Eagle Materials Inc (EXP) 2013 Q4 法說會逐字稿

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

My name is Steve, and I'll be your operator today.

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

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

(Operator Instructions)

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

Now, 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 fourth 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.

Increased demand for our products, combined with higher net sales prices, resulted in a 30% year-over-year increase in Eagle's consolidated revenues, and a 190% increase in Eagle's earnings per share this past year.

During our fourth quarter, segment operating earnings and earnings per share were impacted by adverse weather and major maintenance costs at two of our recently-acquired cement facilities.

These repair outages lasted twice as long as a normal major maintenance outage, and were more extensive than Eagle generally experiences.

We have put in place our rigorous maintenance programs to bring these plants back to like-new condition.

Excluding these maintenance costs, we are very pleased with the performance of all of our businesses, with cement, wallboard and paperboard achieving year-over-year earnings and pricing improvement.

We are also pleased to announce that our new frac sand business, Northern White Sand Company, completed construction of its first processing facility in Corpus Christi during March.

The plant has been commissioned, and in April, we started selling products into the marketplace.

A 21% increase in our annual cement sales volumes and a 3% increase in our average net cement sales price were the primary drivers of the increase in Eagle's annual cement concrete and aggregates revenues.

For comparison purposes, Eagle's annual cement sales volumes increased 12% from the prior year, excluding the Tulsa and Sugar Creek sales volumes.

Cement price increases were realized in all of our markets during this winter and spring.

Increased wallboard average net sales prices and increased gypsum wallboard paperboard sales volumes resulted in a 29% increase in our annual comparative of wallboard and paperboard revenues.

Those same factors resulted in a 307% increase in our annual wallboard and paperboard operating income.

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

We went through our annual routine maintenance outage at the mill during the fourth quarter, which negatively impacted our operating costs and shipments during the quarter.

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

Thank you, Steve.

During fiscal 2013, Eagle generated $124.4 million of cash flow from operations, a 104% increase from the prior year.

The cash flow from operations, combined with proceeds from an equity offering completed in the fall, and borrowings under our bank credit facility were utilized to fund the acquisition of the Lafarge cement, concrete, and aggregate plants in Missouri and Oklahoma, build the frac sand processing facility, and make sustaining capital expenditure investments.

In addition, we paid dividends of $18.5 million.

Interest expense for the year totaled $15.8 million, down 5%, reflecting lower average borrowing levels and lower borrowing costs under our bank credit facility.

After considering the impact of the acquisition funding, interest expense should run near $5 million per quarter in this year.

Our effective tax rate for fiscal 2013 was 31%, reflecting improved earnings.

This final slide reflects our balance sheet post the transaction.

Our net debt to cap ratio was 41% at March 31, 2013.

Thank you for attending today's call.

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

Steve?

(Operator Instructions)

Stand by for your first question, which comes from the line of Trey Grooms from Stephens, Inc.

Please go ahead.

This is actually BG Dickey sitting in for Trey.

First question is on wallboard.

A while ago, there was some noise out in the investment community that there might actually be some slippage in wallboard pricing.

Obviously, you didn't see anything like that in the quarter, nor did your other public competitor, but can you talk about what wallboard pricing has done since the quarter's end?

Is it still sticking in the range you reported for the March quarter?

Sure.

The January price has been fully implemented, and demand remains strong.

You can see Q-over-Q order demand was up 9% in the fourth quarter, and orders since then actually remained robust.

We have actually finalized at least our April financials, and interim financials for wallboard and the mill mix is actually up slightly.

It's up to around $148.

Okay.

That's helpful.

Thanks.

And then switching to cement, you called out, I believe, $14 million in annual maintenance expense for these new facilities.

Doesn't sound like that's a good run rate going forward.

I think you said it was kind of double what it normally is.

Can you give us some help in terms of what we should expect for annual maintenance going forward on these facilities?

Yes.

So we're -- we are very rigorous with our maintenance programs.

They're very routine and very extensive.

We usually perform just one a year, and expect the plant to run for another 12 months after we finish it.

So maybe a minor outage here and there, but nothing major.

And so, when you pick up a new plant that has maybe been in a little different mode, maybe a little bit more episodic in their maintenance programs, that initial maintenance is going to require a little catch-up work, and that's in fact what we did.

So the majority of the catch-up work always occurs initially.

When you finally get into it, you may find a few other things that you know you're going to need to perform the next time, but you put the plant in condition where you expect it to run, generally for another 12 months.

