefits that we received resulted primarily from the expiration of a federal statute of limitations.

Craig will have more on these items towards the end of the presentation.

A 13% increase in our Cement sales volumes was the primary driver of the increase in Eagle's comparative quarterly of cement, concrete and aggregate revenues.

Volume improvement occurred in all three of our wholly-owned cement plants, as previously awarded bid work began to materialize and the relatively mild winter weather allowed construction activity to continue.

While our Texas Cement volumes decreased slightly for the quarter, we continued to see strong demand from the energy sector for oil well cement, which we expect will continue.

Our third quarter cement cost was impacted by approximately $2.5 million of maintenance costs that did not occur in the prior year's quarter.

Average net 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 this spring.

Increased wallboard and paperboard average net sales prices and increased sales volumes drove a 24% increase in our Wallboard and Paperboard revenues.

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

Operating earnings in our wallboard and paperboard business improved to $5.4 million for the quarter versus a loss of $400,000 last year.

As we mentioned during our last quarterly conference call, in September, American Gypsum announced a two-pronged approach to improving the profitability of our gypsum wallboard business.

First, American Gypsum eliminated the practice of job quotes.

And second, American Gypsum announced a 35% price increase on all of our products to all of our customers effective January 2.

The January wallboard price increase has been successfully implemented.

While our January sales volumes are slightly reduced, this is anticipated and is acceptable.

Price remains more important than volumes.

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

Thank you, Steve.

Operating cash flow during the quarter was $16.2 million, up 45% from the prior year, with capital spending of approximately $15.4 million.

The majority of our capital spending during the quarter was used to acquire additional sand and aggregates reserves.

During the third quarter of fiscal 2012, income taxes and interest expense were positively affected by our participation in state amnesty programs with the states of Arizona, Colorado, and California, as well as the expiration of the federal statute of limitations for certain items relating to the 2004 through 2006 tax years.

These events were treated as discrete items in the tax provision and interest calculation, and a benefit totalling approximately $2.8 million, or $0.06 per diluted share, was recognized.

Excluding the impact from the discrete items, the effective tax rate for the nine months was 23%.

On this last slide, you can see 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 December 31, 2011.

During the third quarter, we completed the repurchase of approximately $88.1 million of our senior notes.

The purchase of the notes was funded with cash and lower-cost borrowings under our revolving bank facility.

The transaction was completed at a slight premium and resulted in a loss on debt retirement of approximately $2.1 million, or $0.04 per diluted share.

As a result of the debt repurchase, we were able to modestly reduce our outstanding debt, lower our financing costs, and improve overall financial flexibility.

Excluding the loss of debt retirement, our third quarter interest expense was $4.2 million.

Thank you for attending today's call.

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

(Operator Instructions) Garik Shmois, Longbow Research.

First question is, Steve, you mentioned the January volumes in Wallboard are slightly reduced.

I know it's just one month into this quarter and you don't want to probably provide too much guidance, but do you think that this is from you losing share as a result of the price increase or do you think the industry started the year down because of the pre-buy that occurred in the prior quarter ahead of the price increase?

I really think it's a combination of the two.

We ended the year very strong, with a strong December, and stronger than last year's December by about 10%.

So clearly there was some pre-buying.

But we anticipated that we would lose some market share as we took a very strong approach to this price increase.

Okay, and do you take any downtime in your Wallboard plants the last quarter or at least enough to have a material cost hit to margins?

We did have some major downturn.

It kind of bridged the last quarter and this quarter, so it was during the holiday period, the end of December and early January.

So there will be a little bridge.

Not tremendous, but there was some maintenance costs that did occur.

Okay, and your wallboard prices ticked up sequentially in the quarter.

Can you provide some color as to what drove that?

Was that the price increases that were announced early in calendar 2011 flowing through, or was it a strategy of being more disciplined on price during the quarter?

So the Q2 to Q3 price increase improvement was primarily a function of product, geographic, and customer mix.

So certainly being a little more selective.

Okay, and then just lastly, switching to Cement, can you provide some color on the 22% volume growth in the wholly-owned business?

Were there some geographies that stood out, in particular, just what's happening there that was so strong?

A very nice winter, and that really impacted the Northern part of the country, and all three of our cement plants have a lot of seasonality.

So we have a plant in Chicago and a year ago the weather was much different.

We have a plant in Laramie, Wyoming, and that serves Wyoming and the Denver market.

The weather's been fairly mild there, and our plant in Northern Nevada in Reno, the same thing, mild weather.

