Eagle Materials Inc (EXP) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2013 Eagle Materials earnings conference call.

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

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

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

(Operator Instructions)

As a reminder, today's conference is being recorded for replay purposes.

And with that, I would now like to turn the conference over to your host for today, Mr. Steve Rowley, President and CEO.

Please go ahead, sir.

Thank you and welcome to Eagle Materials conference call for the first quarter of fiscal year 2013.

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 our heavy construction products and light weight building materials continue to improve during the first quarter.

As we have mentioned in the past, Eagle is geographically very well advantaged with respect to early recovery construction market.

This quarter's results illustrate this advantage.

Eagle's first quarter revenues increased 29%.

Operating earnings and earnings per share increased dramatically as a result of much improved wallboard net sales price and strong volumes across all business lines.

We are encouraged by the improving housing fundamentals and Eagle remains well positioned as we enter this up cycle.

A 26% increase in our cement sales volume was the primary driver of the increase in Eagle's quarterly comparative of cement, concrete and aggregate revenues.

Volume improvement occurred in all of our cement market and our Wyoming cement facility now joins our Texas plant in being in a sold-out position.

We continue to see strong demand from the energy sector for oil well cement, which we expect will continue.

As we pointed out in the earnings release, our first quarter cement costs were impacted by approximately $8 million of maintenance costs that did not occur in the prior year's quarter.

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

Price increases had been announced for later this summer and fall in the West, Midwest and Texas regions.

In addition, there is an $8 per ton price increase announcement in the mountain region for January 1.

Much improved wallboard average sales prices and increased wallboard sales volumes drove a 27% increase in our quarterly comparative of wallboard and paperboard revenues.

Operating earnings in our wallboard and paper board business improved to $19.3 million for the first quarter versus $1.3 million a year ago.

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

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

Thank you, Steve.

Operating cash flow during the first quarter increased dramatically to $19.1 million, with capital spending of approximately $4.7 million.

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

Interest expense during the quarter declined 18% to $3.8 million, reflecting lower borrowing levels and lower cost borrowings under our bank credit facility.

The effective tax rate for the quarter was approximately 30%.

This final chart reflects our efforts to improve financial flexibility, which positions Eagle's for growth in this up coming up cycle.

Thank you for attending today's call.

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

Keith?

(Operator Instructions)

Trey Grooms, Stephens, Inc.

Hey, good afternoon, guys, congratulations on a great quarter.

First off, Steve, can you talk about how wallboard demand is progressed through the quarter?

And also, one of your competitors mentioned that they had seen a pause in some of the demand for -- in some of their end markets.

Can you talk about how your July is trended there and what you're seeing?

Our volumes, we just remained pleasantly surprised at the level.

And, we think a lot of that has to do with our geographic position, those housing markets are stronger than some of the others in the country.

But we really are in a very nice position and our backlog of orders has steadily grown since January 1. So, we started with a backlog of maybe 5 million and now it's up to over 35 million for the backlog and continuing to rise since beginning of the year.

Sequentially from June to July there's been a continued improvement then, it sounds like.

That's correct.

And then on the cement side, you pointed out Wyoming is sold out.

Can you talk a little bit about what's behind that, what is driving that strength in mountain cement.

And then also, can you touch on how your other plants are doing?

Sure.

The Rocky Mountain region is just recovering faster than some of the others.

The Denver market, just commercial and housing, seems to be improving faster than some of the other markets that are out there.

And there's also the energy impact to the Laramie, Wyoming, plant with the development required for the oil wells.

So, that is really what has impacted the Laramie plant and we're excited to finally have that plant back in a sold-out position.

If you go out West, it is still a little weak in northern Nevada.

Starting to see things pick up maybe in the Bay Area that may be starting to trickle out into Sacramento, although it is still a little weak once you get out from the Bay Area and Silicon Valley, but those areas are starting to improve.

It is just a little far reach for that plant to get into the Bay Area.

And Texas, as we mentioned, we're in a oversold position in Texas.

When you get to the Midwest, there is work out there.

The work that we have been getting and our volume dropped dramatically, is bid work that we bid over the last couple of years.

So, it is a little lower-priced work, but it does contribute cash to the business and we're happy to have that volume.

And then my last question is for Craig.

