Eagle Materials Inc.
Q4 2008 Earnings Call Transcript

Published: 7 May 2008

[Operator:]

Ladies and gentlemen thank you for standing by. Welcome to the financial results for the fourth quarter fiscal year 2008 conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions) I would now like to turn the conference over to Mr. Steve Rowley, President and Chief Executive Officer of Eagle Materials, Inc. Please go ahead Sir.

[Steven Rowley:]

Good morning and welcome to Eagle Materials conference call for the fourth quarter and fiscal year 2008. Joining me today are Art Zunker, our Senior Vice President and CFO and Craig Kesler our Vice President of Investor Relations and Corporate Development. 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 web cast. While you are 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. Housing industry and financial market problems continue to feed off one another reducing building material sales opportunities. These reduced sales opportunities coupled with additional new products from the many new wallboard plants entering the marketplace has the U.S. wallboard industry operating at record low capacity utilization. This has created an extremely competitive marketplace particularly in the eastern half of the U.S. where these new wallboard plants have been built. While currently the reduced demand for wallboard is painful, the very large drop in housing starts is needed to alleviate the current extremely tight inventory of vacant houses in the U.S. For Eagle the impact to our fiscal 2008 was lower wallboard demand and lower wallboard prices causing Eagle’s annual comparative revenues to decline 19% and operating earnings to decline 44%. Additionally, our fourth quarter results were impacted by some one-time occurrences including a $4.5 million in start costs at our new wallboard plant in South Carolina, $3 million in major maintenance expenditures at our Illinois Cement facility and a $1.3 million true up of our state income tax accrual. Fiscal 2008 has proven to be both challenging and rewarding for Eagle Materials. We achieved record operating earnings in our cement business while selling out all four of our cement plants for a record 22nd consecutive year. We completed the construction and start up of our new wallboard plant in South Carolina on time and under budget and we steadily improved the operating performance at all of our facilities with respect to safety, quality, customer service and cost reduction. Wallboard revenues declined during this quarter because of the impact of very weak residential construction combined with the new wallboard supply entering the marketplace. Our average net sales price declined 35% compared to the prior year while our sales volume declined 5%. The 110% drop in wallboard operating earnings compared to last year’s fourth quarter was primarily the result of the 35% year-over-year drop in net sales growth combined with approximately $4.5 million of Georgetown startup costs. Excluding the impact of starting up the Georgetown plant our wallboard operations were profitable during the fourth quarter. Our fourth quarter’s net revenue decline was associated with a 3% volume decline. The majority of the volume decline was in the Midwest and the West where unusually difficult winter weather impacted our sales volumes. Our fourth quarter cement earnings were down 13% compared to the prior year primarily due to lower sales volume and the $3 million in major maintenance costs at our Illinois Cement plant. During this year’s fourth quarter approximately 21% of our sales volume was imported product versus 30% in the prior year’s fourth quarter. In fiscal 2008 we set a new company record for cement sales volume and our $96 per ton mill net was also a record high for Eagle Materials. Continued very high recycled fiber costs combined with reduced gypsum board liner board sales were the major reasons for reduced quarterly and annual comparative paper board operating earnings. The lack of significant large construction projects and extremely weak residential construction has created a very difficult market for concrete and aggregates businesses in Northern California. This was the primary cause for reduced quarterly and annual comparative results in concrete and aggregates. Art will now cover Eagle’s financial position.

[Arthur Zunker:]

Thank you Steve. During fiscal 2008 we generated approximately $151 million cash flow from operations, a 38% decline from the same period a year ago. Approximately $97 million was utilized to fund capital expenditures the majority towards the construction of our new wallboard plant in South Carolina. The combination of capital spending and repurchasing stock has increased our net debt to cap ratio at March 31 to approximately 48%. During the year we issued $200 million in senior unsecured notes in a private placement transaction. The average maturity of the notes is approximately 10 years with an average interest rate of 6.35%. At March 31, 2008 we had no borrowing outstanding on our outstanding credit facility and our first principal payment on our outstanding note is not due until 2012. In fiscal 2008 we paid $45.8 million to the IRS to stop interest while we appeal their proposed adjustment to our tax returns. Additionally, our fourth quarter tax rate was impacted by $1.3 million due to the true up of our annual tax rate. Excluding the one-time true up amount our fourth quarter tax rate would have been approximately 31%. Thank you for attending today’s call. We will now move to question-and-answers.

