Eagle Materials Inc (EXP) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Eagle Materials fiscal year and fourth quarter results conference call.

My name is Papendra.

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 towards the end of this conference.

(Operator Instructions).

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

I would like to turn the call over to Mr. Steve Rowley, President and CEO.

Thank you and welcome to Eagle Materials conference call for the fourth quarter and 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 cost 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 is beginning to improve, while demand for heavy side construction products enjoyed strong demand associated with an exceptionally mild winter.

Eagle's fiscal 2012 consolidated revenues increased 7% year-over-year, due primarily to improved sales volume of cement and paperboard, combined with higher net sales prices across each business line.

For the year, Eagle's operating earnings improved 14%, with increases coming in each business segment except for concrete and aggregate.

Eagle's fourth-quarter revenues increased 22%, and operating earnings and earnings per share increased dramatically as a result of seasonally strong cement sales volumes and much improved wallboard net sales prices.

While the mild winter experienced across most of the US certainly helped our quarterly cement sales volumes, we have also experienced greater than seasonal demand improvement in March and April, indicating the construction activity is beginning to pick up in most of our markets.

We are very encouraged by improving housing fundamentals and homebuilder enthusiasm.

Eagle remains well positioned as we enter a construction up cycle.

A 7% increase in annual cement sales volume was the primary driver of the decrease in Eagle's annual comparative cement revenues.

Volume improvement occurred in all four of our cement markets.

Texas cement volumes continue to be buoyed by strong demand in the energy sector and we expect this will continue.

Average net cement sales prices have remained relatively stable for the past year in all of our markets with typical seasonal variations explaining the changes in the fourth quarter.

Cement price increases from $5 to $6 per ton were successfully implemented this spring in the Texas and Rocky Mountain regions.

Price increases are expected this summer in the West and Midwest.

The fourth quarter wallboard price increase had an important impact on American gypsum profitability, but that only tells part of the story.

Escalating costs of raw materials and increased freight, both inbound and outbound, continue to pressure margins throughout the year.

However, I am proud to say that we have not stopped working on lowering our costs.

In spite of the fourth quarter being our lowest volume quarter during fiscal 2012, it was also our lowest cost quarter of the year.

Additionally, our paperboard continues to perform exceptionally well and remains sold out.

As a result of the increase in raw material transportation costs, American gypsum took a multi-pronged approach to improving profitability of its gypsum wallboard business.

First, we improved operational efficiency through well executed capital expenditures.

We also streamlined our plant operations, reducing employee headcount and focusing on quality, plant efficiency and cost reduction, not volume.

With this streamlined approach to operations, price remains more important than volume.

Second, we implemented a price increase on all of our products to all of our customers effective January 1.

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

Thank you, Steve.

Operating cash flow during fiscal 2012 increased 38% to $60.9 million, with annual capital spending of approximately $26.1 million.

Excess cash flow was used to reduce outstanding borrowings and further improve our financial flexibility.

Interest expense during the fourth quarter was $3.3 million, including a benefit of $500,000 related to reduced IRS interest.

Excluding the benefit, interest expense on borrowings was $3.8 million, down from the prior year's fourth quarter as a result of lower cost borrowings under our bank credit facility.

The effective tax rate for the quarter was 29% and is a reasonable rate to use for FY '13.

This final chart is unique for a company in the building materials and construction product space, declining debt and an improving capital structure.

This has all been achieved without the issuance of equity.

We are currently starting to come out of a deep cyclical trough and Eagle's low cost producer position, strong cash flow from operations, quality products, exceptional people and our growth initiatives well position us for increased prosperity in the next up cycle.

Thank you for attending today's call.

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

(Operator Instructions)

Trey Grooms, Stephens.

Can you talk a little bit, Steve -- you touched on it as far as how March and April look -- can you quantify a little bit more what the trends were as you move through the quarter and then, obviously, April and what you are seeing thus far in May?

Cement has remained very strong.

The volumes are 25% to 30% up for this first six weeks of this quarter.

We had a price increase in Texas of $6 that has been fully implemented.

Price increase of $8 in the Rocky Mountain region, the majority of which has been implemented.

Pricing and volume, very -- volume is strong in all of our markets.

Pricing improving substantially in two of our markets.

Very positive about Cement going forward.