And we may have a few other little things to catch up throughout the year, but not dramatic like this, the initial catch-up.

Okay.

So would it be fair to say for both plants, a $5 million to $7 million annualized number would be more in line with --?

Typically, depends on the type of plant, the size of the plant, but those are numbers that we see at our other plants on a routine basis, for the major maintenance.

Okay.

Great.

That's helpful.

And then on the frac sand opportunity, can you just give us an update on overall opportunity besides Eagle Ford, and how we can -- how we should think about start-up costs associated with that business?

So we commissioned the plant really early this quarter, and we're very pleased with the results.

The plant operates easily at rated capacity, quality and customer service goals have been achieved.

We have very high quality Northern White products out in the marketplace, and the ability to load trucks extremely fast, and not have a line of trucks waiting to get loaded, that has been proved out as well.

So, very excited with the initial commissioning of the frac sand plan.

We also additionally have some more product now on the river coming down to Corpus Christi.

As we progress throughout the year, we anticipate spending more capital and expanding our footprint beyond the Eagle Ford to other major shale play markets.

Okay.

That kind of leads into my next question.

Another E&P Company recently said on one of their earnings call, that they were lowering cost in the Haynesville by pushing more white sand.

That's historically been a ceramic market.

Logistically, is that a good basin for you to move into?

Which basin did you say?

The Haynesville.

The Haynesville.

That tends to be a dry gas play.

Don't know that there's a lot of activity in that market right now, has not been really one of our targets.

Okay.

And then lastly, and I'll pass it along, talk about with the increased capacity in the Eagle Ford, any concern there on pricing pressure?

No, none whatsoever.

Thanks.

I'll pass it on.

Thank you.

And your next question is from the line of Kathryn Thompson.

Please go ahead.

First on the frac sands, you'll selling third-party frac sand as of April, could you discuss the ROIC of these sales versus Eagle's current core business, and also additional clarity on the product that is going to be processed, pulled out of Illinois plant, the Illinois property, and when you'll be selling that?

We can tell you that we're very pleased with the margins on the initial sales.

They're really meeting or beating expectations of buying third-party sand and processing it to get the plant initially up and running.

We still believe that our plant in Illinois will be up and running middle of the summer time frame, sand getting down to corpus kind of early fall and that's when the margins will improve further.

In terms of return on equity, ROIC, is ROIC on your third-party sales at least equal to, or above core Eagle's returns?

That's really hard to -- we're just in the early stages, but the sales price, the margins and the cost to move the -- to buy the sand and move it down the river, all as expected.

So nothing's changed.

This is a very high return project, and it's a reasonable return, even with purchased product.

It's an exceptional return with our own product.

Just to clarify on your expansion into other frac sand opportunities, I assume these are going to be barge opportunities, so you can continue to take advantage of that cost differential, the arbitrage?

It will be a combination of both and it's really all about the best logistics to each market that we're chasing.

So clearly, the Eagle Ford that made sense, the best logistics and the best customer service was by barging down in Eagle Ford.

There's not any barging facilities that I know of up in the Dakotas, so that one will have to be handled a little different logistically.

Have not made a final decision on the Utica and Marcellus.

That one will be a close call, which gives us the best logistics.

Okay.

And once again, on the $0.21 maintenance costs, would you guess about half to a third is really more one-time?

Certainly more than a half would be one-time, would be my guess.

Okay.

Great.

Thanks so much.

Thank you.

And your next question is from the line of Jerry Revich of Goldman Sachs.

Please go ahead, Jerry.

Can you gentlemen talk about the frac sand ramp with the third-party cement, perhaps gives a sense for how many truckloads you're shipping, and what the initial customer use have been like.

So the June quarter frac sand sales will be minimal.

We're just testing out the plan, and kind of feeling the plan and the market out.

But we do have sand now on the river, and we plan to progressively ramp up our sales going forward this summer.

So the current quarter that we're in will be fairly minimal, starting to increase in the second and third quarters, ramping up throughout those quarters.

And Steve, how long do you need to be running operations before you feel comfortable opening up the product to full runs for your bigger customers, particularly the likes of Halliburton?

What do you need to see before you're comfortable ramping up and supplying in volume, how long of a test period are you looking for?

So we're going to be doing that this summer.

Once we get our sand down there and our sand in the marketplace, that's when we're really going to ramp it up.

So it's a two-step process here.