[Operator:]

(Operator Instructions) Your first question comes from the line of Garrick Schmoies of Longbow Research.

[Garrick Schmoies:]

I was wondering if you could talk about wallboard pricing trends during the quarter particularly with respect to the announced increases in February and also if you can shed some light on the increases that were announced in April as well?

[Steven Rowley:]

As you know it really is a very dynamic time in the gypsum wallboard industry. We are going through a really painful structural evolution in the East where numerous large new synthetic gypsum plants are now delivering product into a shrinking market. Of course as is the norm for this industry, competition for market share generally drives pricing down below industry average costs which is where we are today. Subsequent efforts to cover some of these ever increasing inflationary costs are being met with fierce resistance from builders and contractors whose businesses are also struggling. So in regards to the February and April price increases at best we covered the increased delivery cost associated with the current very high price of diesel. Subsequently if we want it down to a mill net because the delivery cost is subtracted from the gross price to get to our mill net. Currently Eagle’s price is essentially flat with our fourth quarter results.

[Garrick Schmoies:]

Are you seeing maybe a regional discrepancy with respect to pricing, especially given the capacity that is coming on line on the East coast?

[Steven Rowley:]

Yes. Pricing is always very competitive in this industry in all the markets but yes you can say that pricing has been more difficult in the East associated with the dramatic increase in supply hitting that marketplace.

[Garrick Schmoies:]

Can you just update us on cement price increases? I think in the press release you mentioned a positive outlook for Texas but can you talk about the Mountain Cement plant and Nevada as well?

[Steven Rowley:]

Where we stand today is essentially the only significant price increase that is holding is the $10 per ton price increase in Houston. All other attempts at price increases at least in our markets really are not holding.

[Garrick Schmoies:]

On the maintenance at Illinois Cement is it possible to quantify the productivity improvements you hope to generate there?

[Steven Rowley:]

Yes it is. When we put the expansion project in place a year ago we had our assumption as to the fuel [inaudible] versus the kiln a little bit backwards. Therefore we had to change the flow from one coal mill to another. The reason for doing that is to allow us to burn a much lower priced fuel, petroleum coke, and the mill we had to [inaudible] was just too small to grind and very hard petroleum coke products that we wanted to burn in the [inaudible]. So it will be a dramatic reduction in our fuel costs once that coal mill flip flop occurs. So that is what we are achieving now and we do have 100% petroleum coke now on the [inaudible].

[Garrick Schmoies:]

So the maintenance is completed at the plant?

[Steven Rowley:]

That is correct.

[Operator:]

The next question comes from the line of Trey Grooms of Stephens Inc.

[Trey Grooms:]

First off, on cement it looks like if you X out Illinois the costs were actually down sequentially year-over-year which to me came as a surprise given that a lot of energy costs are up right now. Can you kind of talk about what is going on there and what is helping you guys achieve that low level cost for those plants?

[Steven Rowley:]

The reason for that was the modernization of Illinois Cement. By doing that we are able to dramatically reduce our cost structure of the company overall and then overcome some coal increased prices as well as power increased prices that we have had to absorb at other facilities.

[Trey Grooms:]

As far as Georgetown coming on line, you guys were able to I guess the start up costs were much lower than your original expectations. First off can you tell us how you guys managed that and what was different? Secondly kind of on the tail of the previous question can you give us an idea or reminder of what your expectations are for cost benefits with that plant coming on and the full impact of that plant?