On the Wallboard side, volumes -- we are very pleasantly surprised with the current level of volumes, and they are trending higher than the first quarter.

We remain focused on quality service and quality products in our core markets.

Again, as we have mentioned before, price remains more important to us than volume.

Service to our core markets remains more important to us than volume.

On that -- with the Wallboard pricing, you guys did a great job implementing that and pricing up nicely in the quarter.

Are you seeing any signs of it moving around at all here as we have gotten into your fiscal first quarter?

We have said before that we are really focused on price; and price, in fact, has really remained unchanged since the first of the year.

We are very pleased with that.

Again, pleasantly surprised at the level of volume with that same price.

Jack Kasprzak, BB&T.

On Wallboard pricing -- do you think your average realization will improve a bit in the June quarter versus the March quarter?

It was obviously up quite a bit in the March quarter, but maybe didn't seem like it was in dollars up as much as the price increase.

The pricing is slightly better if we look at March and April, as compared to the average for the quarter.

I think pricing for us -- and we have really gone through the majority of any backlog of job quotes we have had from the prior year -- pricing is stable right now.

We believe that it will stay that way.

No reason not to, because we still are very happy with the volume levels that we are currently supplying in the marketplace.

You're obviously suggesting the June quarter, in terms of Wallboard volumes, has a better trend than what we saw in the March quarter.

Could you talk about the factors that led to the decline in the March quarter for Wallboard volume?

Certainly -- a lot of that was ahead of the January 1 price increase.

There was a large volume swing in December.

The biggest change in volume was, January was a little slower.

However, February picked up nicely.

March improved nicely as well.

I can tell you it has even improved beyond that in April and May.

Volumes are improving and pricing is the same as it was in January.

The price increases in Cement that you referenced for the Summer in the West, are those in the $5 range as well?

That's correct.

Todd Vencil, Sterne, Agee.

Steve, I understand the impact of the pre-buy ahead of the price increase.

It does look like you guys, at least for the quarter, lost a bit of Wallboard share.

Can you talk about what might have been under that, and whether you think that might be permanent or a temporary factor?

We are not really focused on that at all.

We are, as I mentioned in the earlier remarks, we really are focused on producing a very high quality product and shipping it into our core markets.

The volumes we get are the volumes that we will get; we are happy with these results.

Certainly much happier with these results than the results from the previous two, three, or four years.

Did you guys have much of an impact from job quotes that you brought into 2012 with you?

We started with a few.

In the early part of the quarter, we worked through the majority of those.

Very little, if any, left there.

Any way to quantify what the impact was, either as a fraction of your volume or as an impact on the average mill net in the quarter?

No, it would be hard for me to quantify that.

We really have not done the calculations.

Not substantial.

There's probably more of an impact, certainly in the earlier part, with transportation costs.

Transportation costs have eased a little bit now, but they are still high.

Natural gas costs are coming up a little bit as transportation costs are coming down.

That will probably end up being a wash in this current quarter.

To put transportation into perspective -- if you look out over the last couple of years, that is about a $6 change per MSF in mill net with increased transportation cost.

Whereas, over that same period, natural gas costs have only reduced production costs by about $2.50.

Combination of diesel, combination of trucking rates, has had a huge impact on margins in the wallboard industry.

Coming at a similar issue a different way, and given that, from your comments, it sounds like job quotes did have a bit of an impact on the Wallboard average price -- where do you think your mill net settles out, now that those are fully or almost fully out of the way?

The implications with mill net are transportation.

My guess is that movements in transportation costs will have a much greater impact than any movement in job quotes.

The corporate general expense was a bit above where we were looking for it.

Anything in particular in there in the quarter?

Really small, mostly one-off.

I'll let Craig go into some details there.

As Steve mentioned, there are some one-offs.

Certainly a piece of that was associated with stock-based compensation.

The other piece of it, the most significant one, would have been legal costs associated with our recovery efforts for the $100 million that we paid in our dispute with the IRS.

Do you have a number in that legal expense?

It is slightly under $1 million for the quarter.

As we started the discovery phase and some of the depositions, that will continue a little bit here into FY '13.

Trying to recover, and after we have requested our refund of the $100 million.

You called out maintenance expense in Cement.

You said it was up $2 million year-over-year.

