Eagle Materials Inc (EXP) 2013 Q2 法說會逐字稿

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

My name is Sharon and I'll be your operator 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 Steve Rowley, President and CEO.

Please proceed, sir.

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

Joining me today is Craig Kesler, our Chief Financial Officer.

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.

The discussion agenda will focus on the second quarter results, and then I will make some comments on our recently announced acquisition plans.

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 risk 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.

Increased demand for our products, combined with higher prices during the second quarter, resulted in a 22% year-over-year increase in Eagle's consolidated revenues.

Operating earnings and earnings per share increased dramatically this quarter, primarily because of improved wallboard net sales prices and strong volumes across all our major business lines and lower recycled fiber input prices.

As we mentioned in the press release, during the quarter we incurred costs related to the pending acquisition, as well as litigation costs associated with our lawsuit against the IRS that impacted our quarterly EPS by approximately $0.09.

A 6% increase in our quarterly cement sales volumes and a 2% increase in our average net cement sales price were the primary drivers of the increase in Eagle's quarterly comparative of Cement, Concrete and Aggregates revenues.

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

Our Illinois cement operation experienced an unplanned outage in late July and early August, which impacted this quarter's production costs.

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

We have announced cement price increases in all of our markets for either this fall or early next year, from $5 to $8 per ton.

Increased wallboard average net sales prices and increased sales volumes resulted in a 33% increase in our quarterly comparative of Wallboard and Paperboard revenues.

Operating earnings in our Wallboard and Paperboard business improved to $24.2 million for the second quarter versus $1.5 million a year ago, driven by improved wallboard pricing, improved wallboard and gypsum-facing paper demand and lower recycled paper input costs.

Our paper mill continues to perform exceptionally well and remains sold out.

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

Thank you, Steve.

Operating cash flow during the first six months of the year increased 143% to $66.8 million with capital spending of approximately $8.6 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 22% to $3.5 million, reflecting lower borrowing levels and lower cost borrowings under our bank credit facility.

The effective tax rate for the quarter was 31% and is a good rate to use for the remainder of the year.

In advance of our pending acquisition, we completed an equity follow-on offering in early October.

We issued a total of 3.45 million shares and the offering raised approximately $154 million.

The new shares will be included in our weighted average shares outstanding for the December quarter, bringing total diluted shares outstanding to approximately 48.8 million shares.

This next slide reflects the impact from improved earnings and cash flow from operations over the past 12 months.

Our net debt-to-cap ratio was 29% at September 30, 2012.

On a pro forma basis, giving effect to the pending acquisition, we would have had an approximate 45% net debt-to-cap ratio.

With that, I'll turn it back over to you, Steve.

Thanks, Craig.

With respect to our announced acquisition of Lafarge's cement plants in Sugar Creek and Tulsa, and related ready-mix aggregates and fly ash operations, all of our key criteria boxes have been checked.

They are all low-production cost assets, geographically close to the marketplace, geographically complementary with existing Eagle cement assets, and located in markets that are well positioned to participate in the US construction recovery while also providing access to additional major oil and gas basins.

These new assets will increase our annual cement capacity by nearly 60%, to 5 million tons, and provide an immediate meaningful contribution to cash flow and net earnings.

As Craig mentioned, we successfully completed an equity follow-on offering in early October and expanded our bank credit facility to fund the pending acquisition.

We are very excited about this opportunity to grow Eagle with some truly outstanding assets, as well as welcome the talented new group of employees to Eagle.

Thank you for attending today's call.

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

(Operator Instructions)

Your first question comes from the line of Trey Grooms, Stephens Inc.

Good morning, Steve and Craig.

Good morning.

First off, congrats on a great quarter.

But my questions are on the new cement assets here.

First off, can you talk about how each of these two plants compare to your existing footprint from a cost perspective, current utilization rates, et cetera?

And then as a follow-up to that, Steve, can you give us some color on how to think about the ability to run high-grade oil well cement from those plants?

What kind of oil well, cement mix had they seen in the past and kind of where do you think it could go?

Sure.

Thanks, Trey.

The -- both of these plants are very low cost plants.

So one plant is a -- is effectively a brand-new, very well engineered, modern plant built within the last four or five years by Lafarge and Sugar Creek.

And the plant in Tulsa has recently been modified to burn fuel quality waste, which has dramatically reduced production costs at that plant.