The wallboard costs, if you look at them year-over-year per MSF were up a little bit.

Can you talk about is there something specific going on there?

I would have thought with the higher volume it might have come in just a little bit.

I'm sorry, Trey.

So, for this quarter total costs were about $88 a 1,000.

Looks to be down $6.00 from the prior year, from the June of 2011, and the significant benefit there is natural gas is the vast majority of that improvement.

And then with the higher volumes, the improvement in the fixed cost absorption.

I'm sorry.

I must have been looking at my numbers wrong.

Thanks for clearing that up, Craig.

Kathryn Thompson, Thompson Research Group.

I am going back to the cement segment.

Can you delineate what portion of demand increase is driven by the energy sector, both at the JV, which presented at least half but maybe clarify that?

And then also in Wyoming.

And then, finally, could you give an update with the Illinois plant in regards to making well-based cement there?

Demand is very strong at Texas, both for construction-grade cement, as well as for oil well cement.

And it is a very large part of our manufactured volume is going to oil well cement.

It may not be at 50%, but it may be approaching that of the manufactured product at Texas Lehigh.

And then in Laramie, we're at 25%, maybe approaching 30% being oil well demand driven, as far as the profit is concerned.

And as far as the oil well cement in Illinois, the development continues on plan and we still plan to introduce that product into the marketplace later this fall.

There has been some talk, according to our industry contacts, about price increase in early calendar 2013, January 2013 and you guys had given a little bit of look ahead and there is certainly other talk from manufacturers in the field.

What are you doing to curtail potential excessive pre-buy to the -- going into 2013?

Can you make any comments from your customers about a central price increase?

In other words, are they supportive or not or just some general commentary.

It was a little hard to hear.

It this about wallboard that you're asking?

Yes, this is for wallboard specifically.

Earlier this year we gave guidance on pricing for calendar year '13 and many commercial jobs have long lead times and this guidance has actually helped many drywall contractors to secure jobs next year at higher prices.

So that was the reason, because we had given a price just for the year of '12 and then as you got very early into this year realized there were a lot of jobs that we're bidding into the following year.

So we went out, gave guidance, and we can tell you we've had very positive feedback from a lot of contractors that say that by giving them guidance, they have been able to secure jobs next year at higher prices.

And once again, tailing off the previous question about current wallboard volumes trends.

How much of that do you think is core demand versus a little bit of pre-buy?

I am not sure.

This would be a little early.

Typically you think about pre-buy in the month right ahead of a price increase.

And we gave a price increase announcement that was just for calendar year '12.

So if you're thinking about calendar year '13, this would be certainly a little early for pre-buy.

Probably really more reflective of current demand.

So this is probably, what you're seeing now is more reflective of what you're just -- for core demand in the market.

That's correct.

Okay.

Great.

Thanks so much.

Todd Vencil, Sterne Agee.

I think last, first quarter you guys told us you had $3 million of maintenance that was your half of what you spent or the impact, anyway, at the JV plant.

So, if I take the $8 million greater comment from this year, was the absolute level of maintenance in the quarter about $11 million?

I think the stuff at Texas Lehigh had more to do in the last quarter with some finish mill maintenance.

The major maintenance on the kiln really occurred this quarter and then actually we had major maintenance as planned in all four quarters.

Sometimes they will move a month and get moved forward a quarter or back a quarter.

I think this year they all just moved, some moved back, some moved forward and they just all hit in the same quarter.

Sure, fair enough.

Did that add up to about $11 million this quarter?

When I look at the maintenance costs, they're closer to what we would normally plan for annual maintenance for all of our plants.

So, I don't think it was $11 million.

How far out do you feel like you guys can get -- and I know the kiln tells you when it needs to come down, but are we looking at probably a couple of quarters now before we have to do any major maintenance again?

When we perform these routine major maintenances, especially when you get into a sold-out position, it is a once-a-year thing.

And you plan it and maybe it is 11 months, maybe it's 13 months, but typically you plan this somewhere around an annual cycle and you just get busy and you shut the plant down for about a half a month and bringing in a lot of contractors and work a lot of overtime and you get the plant back in like-new condition.

And when you're in a sold-out position it is critical that you have that, because you want to have the cement available when the customers need it.

You can't be up and down.