What is the absolute number on that, and how should we look for that to play out?

If you really looked at it, our maintenance costs were up $0.40 a ton.

We had, I think -- fuel was up about the same $0.40 or $0.50 a ton.

Primarily that was transportation costs, rail rates getting the fuel to the plants.

Then some purchased raw materials were up as well.

A lot of that is associated with freight, once again.

Kathryn Thompson, Thompson Research Group.

Tagging along with the G&A commentary you just had -- how should we think about G&A expense for fiscal '11?

Particularly, assuming that if you have better results, you should see an increase in incentive comp?

Yes, our FY '13 -- we finished FY '12 at this $19.6 million.

We will be in that range, maybe slightly higher, as some of these other things improve, as you mentioned.

The same thing on the effective tax rate.

This quarter with the earnings improvement, we are at 29%.

It should be about in the same range.

On the corporate G&A, it really should be close to flat or so for next year.

We talked a little bit about job quotes throughout the Q&A today.

It is our understanding that the percentage of job quotes you had were meaningfully lower than that of your peers.

What percentage of your overall jobs going into calendar 2012 were protected by job quotes?

And how does this compare against your industry peers, to the best of your knowledge?

We don't know.

We try to minimize that.

Some of the quotes had escalators on them, and I'm sure some of our competitors quotes had escalators on.

It is a question of what was the better price at that point in time.

I can tell you, currently, we have minimal -- less than 3% left.

I know that you have been looking to get API approval for your class H production out of your Illinois facility, classic cement.

What is the status of the process?

We are very pleased with the product that we have produced.

Our current plans now are to introduce that product into the marketplace this Fall.

More like the August, September time range, you will introduce?

That is on the cusp of Summer/Fall.

Looking forward, how much reasonably, out of your Illinois facility, could you produce of this well grade product in calendar 2012 and into calendar 2013?

With this product, you have to gain a reputation, and it takes a while for that to occur.

It's a slow ramp up, once you introduce it into the market.

Once it is accepted and it is working well, and more importantly, it is consistently made and consistently delivered to the product as the same product every time -- that is when your reputation gets to the point where it is very easy to sell this product.

I'm not going to say that this thing ramps right up, but I am going to say that, as we produced this product and tested it, we are very pleased with the quality of product.

We're also very pleased with the systems that we have put in place at Illinois Cement to be very consistent in having a uniform product produced as well.

Now it is up to us to prove that in the marketplace.

You also had in your prepared comments that wholly-owned cement volumes -- or cement volumes in general -- were positively impacted by warmer weather.

In particular, wholly-owned were up very strongly for the second consecutive quarter.

How much of this demand was driven by warmer weather versus pure increased demand or pure market?

When January and February, we were having strong sales, we believe that was really weather-related, and it clearly was.

As we got into March and then April and now May, there's something beyond weather impacting our sales volumes.

This is for construction grades.

There is improved opportunity for cement volumes in our markets.

This is really in all of our markets.

Would you say that maybe half of demand in the quarter was driven by warm weather and the other half increased demand?

Hard to tell, but I can say that the Winter is behind us now.

We are into Spring and Summer and volumes are very strong.

Garik Shmois, Longbow Research.

A follow up question on your Cement volume outlook -- looking at the PCA's forecast nationwide, they are pointing towards about 3% to 4% volume growth.

Obviously you have been doing much better than that from the sounds of it.

This quarter has gotten off to a much better start.

Just wondering -- how is your visibility into cement demand?

And maybe you can provide some color as to what end markets are providing that outsized growth?

We will talk regionally a little bit here, because Cement is a regional business.

Texas, very strong.

Not only do we have the strong demand for the well, but also the construction grades are very strong in Texas as we speak, which also help in the implementation of that $6 per ton price increase.

When you go out to the Rocky Mountain region, volumes a very strong there as well.

You get out to the West, we have strong volumes.

A lot of it is associated with bid work that we'd obtained over the last year or so.

The same thing in Illinois.

We have a lot of the demand going to jobs that we had put in place over the last year or two.

Volumes are strong.

Those jobs are picking up -- where sometimes you bid a job and they really don't get after it, and it's a little slow going as far as the volume to the job.

That is not the case this year.

Those jobs are moving like they have got other jobs in their backlog, so they want to get this job behind them and move on.