So they are both very well positioned as low cost plants in the marketplace.

So, excited to have both of these operations a part of Eagle Materials.

With respect to the ability to integrate these plants into our oil well business and serve a larger market to different basins, both of these plants are very close -- at least the Tulsa plant to some oil basins.

And the plant in Kansas City also has the ability to reach some other basins that we currently are not supplying.

So we believe that within the first year, we will be able to convert some of the production at both of those facilities over to high quality oil well cement.

And could you tell us, Steve, roughly where these plants are running from a capacity utilization standpoint?

Yes.

They are running about 75% to 87.5 % full capacity right now.

And they are both running about the same?

Both running about the same.

Okay.

Thanks a lot.

I'll jump back in queue.

Katheryn Thompson, Thompson Research Group.

Hi.

Thanks for taking my questions today.

You had another strong quarter of cement demand for your wholly owned segment.

Could you give a little bit more color on what's driving this and how sustainable this is?

Yes.

So demand is very strong and we, in fact, are sold out and two markets remain sold out in the mountain region and the Texas region.

So in both of those markets, we're scrambling to purchase other product to meet the demands of our customers.

So we're finding ways to bring product into the market -- into those marketplaces to meet demand.

Demand in Northern Nevada, Northern California; however, remains somewhat muted, although we are starting to see increased backlogs as we go into next year in that marketplace.

And demand in Illinois cement has been strong, primarily with the large bid jobs that we had contracted to supply earlier this year.

So with that piece, that's what has improved the -- our cement volumes in the Midwest.

It's really has been us changing bid work as opposed to day-to-day business.

And what was the impact of the unplanned outage in Illinois?

And also, if you could give an update on well grade cement production at that plant also?

Yes.

The -- we're -- as far as the impact is concerned, it was -- we had reduced clinker production, which impacted the production costs and some maintenance costs associated with it.

I don't think we were really able to define the amount, but it certainly was an impact to the earnings for the quarter that we had not anticipated.

And as far as oil well, we're now finally very pleased with the quality of the oil well cement that we're producing at Illinois cement.

And we now plan to move more aggressively into marketing a product that we have complete confidence in its superior performance characteristics.

And where's the initial market that you're targeting for this product?

The initial market that we're targeting will be towards the east, towards Ohio.

Okay.

Also, if you could talk a little bit -- tagging on with the previous questions on Lafarge assets, just with any new acquisition, there obviously are going to be some first-order strategic moves as -- not only as you integrate, but for things you would like to do differently with the acquired assets.

Could you give a little bit more color on what these strategic moves may be for the acquired assets?

We certainly need to kind of get our feet on the ground first.

But we clearly have defined a lot of small-dollar, high-return capital projects that we plan to implement in the first one to two years.

So it's really a function of not looking -- it's never one item.

It's always a 1,001 little items.

We've had a chance to take a pretty good look at it.

And we see a number of things that -- areas where maybe it's been a little starved for capital and we can, with capital, make some immediate improvements.

Okay.

And final question for the day, could you maybe put a little bit more color around the frack sand opportunity?

Sure.

We are -- construction is within budget, progressing very nicely.

We anticipate completion near the calendar year-end with products entering the marketplace by fiscal year-end.

Great.

Thanks so much.

Todd Vencil, Sterne Agee.

Thanks very much.

Good morning, guys.

Good morning, Todd.

Steve, you mentioned that you have some new price increases of $5 to $8 out in each of your markets for cement.

Can you just kind of walk through the details on where, when, and how much?

Sure.

Texas is actually this month, so we're really starting to see price increases this month in Texas for about $5.

All the other price increases range from $6 to $8 in the various markets and they are all scheduled for a January 1 implementation.

Got it.

Thanks for that.

And you mentioned that mountain and Texas are still sold out.

Can you talk about what the utilization rates look like and what you're looking for for the next few months in Illinois and Nevada?

They are in about the 75% range.

Okay.

And switching over to wallboard, I mean, at what point -- I guess talk about -- obviously demand's been good there.

Talk about what you're expecting and how you're thinking about managing capacity, adding shifts, things like that, as we sort of look toward the end of this year, first part of next year.

So what we've noticed is demand has really started to increase for wallboard.

Really, right now, we're at about an annualized pace of about 20 billion square foot per year.

So that's up dramatically from -- I think it was about 17 billion square feet -- a little over 17 billion square feet in 2011.