When you're not sold out, maybe you'll say, okay, I'm going to skip maintenance or I've got to have a short inventory control shutdown, so you shut down for a month.

In the middle you do a little work.

It gets a little erratic.

But once you are up and fully utilized, then you get into these planned annual maintenances.

Looking at the cement price, it came down sequentially.

We had a model going up just because we needed a price increases.

Was the decline due to some of the lower-cost bid work that you guys did in the midwest and maybe some other geographic type shifts?

Absolutely, that's what it was.

We had very high volumes in the Midwest and a lot of that volume was associated with bid work.

Can you tell me about what the utilization was on the Illinois plant?

The utilization was low on the Illinois plant.

We did have our maintenance outage and we had run our plant a little longer than we had the year before during the winter to build up some inventory.

We were in the middle of some labor negotiations and we wanted to make sure that we had plenty of inventory for these bid works when the construction season started and, therefore, we were bulging at the seams.

So, when we shut down for the major maintenance we also took an extended down time to get the inventory level back to normal levels.

We've heard a couple of cement guys talk about starting to use natural gas to fire the kilns.

Is that something that you guys have looked at that or can do or can't do?

The answer is yes and we are doing it where it makes sense.

Any color on how many of your plants that might be available to?

Currently, I think, we're burning at two of our plants.

Okay.

Perfect.

Thanks a lot.

Jack Kasprzak, BB&T Capital.

Is it possible to break out the $8 million of cement maintenance between the wholly owned plants and the joint venture?

I don't have that off the top of my head, but we did a very thorough job at Texas Lehigh and, of course, then that becomes subtract half of that because of the JV.

Craig would have to look into how those numbers -- I haven't looked at it on that basis, but I can tell you we probably put more money and time into that maintenance than the others, especially with the demand in Texas and the demand for oil well cement.

We want to have surety of supply available for our customers there.

What is the capacity of that Texas plant now?

The Texas plant manufacturing capacity is about 1.4 million.

Back to the issue of cement prices, it sounds like you're more confident in the price increases.

There are more of them.

Would we expect to get more of an impact on our average cement sales price in coming quarters from these price increases versus what we've seen where it's been a little more flattish, maybe somewhat erratic from quarter to quarter?

As the volumes adjust more, to more regular construction or regular day-to-day work versus some of the bid work, the answer is yes, the price should improve.

And, Steve, your comment on housing with regard to encouraged by the improving fundamentals and you mentioned your geographic exposure there.

But what is it -- your backlog is building and you're seeing customers doing more in the housing area, there is just more -- there are more conversations on the ground about projects starting, are you gauging -- is that how you're gauging it or are you just looking at macro numbers, which are also encouraging?

What is increasing your confidence and what's happening with housing with your business?

Yes, it is really in the core markets that are close to our plant.

Our plants just are fortunate to be around markets that are a little bit better off than the national average.

Some of our markets are obviously close to some markets that are -- that we mentioned that really helps with cement, the energy sector, while in addition to that you need infrastructure to go with all of the construction activity associated with the energy sector and the improvement in that area.

So, clearly that works very well for our plant in Oklahoma down into Texas and our plant in Colorado into the Colorado Rocky Mountain region, where there is the weather (inaudible) energy plays.

Demand has also been pretty strong for our plant in South Carolina.

So, we're really happy with the way demand.

And out of the Mexico, Phoenix is starting to pick up a little bit.

So, we're starting to see demand in markets that are very easy for our plants to ship to.

Okay.

Great.

Thanks very much.

Garik Shmois, Longbow Research.

Just a couple follow-up questions for me, just on cement pricing and then the mix in the midwest.

Just wondering if you could maybe provide a little more color on how long you anticipate some of the bid work to be a negative mix impact on selling prices, all things being equal?

Well, at least, out of that one plant we still have a fair amount of backlog, but I think we shipped a higher percentage there in this past quarter than we did from our other plants.

So, I think our other plant volumes are picking up now relative to that plant and so the average for the Company will get better, whereas the pricing in the Midwest should not improve that much and that should still be impacted by a fair amount of the bid work that we haven't completed yet.

Is it fair to assume that all of the maintenance that you are planning on doing as you see right now, your annual maintenance occurred in the first quarter, is there any lingering maintenance still left to be had?