A follow-up -- in Texas, I would imagine that plant remains sold out.

Can you talk about how you are viewing your ability to import into the Texas market, and if you think that you are going to scale up imports to meet demand?

Currently we are having to do that.

Our first choice is to provide additional product domestically, whether it is from Texas or neighboring states.

We will look there first to try to help the shortage that we are seeing for our customers and our own internal consumption.

We will also ramp up the imports into our terminal in Houston as needed to meet the demand.

Was there any change in the quarter with respect to the DML cement that you were importing, relative to the year ago period?

Not in the past quarter.

Lastly -- a question for Craig on the interest expense.

Should we assume somewhere around $3 million, $3.3 million per quarter as a run rate?

As I mentioned, this quarter we had a little bit of a benefit run in through there.

I would use more than $3.8 million in the quarter, based on where we are with current outstanding borrowings.

Glenn Wortman, Sidoti and Company.

Focusing on the Paperboard business -- your margins were up pretty nicely in fiscal '12 versus fiscal '11.

Can you give us the full year review of what drove that margin improvement, and what is a good normalized margin to use going forward?

Two things really impacted that.

The first being, the prior year we had a real high spike in OCC, and that moderated a little bit.

The next was a shift in product mix to much higher margin sales product; both increased sales to the Gypsum business, as well as increased sales to the bag business.

Both of those things really improved our margins on the revenue side.

A decrease in OCC costs helped us as well.

On a go-forward basis, maybe over a long-term, three-, five-year period -- what do you think you could normalize margins for that business?

The margins go way up as the mix shifts.

We are starting to feel, and we're starting to see, and there is a lot of people starting to talk about, homebuilding starting to recover.

As homebuilding recovers and we shift to more gypsum liner, our highest margins are always when we are producing gypsum liner on that mill.

We anticipate those margins and earnings from Paperboard to go up dramatically with the housing recovery.

One other question on your joint venture in Texas -- sounds like you're sold out down there, so any increase in volumes in fiscal '13 would likely come from imports.

Would you expect some margin degradation for the joint venture if, in fact, that becomes the case?

No, what we will see is, on the incremental sales, there is smaller margin on the purchase.

That's always going to be the case.

We have also had a very nice price increase that should offset that.

You are going to have the pluses and minuses of that occur, but things are looking towards higher profitability, both from manufactured product as well as adding to that with purchased product.

John Baugh, Stifel Nicholas.

On the Wallboard side, the pricing sounds fairly set, but I was wondering if you could give us your outlook on OCC, that gas, the transportation, which we already talked about -- any other costs associated with Wallboard trends, or how we think about that for the remainder of the coming fiscal year?

OCC has moderated a little bit.

It is really hard to predict.

A lot of times you will have China coming into the US purchasing OCC, and that price moves around with the amount of OCC that is being shipped overseas.

That is a hard one to predict.

Natural gas has eased up a little bit.

We still have not seen a need to try to hedge to any great extent.

We are very happy with our consumption, and slightly hedged with natural gas.

Any update on the [plausible situation]?

That is a market that has been a little slower.

Things are picking up, as I mentioned, as far as some bid work in Reno.

The regular construction in Northern California remains very slow.

It's slow ramping up those sales.

Todd Vencil, Sterne, Agee.

Craig, do you have a CapEx number in mind for the coming fiscal year?

Yes, not dramatically different than where we have been for sustaining capital.

We're still in that $15 million to $20 million.

We're also looking at some developmental capital, and maybe in about the same range.

Craig, I don't know if you have that handy -- can you break out DD&A for us by segment and give us a total in the quarter?

Sure.

Just for the quarter?

Yes.

You have the year end stuff and the 10-K, but for the quarter, $12.8 million for the entire company.

Roughly a similar breakdown from where we have been previous quarters -- $4.1 million in Cement, $5.1 million in Wallboard, $2.2 million in Paper and the rest is Con-ag, $1.2 million, $1.3 million.

Thank you much.

That is all the time we have for questions today.

Ladies and gentlemen, this concludes your call.

I will hand it over to the speaker for any concluding remarks.

Thank you.

Looking forward to the next call.

Thank you.

Ladies and gentlemen, that concludes your call for today.

Thank you for joining.

You may now disconnect.