And the estimate this year is it will come in a little over 18 billion square feet.

So it's up well over 10% on an ongoing forward-looking basis.

We truly are starting to see housing recovery start to materialize.

As far as a price increase, we've announced a 25% price increase for the full calendar year 2013.

This will be price for all of our customers' work for the entire year.

Right.

And on the staffing question, are you guys getting close to the point where we're going to start -- need to think about adding shifts?

What we've done as volumes come up is we've added a body or two and worked a little more overtime just to meet demand.

Our focus remains on serving customers in our core markets -- very close to our plants in the core markets.

And transportation costs are still very, very high to ship wallboard any distance.

Got it.

Thanks a lot.

Garik Shmois, Longbow Research.

Thank you.

I have a question on wallboard volumes -- very strong in the quarter, out-paced the industry.

Did you see a pre-buy in your markets ahead of the price increase?

And if so, is it possible to parse out how much you think the volume growth was attributed to pre-buys as opposed to just organic demand in your markets?

Early on, we heard some talk about a pre-buy, but as this quarter continued, it became obvious that it was something more than just a pre-buy.

And as we made our rounds to our customers, we started peeking in their warehouses.

We didn't see a whole lot of wallboard built up in their warehouses.

So we really attribute the increased demand to increase in housing demand.

Okay, thanks.

And then a question on cement volumes.

When you reported in your -- in the prospectus a month ago, volumes were up about 13% in cement, I believe, through August, which would imply some deceleration into September.

Is this something -- you have mentioned that volumes are still strong, but should we be concerned about perhaps the year over year growth trends slowing down over the next several quarters?

No, not at all.

We had a very mild winter so there was a lot of work that got a jump start to the year that might have normally occurred later on in the year.

But, no, in general, we see construction demand picking up in all of our markets.

Okay.

And then just my last questions on pricing, it picked up a little bit quarter over quarter after the June quarter saw some sequential price declines.

Is this just a function of the timing of the price increases that you got earlier in the year flowing through or are you getting positive mix benefit as perhaps some of these bid projects roll off?

It's really the timing of the price increases.

It take as while for them to be implemented.

So we're starting to see the price increases impact our average mill nets.

Okay.

Great.

Thanks so much.

John Baugh, Stifel.

Yes.

Thank you, Steve and Craig.

I wanted to ask on wallboard, are you anticipating any difference in terms of orders and shipments relating to this year's price increase pending versus last years?

And do you have anything in place to sort of cap orders in front of the price increase?

We're -- we've really been kind of hand-to-mouth all summer long and this fall as far as wallboard shipments.

So we're doing the best we can to take care of orders as they come in and we'll add a few -- we've added a few people to help that out and increase our ability to produce slightly more wallboard.

But it's really just been a function of being patient and realizing that we can deliver wallboard.

It may not be tomorrow, but certainly within a few weeks we have met all of the customer service requirements of our customers.

Right.

So do you anticipate in the fourth calendar quarter here, Steve, that there would be much of a change in the cadence of orders-to-shipments versus the prior year?

Obviously the overall business, as you cited, is up.

So I would anticipate it will be up.

I'm just wondering whether the timing of the price increases is just the same or the order patterns might change in terms of what happened last year.

Last year we did see a pickup ahead of the price increase and then a -- kind of a lag after that right after the first of the year.

So over the two-month period, it probably averaged out.

That could very well be possible again this year.

Okay.

And then your numbers were obviously better than the industry average.

Obviously, you don't participate in every market around the United States.

I'm just curious from your seat, were your markets just better than the industry average or is there some implied share gain here in the [ballpark]?

Thank you.

I think our share quarter over quarter actually went down slightly -- flat to down slightly from where it was the quarter before.

So I think we're very happy with our position and happy with the markets that we're participating in.

Thank you.

Neil Frohnapple, Northcoast Research.

Hi.

Thanks and congrats on a nice quarter.

Could you guys comment a little bit more on the 25% wallboard price increase for next year?

Has there been any pushback from contractors or distributors at this point?

No.

I think we gave guidance earlier in the year for about this level.

And in fact I know some of the contractors have used that to quote work for next year.

And they are very happy that they have been able to sustain price increases for work quoted into next year.

I know that our price increase is a little bit less than what we have seen from our competitors' prices, so we feel that it's a very reasonable price increase.