Typically in the winter we'll do some finish mill maintenance, but the major maintenance has to do with the kilns systems and that is what occurred in the first quarter.

It would be only minor use of your plant to have your major maintenance and you hope you make it a year.

Sometimes you might have a very small outage where you are just down for two or three days, put a patch job on some refractory or a quick little fix to a clinker cooler, if you had to, but that usually you plan for it, you hope it doesn't happen and sometimes it does, sometimes it doesn't, but, you might plan for one other small outage later on in the year.

Was the expense that you incurred this last quarter, the $8 million increase, is that, from a dollar standpoint, pretty similar to what you spent on your annual maintenance in fiscal '12?

Our maintenance is really -- we do it routinely, not episodically.

It is very similar to maintenance.

Every once in a while something cycle on a two to three years time frame, but the majority of it is annual and the costs are typically don't vary that much from year-to-year in total maintenance.

I'm sorry if I'm beating this into the ground, but I was just wondering if maybe you could walk us through the normal maintenance expense that you saw by quarter in fiscal '12, just so we have an apples to apples comparison going forward.

I did not go back and actually do that analysis, say what maintenance hit what quarter last year.

But I can just say in general if you look at a 12-month rolling average, looking at the 12-month rolling average the maintenance spend isn't any different than we normally see.

Looking forward and looking at our budget for this year and looking at a re-projection based on the actual cost of maintenance in the first quarter, we don't see any difference in the budgeted maintenance for the year.

Just quickly on SG&A, it crept up year-over-year.

Just wondering if you could provide some color on what happened there, maybe a guide for SG&A going forward.

As you mentioned, we had an increase of a little over $1 million increase in corporate G&A during the quarter and roughly half of that was associated with non-cash equity compensation and the other half was associated with legal costs related to our tax dispute, as we prepare to go to court for our tax refund.

I think I had mentioned that back in the fourth-quarter conference call that we would see those costs into this year as well.

Okay.

Thanks so much for your help.

Rodny Nacier, KeyBanc Capital Markets.

You provided earlier some month-to-month trends in your wallboard business.

I was hoping I can get some color on monthly activity in the cement side and into July how volumes are faring.

Volumes remain very strong.

So, we had another real strong month.

We just got those numbers yesterday and the cement volumes continue to be very strong for us.

I was hoping you could relate that to the PCA forecast, which is looking nationally for cement volumes up 6%, which would imply some slowing now.

I realize you have some regional differences versus the national trends, but you get the impression that in your confidence that strong volumes are going to continue through the rest of the year?

Yes, we do.

And on the pricing side in cement, could you go over again what the dollar amount was in the West and the Midwest and the timing and also your confidence in getting those price increases realized versus a year ago.

The dollar amount in the West is about $5.

The dollar amount in the Midwest is, I believe, $6.

And very strong confidence.

I think there everybody has a price letter out in the west.

And in the Midwest not everybody has price increase letters out.

Okay.

That is helpful.

Could you provide an update on some of the adjacent businesses that you have invested in over the past few quarters, specifically in the Midwest?

We are in the process and you've seen, you may if you've read the K you may have noticed we've added some information over the last couple quarters in the Qs and the Ks.

We're in the process of developing a new business for Eagle.

And that is frac sand.

We currently believe that we will be ready to enter the marketplace early next year and we're currently just finalizing a few details.

Once we have finalized these details, we will be ready to make a more formal announcement.

And you also had a, I believe, a bars loading facility, is that tied to the frac sand or is that (multiple speakers).

That is correct, that is correct.

All right.

Thank you very much.

John Baugh, Stifel Nicolaus.

Could you delineate the pricing that you're seeing in cement between oil and construction and/or bid jobs, for that matter?

I don't know if you want to go by region, you can just do it by the Company?

It's simpler.

We really don't give that kind of information out.

You mentioned the guidance about pricing for wallboard.

Refresh my memory again on what you said?

20% to 25% increase.

And that's not just quote for commercial, that is going to be for residential, too.

Obviously, residential isn't really looking that forward, yet.

That's correct.

Okay, thank you.

Good luck.

Scott Levine, JPMorgan.

Just to clarify a couple of points really quickly.

You said 20% to 25% wallboard increase for calendar 2013 is the initial indication?

That is the guidance that we gave and that was based on January pricing.