[Steven Rowley:]

Clearly the Georgetown both construction and startup exceeded our expectations. It has gone very well. A lot of effort went into not only building a nice facility but training all of the new employees that we hired in that area. We are really fortunate to be able to hire a workforce that was very qualified. It was a marketplace that needs some new industry as there had been a recent steel mill that had closed so the quality of the employees we were able to hire in that area was outstanding and that helped us to rapidly bring this plant up to a very high operating efficiency.

[Trey Grooms:]

I know it is constantly changing and you said sequentially that your gross price for wallboard was essentially flat. Do you expect that trend to continue or do you think there is more pain ahead I guess in the industry? Or do you feel that we’ve hit an area here where we could see a bottom to wallboard pricing?

[Steven Rowley:]

Clearly the current pricing is very painful, but we still have the structural issue really very, very low industry capacity utilization if not the lowest in the history of the industry. So structurally we need to have something change, either demand to grow or some of the older 60-year-old capacity to close before we would have a good chance of getting a price increase to cover some of this inflationary cost that we are seeing.

[Trey Grooms:]

Lastly, I noticed you guys didn’t buy back any stock in the quarter. Not really a surprise given how aggressive you have been in the prior two. Can you give us an update on your thoughts on stock buybacks going forward?

[Steven Rowley:]

We are also going to continue to watch the wallboard industry to see where pricing finally turns but in the meantime we have got a lot of capital investment we are looking at going forward. Our Nevada Cement project continues to develop. We have now received our permit to construct from the state and are finalizing negotiations with the bidders as we speak. So timing for starting that project as we have stated in the past should be for early this summer.

[Operator:]

The next question comes from the line of Jack Kasprzak of BB&T Capital Markets.

[Jack Kasprzak:]

I wanted to ask about wallboard pricing as well. Steve I thought if I’m not mistaken there was a price increase announcement for April by the industry. Am I right to assume that given the factors you have already outlined that is probably going to fail or at least most of it if not whole? Is that the situation?

[Steven Rowley:]

Essentially Jack that price increase even before we hit the announcement date the majority of that had already been negotiated away with one-off deals. There might have been a little bit of money left to cover the increased delivery costs associated with diesel but it is just a very, very competitive market so it is tough to get a price increase in the wallboard industry right now.

[Jack Kasprzak:]

On cement, on the subject of price increases as well, you mentioned the only area where you have a price increase holding is Houston. You said Houston specifically. Is it not the case that there is some amount of pricing holding in other parts of Texas as well?

[Steven Rowley:]

It looks like the attempt to get $5 in the rest of the state is not going to hold.

[Jack Kasprzak:]

So that is a relatively new development, correct?

[Steven Rowley:]

That is correct.

[Jack Kasprzak:]

With regard to the Fernley, Nevada plant, how much of the cement that you guys produce at that plant do you typically ship to California?

[Steven Rowley:]

You kind of have to look at where you are in a cycle. During a couple of years ago or even last year I don’t think we shipped from the plant relatively little or no cement to that market. As Northern California and Northern Nevada has been hit hard with this home building recession we have stopped purchasing product to ship into Northern California and have started shipping from Nevada. But a normal market really little or no product would go to Northern California.

[Jack Kasprzak:]

So you guys don’t really have much dependence, if that is the right word or exposure on the cement side to the state of California then?

[Steven Rowley:]

That is correct. The exposure was from any profit that we would get from purchased product that we would bring into that terminal.

[Jack Kasprzak:]

Can you remind us how much you have left on your share buyback authorization? And also while you are at it capEx for 2000 [sic] and fiscal 2009 update please.

[Steven Rowley:]

I’ll let Art handle that.

[Arthur Zunker:]

We have about 717,000 shares left under the repurchase authorization. Then for capEx for fiscal 2009 we are currently looking at something around $115 million worth and part of that applicable to the Nevada plant that Steve talked about earlier.