So that was the major reason for the volume increase.

Okay.

And if I understand from prior comments, you're going to be selling oil well cement from the Illinois facility.

Can you provide an update on your progress there and if we should anticipate some volumes in at least calendar 2012?

Yes, it's a little premature.

It's a difficult -- certainly the product that is in greatest demand and certainly performs the best is a class H, and we continue to work at producing that product at Illinois.

We've been doing it for many years and very successfully down at Texas Lehigh.

We're still on the learning curve, we've got one more burn.

We think we're very close.

We've completely cross-trained our employees at Illinois Cement with our Texas Lehigh operation, and we believe that sometime this quarter we should have that class H cement qualified at Illinois Cement and able to enter the market halfway through the year.

Okay, great.

Thanks so much.

Trey Grooms, Stephens Inc.

First off, congrats on a good quarter.

My first question is back to the wallboard and the pricing there, so $95 mill net in the quarter.

Did you end the quarter about in that same range, or was it a little more, a little less?

We ended about in that same range.

Okay, and so if I understand right, the 35% increase, from my understanding, thus far, it's shaking out to about $40 per MSF.

Is that about right, the way to think about it?

I guess you have been doing some channel checks.

As far as we're concerned, all of our new business is priced up $40, effective January 2.

And in the month of January, approximately 75% of our book of business was new business.

The rest was from some old job quotes that we still had on the books.

Okay.

That's all real helpful.

Thank you.

And then on nat gas, so with the move in nat gas lately, can you talk about how this could impact Eagle, both from Wallboard and if there would be any impact at all on the Cement side as well?

It would be a minor impact in Cement.

Gas, in a couple of areas, might be getting close to the cost of a solid fuel, like petroleum coke or coal, but where it really impacts is in both Wallboard and Paperboard.

So to put it in perspective, our Wallboard plants consume 1.7 million to 1.8 million BTUs per MSF.

And that's a full product mix average, not a half-inch number.

And our paperboard machine consumes about 4.5 million to 5 million BTUs per ton.

That's also a mix, and the greater range there is because we have a big swing in the products that we make from the 40-pound basis weight down to a 15-pound basis weight.

So there's a swing.

But on average, 4.5 million to 5 million BTUs per ton is a good number to use for the paper mill.

Okay, my last question is on potential M&A.

In the past, you guys have talked about focusing a little bit more on the heavy materials side of the business, so Aggregates and Cement.

Can you talk a little bit about what the pipeline looks like there as you look out into those markets?

There are still some opportunities out there.

None that seem very appealing at the present though.

Okay.

Well, thanks a lot.

Jack Kasprzak, BB&T.

Wholly-owned cement prices were down a little from the September quarter to the December quarter.

Was there anything in particular happening there?

It's just a little mix.

Again, a shift from -- our lowest pricing is in the Midwest, so as volumes were up a bit in the Midwest, it's really just a mix issue.

And are all the, to your knowledge, your competitors out with a similar $5 to $8 a ton price increases for cement?

We have very, very good traction for cement price increases in all of our markets, with the exception of the Midwest.

So, yes, all of our competitors are out in the other markets.

The Midwest is still the difficult market.

And on Wallboard, we're to assume that all of the competitors, well we know they all announced the same price increase, but as we sit here today -- for the beginning of January, so as we sit here today, it seems like everybody's holding the line as far as you guys can tell?

I really can't speak for our competitors.

I can just tell you that we are very confident in the prices that we're getting and we're also very comfortable with the volume levels that we have, that they are acceptable.

So as far as we're concerned, steady as she goes moving forward.

Steve, you mentioned at the very beginning, you're beginning to see initial signs of improvement across your business lines, and obviously you mentioned your volumes were up.

But out there in the economy, what are you seeing that's driving the volume growth in terms of types of projects, and are you surprised or is this what you have expected to see?

So you get to a point where volumes start rocking along the bottom, but then they start to tick up a little bit.

You get where you're along the bottom and you really refine your -- the way you do business.

You continue to drive costs out of the business and you start to get very comfortable at that level.

And then when things start to improve, you start to realize the fruits of all the hard work that's gone on.

And so just a small amount of improvement, you start to see a big difference in the bottom line of the Company.

So it's really a combination of that.

You're starting to see volume improvement, not great, but a lot of jobs that are opening up for us to supply product to.

Not necessarily in single-family housing.

Multifamily housing, though, is starting to get very strong.

Right, okay.