First step with the purchased product, and then the second step, once we get our sand down there, really ramping it up.

But having a nice customer base with good, high quality purchased product, coming right behind that with very high quality Illinois product in the fall.

And you had excellent cement volumes in a really tough quarter here from a weather standpoint.

I'm wondering if you could just update us on when do you think full-out across your footprint you'll be at full capacity utilization, and if you could, just give us a sense for the extent to which price increases are sticking across your regional footprint?

So cement prices, cement price increases, they're all holding firm.

We're very, very pleased with that.

Sales, even during a fairly rough winter, has not been rough down here in Texas.

It's been very strong.

Sales have also remained very strong in the mountain region.

Sales are actually starting to improve a little bit in Northern California and Northern Nevada.

That's very encouraging, first we've seen that in five years, and winter weather certainly has impacted sales in the Midwest.

However, customer backlogs are strong, and what we're seeing is very strong demand in between the storms, and I think hopefully the storms are behind us, but even during the winter when we had a narrow window and the weather broke, we had very strong sales.

So while our sales were less than last year in the Midwest, they were very strong when the weather was good, so we're very confident that sales are improving in all of our markets.

And Steve, from a pricing standpoint, can you just remind us what price increases you're thinking about for mid-year, or maybe even sooner, by market, if you could?

It's a little early.

You're just initially digesting a couple of these price increases, okay, maybe the ones -- some of them were in January.

Those are fully digested.

The April ones are in the initial stages.

But there still are price increase announcements starting to come out for the fall for a couple of the markets, we're starting to see that out west and down in Texas.

Okay.

Thank you very much.

Thank you.

And your next question is from the line of Garik Shmois of Longbow Research.

Please go ahead.

First question is on fracking sand.

You mentioned you're going to be spending some more capital for expansions.

Just wondering if you could talk about your potential appetite for making acquisitions in that business at this point.

Yes, right now we're really on track with just expanding our current footprint.

We do have, in addition to the very large reserve in Illinois, we do have options on other properties that make sense logistically for some of the other shale plays.

So if we get the entitlements, or feel comfortable about our ability to get the entitlements, we'll move forward and expand those options.

But additionally, we're going to build processing facilities that can easily take sand from our existing mine in Illinois.

Okay.

Thanks.

And, switching to cement, is there any planned maintenance in the June quarter that we should be aware of at this point?

So this is our typical, just a schedule that we've got on for our routine maintenance, has been landing in this first quarter.

So we performed major maintenance at our Texas plant, we perform major maintenance at our Illinois plant, major maintenance at our Mountain plant and major maintenance at our Nevada plant.

All this quarter.

From a comparison perspective, we did the same last year, so on a Q-over-Q, it should be about the same.

Okay.

Thanks.

And then just lastly on paperboard, you also singled out some maintenance expense in the quarter.

Could you quantify how much of an impact that was?

And then also, you had some decreased sales to external customers on paperboard.

Just wondering if there was any margin impact from that, as well?

So the impact of that, we did have a little longer maintenance, took us a little longer this year, we had a little boiler work we had to do on the machine.

To quantify the cost, year-over-year, our maintenance costs at the mill are up a little over $1 million, $1.1 million or something versus last year.

That was the impact of the maintenance cost at Republic.

And because the machine was down a little longer, we did have to back away from some of our external sales.

They tended to be the lower margin sales.

Okay.

Got it.

Thanks for the help.

Your next question is from the line of Neil Frohnapple from Northcoast Research.

Please go ahead.

Your wallboard volume growth in the quarter outpaced the industry again.

Just wondered if you continue to attribute that to faster-growing markets you're in, or if there's something else you can point to.

We're counting our blessings that we're in some very, very strong housing markets.

And then you mentioned mill net for April, 148.

What allowed the jump from the March quarter?

That's a combination of mix and logistics, and when sales are strong, you can kind of pick and choose a little bit.

You don't have to ship quite as far, so the logistics come in a little bit less.

So it's really just a function of picking and choosing the sales.

Okay.

And then have you seen a snapback in demand in your concrete and aggregates business in the Kansas City area, as the weather has improved from the adverse conditions we saw this past quarter?

Just as we speak, in the last week or week and-a-half, we've seen the snapback.

Up until then it was very, very slow.

All right.

Great.

Thank you very much.

And your next question comes from the line of John Baugh from Stifel Nicolaus.

Please go ahead.

Good morning.