[Jack Kasprzak:]

Nevada plant for the majority.

[Operator:]

The next question comes from the line of Glenn [Wardman] of Sidoti.

[Glenn [Wardman]:]

Where do you guys see maybe your wallboard capacity utilization trending to over the next year or so?

[Steven Rowley:]

We are going to be very near industry average so we think that we have with the new capacity we have brought on line of industry capacity we have got somewhere between 9-10% of industry capacity. In that range.

[Glenn [Wardman]:]

With respect to your four cement markets would you still say that consumption still exceeds domestic capacity and if so by how much? If you can just give us any kind of ballpark.

[Steven Rowley:]

Cement is a regional business and clearly the demand remains strong in the markets that we are playing in. If we look at a national basis there still is a need for imports in the U.S. but there are a number of cement plants that are currently under construction. I do not think that we will see a lot of capacity hit early this year but towards the end of this calendar year and next year we will see quite a bit of new capacity come on line in the cement industry.

[Glenn [Wardman]:]

Finally, as far as the two cement extensions what are your current projections for when they will be up and running?

[Steven Rowley:]

The timing for Nevada Cement is an 18-24 month build out as we are looking at the current marketplace. Our Mountain Cement facility probably is going to start up about a year after we start construction of the Nevada plant. As we look at the market we’ll decide whether we’re going to fast track that or go with a normal construction.

[Operator:]

The next question comes from the line of David Sacks with [Hawkeye] Capital.

[David Sacks:]

Steve could you talk a little bit about your perspective on the housing market? What you see housing starts to look like this year? When you might think that the supply/demand balance that you referred to in your opening comments would more normalize? Then if you can compare the current market conditions in wallboard to past downturns and typically when the industry has run at these levels of capacity utilization how much time or pain does it take before the high cost producers de-valuate or take action on their plants?

[Steven Rowley:]

The housing industry we talked about has a lot of inventory out there. The good news is the home builders have dramatically reduced the amount of homes they are building. If you follow permits they are down dramatically. That is going to help alleviate this issue. The financial markets I think are starting to show some signs of strengthening. If you put that into perspective some time in 2009 to see a turnaround in home building is not unreasonable. As far as the wallboard industry this is probably as far as capacity utilization as deep as I’ve seen it. Maybe many years ago it might have been deeper but this is a very deep trough regarding capacity utilization and it just depends on how long the very high cost plants want to continue to play this market before we see a turnaround. But clearly with the capacity utilization in the low to mid 60’s it is a very, very difficult marketplace.

[David Sacks:]

Is there anything unusual about the competitive dynamics given what has happened and the decline that surprised you in terms of pricing integrity or in terms of how your competitors are dealing with inflated raw materials costs and higher transportation costs?

[Steven Rowley:]

I think it is just…I really don’t see anything unusual there. Sometimes you have things moving diametrically opposed. One being the pricing coming down associated with what is going on in the market and the other with costs which have become maybe more dynamic than they have in the past especially with these diesel prices, natural gas, paper, starch, power costs…all of these things have gone up at the same time and it takes awhile for the industry to realize the impact of these increased costs and to realize how much that has reduced margins or negatively impacted margins.

[David Sacks:]

What is your best guess of the industry cost compared to Eagle’s cost?

[Steven Rowley:]

That is pretty hard for me to guess at.

[David Sacks:]

Would a number in the $110-120 range make sense for an industry weighted average cost given the age of capacity?

[Steven Rowley:]

There is so many plants and you have so many new plants and you have some old plants and you are in a transition where some of the older plants are shutting down. So it is kind of hard to pinpoint the industry average cost but that probably is as good a guess as I could come up with.

[Operator:]

Gentlemen there are no further questions at this time. I’ll turn the presentation back over to you.

[Steven Rowley:]

Thank you. We look forward to another call at the end of our first quarter.

[Operator:]

Ladies and gentlemen this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.