The press release mentions, and you guys talked about, some of your moves on the balance sheet.

So what would be the quarterly run rate for interest expense now?

Jake, it should be about $4 million range after this most recent repurchase, with lower cost borrowings under the bank facility.

And would you think, Craig, corporate G&A, I think you said in the past $16 million to $18 million bucks annually.

Is that still a good walking around number?

Yes, that's pretty good.

Okay.

Thanks a lot.

Kathryn Thompson, Thompson.

Just want to dig a little bit further on the volume trends with Wallboard.

We've had very mild weather in November/December that has carried into January.

How much of the third quarter volume increase was driven not just by pre-buy, but by mild weather?

And as we look into January and seeing some improvement not just in Wallboard, but also in your Cement operations, how much of what you're seeing in relative improvement and trends is driven by weather versus real demand?

We know that weather has a huge impact outside in the Northern climate for concrete.

You just can't pour concrete when the temperatures are low and there's a lot of frozen ground and snow and ice on the ground, and you can't even dig foundations once the ground freezes.

So the biggest improvement seasonally is always in the Cement side of the business, or the biggest problem is in the Cement side of the business during the winter times.

When it's time to finally put the wallboard into a home, the roof's already on, and so if you're going to see any impact associated with slower construction, it would have to do -- really there's a lag of three months from when the house actually starts to be built before you put the wallboard in, so you really don't necessarily see that in the winter from a seasonal perspective.

From the fact that every end of December you get into a holiday season period, that's always slow, but that happens every year.

But when you're looking at trends right now, because you spoke to trends being a little bit better, how much do you think that as being driven by weather?

Would it be like a 20% impact maybe, 30%?

On the Cement side, our sales are up greater than 20%, and through January they are up greater than 20%.

And so we really had a very nice January.

We haven't closed the book, but our sales reports show Cement was very strong in January.

Wallboard was down about 10%.

Paper's up about 10%.

Concrete's flat and Aggregate's up about 2%.

So those are some preliminary January numbers that we just had from a sales report.

Okay, are those sales or are those volume figures?

Volume figures.

Volume figures.

Okay.

I know you said that you felt like the price increase was successful.

As far as peers in the market, what other type of feedback are you getting about the wallboard price increase acceptance?

It's very difficult for me to speak of what a competitor or what their approach is.

We just know that it was very, very important for Wallboard, especially for us.

The price pressures still remain out there to produce wallboard, diesel prices, with the exception of natural gas, OCC's gone back up again now, diesel prices are up, all the raw material costs that we talked about before, the starches, and the emulsions and the retarders, and the dextrose, those costs all continue to go up.

So American Gypsum's position is they had to have the price increase.

Okay.

And given what you spoke about earlier in terms of most recent volume trends in Wallboard, does that give you any doubts about the acceptance of the price increase?

We are very, very comfortable with the volume levels that we have now, and so we certainly are more than willing to run at this level.

Okay, and what are your projections for Wallboard industry shipments in 2012?

Probably flat.

We don't see new residential housing improving a whole lot.

Multifamily is up a little bit.

This past year we sold a little over $17 billion.

It should be a little bit higher than that next year.

All right, great.

Thanks so much.

Todd Vencil, Sterne Agee.

A lot of my questions have been knocked out.

I did have one follow-up for you though, Steve.

Talking about the January volume having come off a bit, you said you thought it was a combination of both the impact of the pre-buy and then maybe a little loss of market share.

Do I take that to imply that everybody out there isn't queueing to the -- I don't want to put words in your mouth, but queueing to the price increase?

Or is there some other reason that you might have lost share?

Like I say, we've stuck to our guns with the price increase, and therefore we're getting X amount of orders associated with that $40 price increase.

And the levels are acceptable.

All right.

Thanks, then.

Jim Barrett, CL King.

Steve, could you talk a little bit about the wallboard pricing across your various geographies?

Are you achieving somewhere around $40 across your market areas, or is there wide regional differences?

There's not wide regional differences in the price increase.

We're up $40 to all customers on all products.

Terrific.

And on a related note, of your external paperboard shipments, can you tell us roughly what percentage of those shipments are going to wallboard manufacturers?

I know CertainTeed is a big customer, but can you provide that information?

We're selling roughly right now I would say about half of what we sell internally, externally to wallboard customers.

Okay, and then could you just talk specifically about Texas Lehigh?

My recollection was that was sold out last quarter.

What were the reasons for that business being a bit soft in the quarter?