And on the frac sand, when you have something to announce, is that early calendar '13 as well, is that what you said?

We probably will announce it before then.

We should be into the marketplace in early calendar year '13.

And then maybe a little bit of subjective help on the cement business.

It sounds like some of the bid work at lower prices has been dampening, maybe the reported price.

How should we think about that work rolling off?

I guess we should be thinking about the cement pricing realized within your P&L coming up a little bit more gradually through the balance of the year, is that directionally correct?

That is directionally correct.

The OCC trends have been down, I think, the last few months and in terms of the assumption we should use maybe for paperboard pricing, should that follow and with what type of a lag should it follow?

That has been fairly stable, so I think the impact to the pricing shouldn't be that different even though it's moved a little bit.

But, if you think year-over-year it's down, but I think that the lag in our contract is a three-month lag.

I don't anticipate a big change that -- we saw a change earlier when prices dropped off dramatically, but really been very fortunate to reduce our variable costs by about 10% at that facility from roughly $340 per ton to $310 per ton.

Part of that, about $15 of that, is fiber; roughly maybe 7% of that is gas; 5% maintenance; 3% power, and it's not all just pricing.

A lot of that is efficiency improvements at that plant and the plant will run much more efficient the more gypsum wallboard paper that it produces.

Very happy and very pleased with our performance at the paper mill.

Remind us on the well cement is a portion of your total cement business, what proportion that is now and remind us of the timing on the new plant hitting the market with product on grade H.

The new plant that we're planning to introduce that this fall and in our -- out of our mountain cement plant, it is in the 25% range, 25% to 30% range.

And in our Texas plant, the joint venture, it is starting to approach 50% of our manufactured, not our total sales, because we do purchase a fair amount of product into that market.

That's great.

Thank you.

Glenn Wortman, Sidoti & Company.

Once the bid work is completed in the Midwest, would you try to see a major volume drop off from that plant?

Well, the answer is we're going to hit the winter, anyway, and so we would expect volumes just seasonally to drop off, but with no difference than we had in the past.

And really you're just now getting into the time where you're starting to bid for next year, so it's a little too early to tell you about a backlog of work for next year.

And then just on your cash usage, do you expect to continue to pay down debt?

Are you still looking at some potential asset purchases?

We look at everything.

So, until we found -- until we have found an opportunity, clearly we're going to pay down debt.

Okay.

Thank you.

Jim Barrett, CL King Associates.

Steve, given how early we may be in an up cycle in Texas and given the fact that the Texas Lehigh JV is sold out, is there any plans to allocate, any plans to increase capacity at that plant?

How would you try to capitalize on what could be a improving marketplace there?

Texas Lehigh has two import terminals in the state and we always had the ability to bring product in, exported product in and utilize those import terminals.

And that would be our first plan is to better utilize the import terminals.

We have not been doing that as much, because some of our competitors haven't been as fortunate as us and we have been able to purchase product from some of our competitors, which makes sense.

We would rather buy local product than import product from overseas.

As things get stronger and stronger in Texas, there is less and less purchased product available for the market, which means we would have to ratchet up the imported product into the state.

And that purchased product, do you achieve distributor-like margins on that?

It depends, right?

We get better margins.

They're obviously not the full cash margin that you'd get out of a manufactured plant, but we do get good margins on it.

And then in concrete and aggregates, have you announced any future price increases in ready-mix and aggregates?

We have and we have actually achieved some ready-mix price improvement in the Austin area and I think there is another price increase announced in the Austin area.

We've also increased -- we also have incurred a very small increase in the aggregate price within the Austin area.

Northern California still remains difficult, so not much improvement there.

And how about the frac sand opportunity?

Can you give us any sense as to what the capital commitment would be there?

It's a little early for us to get into those details, but we clearly have plenty of capital available to fund the project.

Are you looking for acquisitions beyond that and, if so, are sellers becoming more receptive as the market conditions start to improve?

This is a greenfield opportunity that we've developed and we actually have another greenfield opportunity that we're looking to develop as well.

That's interesting.

Well, thank you very much.

Ladies and gentlemen, we have no further questions at this time.

Thank you and we appreciate all of the questions and looking forward to the call in the coming quarter.

Thank you very much.

And that will end our conference today.

Thank you very much for joining us and you may all now disconnect.

Have a great day.