Could you give us a pozzolan update, number one?

Number two, maybe some color around wallboard, where you're running capacity-wise and any cost -- energy cost and other cost updates on wallboard and paperboard?

Thank you.

So we continue to sell pozzolan out of our Fernley, Nevada operations.

Demand is just starting to finally improve in Northern Nevada and Northern California.

And in fact, there's a price increase that has been put in place of about $5 per ton in Northern California and Nevada.

So we're seeing that.

It's just volumes are still slow relative to what we had anticipated when we started this many years ago.

But as that construction market and the early signs of strong growth in construction in Northern California and Northern Nevada we're starting to see, so we look forward to that improving going forward.

You had a question about wallboard?

Yes.

Where are you generally on capacity, and then some discussion around key input costs or other costs?

We're running extra overtime right now to meet demand.

A couple of our plants are very effectively running wide open right now, and two of our plants are running three-quarters to slightly higher than that to meet demand.

So things are pretty tight for us right now.

Not to the point where we're ready to make a decision on firing up a new line or a shutdown plant.

Any input cost changes on wallboard?

Paper costs, I think we talked about paper, and our paper costs are fluctuating because we have a long-term supply agreement with OCC.

OCC has bounced back up a little bit, but it's not near as high as it was a year ago.

So the actual price of paper is down both internally and externally year-over-year, just a function of the contractual agreement.

So it would just relate it to the price of OCC.

And lastly --

Other than that, all of the other costs are fairly flat right now.

Thanks.

And then finally, just could you refresh us on what you've done with pricing regarding your customers for 2014?

Yes.

Once again, our customers were looking for direction on pricing for 2014, so in early April, we put another price increase announcement out there for 20%, starting January 1 of 2014.

Thank you.

Thank you.

And your next question is from the line of Kevin Money from Cleveland Research.

Please go ahead.

Just on the paper business, where are we at in terms of the mix shift into selling more paper to the wallboard manufacturers?

What kind of upside is there?

Our gypsum liner sales were up 38% year-over-year for the paper business.

That's really exciting, and really improves our margins.

In fact, I think this year the earnings from the paperboard business would be our second highest year ever for Republic Paperboard Company.

Just a similar question, on the cement side, where are we at in terms of getting some of that mix to more of the oil well cements, and how should we look at the ramp getting to that goal?

So oil well sales continue to prove, especially strong in Texas.

Also doing very well in the Mountain region.

Illinois Cement now has a high quality product ready for sale, and we're really just now sticking our toe into that market.

We'll be a little bit of time before we have -- there's some equipment that we need to install in Oklahoma before we really start producing a Class H oil well cement in Oklahoma, but that capital will be spent sometime during this year, be about a year out before we feel comfortable entering that market, although we do sell a Class C currently out of the Tulsa, Oklahoma plant.

And we'll look towards as we integrate the new plant in Kansas City, and look for the best margins, we'll look to produce that sometime during the year, and get the Kansas City plant qualified as well.

Great.

Just lastly, kind of broadly looking, could you give any kind of commentary on just the different end markets, what you're seeing out of resi, commercial and public?

So residential, you're seeing really, really strong multi-family.

I mean, it's very strong right now.

And in pockets, you're seeing single family strong, in certain particular markets, you're seeing residential strong.

Commercial is slow.

However, when you look at public works in certain areas, Texas public works are very, very strong and growing.

Great.

Thank you.

And your next question is from the line of Jim Barrett of CL King and Associates.

Please go ahead.

Steve, could you give us your expectations for incremental margins for cement and wallboard going forward?

I guess the easiest thing is to say, it's great to see construction starting to turn in America, and it's hard not to feel very invigorated with both volume and prices moving up.

To actually quantify that increase is kind of hard to do, but the directional trends are very, very encouraging.

We can certainly see that.

If you could just talk about the Buda plant, the joint venture specifically, considering that is sold out, is the 12% volume growth reported for that plant in the quarter, is that due wholly to imported product, or are you tweaking the production at the margin to get increased production?

It really is purchased product, and purchased product both imported and purchased from some other plants in the marketplace.

I see.

Okay.

Well, thank you very much.

You're welcome.

Thank you.

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

Well, thank you very much.

It was a great quarter and a great year for Eagle Materials, very exciting, as we started to do business, and we're able to integrate two new cement plants into Eagle Materials.

We're really looking forward to a fantastic fiscal year 2014.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a good day.