And then pertaining to cement, what was the year over year tailwind from lower maintenance costs in the quarter?

And should we expect maintenance costs to be down year over year again in the December quarter?

Would definitely anticipate maintenance costs to be down year over year in the next quarter.

Okay.

And then one final one is a follow-up to Trey's question.

It sounds like the cement asset you are acquiring are very low cost.

Would you expect these plants to be accretive to the overall Company's wholly owned segment margins?

We really think that we'll have definitely meaningful immediate cash contribution to our cement operations once we close.

Great.

Thank you very much.

Ivan Sax, IE.

Good morning.

Good morning, Ivan.

The questions I have for you, please -- like you talk about oil cement capacity.

What kind of current capacity do you have?

And what is the demand?

And are you able to service all the areas where horizontal drilling's going right now?

So currently, that's not the case.

We do -- we are able to service the Eagle Ford very well out of our plant in Texas.

And we are able to serve the mountain region out of our plant in Laramie, Wyoming.

It's very difficult for us to reach other basins from those two existing plants where we produce the product.

We are developing a product and very happy with the product we have developed in Illinois and that product is destined to go east towards the oil basins east of Illinois Cement in the Ohio and Pennsylvania areas.

Okay.

Good.

So do -- will the new cement plants possibly be able to service other areas, geographic areas?

In the new cement plants, we'll be able to service areas in the Oklahoma and north of Kansas.

Thanks.

Second question, could you just draw the distinction between your fracking sand that you are going to be bringing to market in the first quarter versus -- I think there's a poly or mono.

Could you just --

Sure.

Yes, the sand that we are going to be delivering to the marketplace is a northern whites frack sand.

A very high quality sand that is very round and very hard and helps to increase the production from the wells that are fracked with this higher quality sand that comes from the north.

And is there much of that around?

I mean, what's generally being sold now, Steve?

Is it mostly the former or -- like the one that you've been -- is there much competition in that area for this particular kind that you've got?

So there is some sand that is currently being railed from the north down into the Texas market as well as there's some sand locally produced that enters the market.

And the sand that's locally produced has somewhat more difficulty with the higher pressure applications.

Right.

And then, Steve, are there any surprising market observations that you see out there, positive or negative, re any of the markets that we're in?

You know, everything really -- this is the first time that Craig and I have really looked at each other quarter over quarter with big smiles on our faces.

Maybe last quarter we had a little smile on our face.

This smile -- we're very pleased with all of our businesses and generally seeing construction improving across the board.

Now the final question, please, I know that the peak for your EBITDA was about $350 million the last time that we had the up-cycle.

Do you foresee, given the new assets that you've acquired, plus the changes that you've had, that this would possibly be able to meet or beat that $350 million?

Yes, we would be much higher than that $350 million with the same conditions.

And what kind of period of time would that come about, Steve?

When construction is back and we're building homes at a more normalized clip.

Okay, very good.

Thank you so much.

[Gashuan Sridharan], CL King & Associates.

Yes, thank you.

On the Lafarge assets -- I think they made $165 million in sales -- could you give me a breakdown on how much of that is cement and how much of that is aggregate, ready mix and fly ash?

Yes, we have not done that.

Okay.

Would you be able to give us a color on what the peak sales and margin of those assets were?

Yes.

The -- those assets generally produce peak at about -- cash flow of about $70 million.

Okay.

And the pricing in these markets, how are they comparable to Texas markets?

Comparable to Texas?

You know, every market's a little different, but I would say -- and it depends on the mix of products that you're selling.

But generally, the pricing relative to Texas is a little less than Texas.

If you look at it on an aggregate basis.

However, Texas is kind of awkward for us to talk about because we have a -- we really sell a lot of cement to two different types of marketplaces in Texas.

Okay.

And your agreement with Lafarge to supply them cement, would their prices be at market rate?

Prices are -- prices -- we are very happy with the supply agreement and the price associated with it.

Okay.

And in terms of CapEx, in order to convert these assets to cater for the oil wells, what kind of CapEx are we looking at?

Not a dramatic amount.

Again, some small dollars but not a dramatic amount.

Okay.

And you said these assets were recently built, so I assume they were up to EPA standards -- dry clean and all of that good stuff?

Yes.

Okay.

Thank you so much.

Thank you.

I would like to turn the call over to Steve Rowley for closing remarks.

Thank you very much.

I'll look forward to the next call in three months' time.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.