It was not soft at all.

We still remain sold out.

Sometimes that's just a little inventory movement in the amount of inventory you have in your silos.

Okay.

Well, thank you very much.

Brent Thielman, D.A.

Davidson.

Just a nice contribution from the Paperboard business in terms of operating earnings.

Looks like a little lower volumes than where you were at with Q2.

Maybe just walk me through, again nice jump in earnings there, how you got to that.

The biggest difference is we have a higher percentage of sales of higher margin products, just i.e mix.

So we were able to shed some of the some of the products that we were selling at very low margins and replace them with higher-margin products.

In addition to that, we had a couple of months of lower OCC costs this past quarter, and of course natural gas costs have helped as well.

Okay, and then, Steve, I know you said you're sold out for this year, is it too early to say whether you're sold out into next year?

No, it's not.

We are sold out next year.

Okay, great.

Thank you.

Scott Levine, JPMorgan.

So with regard to the pricing in the wallboard, sounds like the volume trends you're fine with.

I was just wondering how things play out if some of your share loss becomes unacceptable, what type of changes might we expect or see with your behavior?

Are you pretty much just looking to hold the line here and the signals you've gotten from your competitors make you comfortable that things should play out as you anticipate?

I'm just wondering what happens if volume trends start to deteriorate beyond what you're willing to accept.

During this December maintenance outage, we put some improvements into our plants.

That has allowed us to reduce manpower again, by a number, by double-digit margin or amounts.

So the reduction of manpower in our Wallboard plants allows us much more flexibility with volumes going forward.

Got it.

And then I think you've indicated previously that investment in the heavy side of the business is a priority.

Would you say that continues to be the case at the same pace, or maybe if you could review your priorities for cash flow deployment?

Absolutely.

Investment on the heavy side, if the opportunity is there and the returns meet our hurdle, that's where we want to invest.

Great.

And I don't know if this was asked before, if it was, I apologize.

Did you give a good go-forward tax rate to assume?

Scott, we did not.

The tax rate for the nine months was 23%.

For FY 2013, somewhere in the 26% to 28% range is probably a good place to start.

Thanks.

Nice quarter.

Keith Johnson, Morgan Keegan.

A couple questions back on the call side.

When we look at Wallboard, sequentially it looks like operating costs dropped from the second quarter, around $98 to the third quarter to around $94.

I know you mentioned natural gas, was the other piece of that OCC?

And then how should we think about that as we look forward into the next quarter?

No, in fact, actually paper costs remain high.

It takes a while for an OCC price to flow into the paper.

I'll be honest, it was a very impressive turnaround in the Wallboard operating efficiency.

They improved dramatically from our second quarter, really returning to our previous standards of excellence, and in many cases, beyond our previous standards of excellence.

We achieved the lowest average weight for Wallboard in American Gypsum history this last quarter.

We also had the lowest amount of waste produced while we were producing this low-weight Gypsum Wallboard.

So very, very impressive performance for the American Gypsum team.

Is this tied partially to any of the transitioning over to the wider Wallboard products and coming up the learning curve and just in a more --

There might have been a little bit of that, certainly.

Okay, and you mentioned that your Paperboard operation got a couple months of benefit on the lower fiber cost and then it will take a little while to work into the Wallboard side.

But I think you mentioned that OCC prices have bounced back up here recently?

So in the last two months, it's gone right back up.

And then just the same cost side on the Cement.

It looked like it dropped off sequentially as well, even though you did have the maintenance expense in there.

I didn't know if there was any drivers there we should think about going forward?

Yes.

In Cement, maintenance can really shift from quarter to quarter.

A year ago in the third quarter, we probably didn't have little or any maintenance in any of our facilities, whereas this year we had some in the third quarter and we had more in the second quarter.

So maintenance just has a tendency to shift quarter to quarter.

It's kind of hard, and that's the only change.

Okay, and then as far as maintenance turnarounds as we look forward going into March and then on into fiscal 2013, is there a way to think about that?

Yes, I think we're pretty good.

We do have, and because we are not sold out in our Northern plants, we will have some downtime later this quarter at a couple of our cement facilities for inventory control.

Okay, great.

Thanks a lot.

And this concludes the question-and-answer portion for today's conference.

I would now like to turn the call back to your host, Steve Rowley, for closing remarks.

Thank you, and looking forward to our year-end call in another three months.

And ladies and gentlemen, this concludes today's conference.

Thank you for your participation.

You may now disconnect, and have a great day.