Eagle Materials Inc. (EXP) Q3 2010 Earnings Report, Transcript and Summary

Welcome to the financial results for the third fiscal year 2010. During the presentation all participants will be in a listen only mode. Afterwards we will conduct a question and answer session. (Operator Instructions) As a reminder, this conference is being recorded Wednesday, January 27, 2010. I would like now to turn the conference over to Steve Rowley, CEO and President of Eagle Materials.

Welcome to Eagle Materials’ conference call for the third quarter fiscal year 2010. Joining me today are Craig Kesler, our Executive Vice President Finance Administration and 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 slides covers our cautionary disclosure regarding forward-looking statements made during this call. These statements are subject to risk and uncertainties that could 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. Eagle Material’s quarterly profits were about half of what they were for our fiscal third quarter a year ago with revenues off by almost a quarter. As disappointing as these results were, I view it as no small accomplishment the fact that Eagle Materials was able to remain profitable in each of its two major segments even in these extreme recession conditions for the construction industry. We’ve responded to this environment by rightsizing our wallboard plant network, managing our presence in the market place and focusing on core markets and opportunities that make financial sense. Additionally, our low cost operations continue to provide us with meaningful cash flow that allows us to improve our financial flexibility. General business conditions and the near term outlook for the construction industry remain difficult. As an example, our customers and our customers’ customers continue to report dramatically reduced backlog. We continue to adjust our operations to fit forecasted opportunities. This difficult environment encourages all markets to remain extremely competitive. At Eagle, all of our companies remain focused…

We continue to generate meaningful cash flow from operations despite a difficult business environment. We remain focused on cost containment, carefully managing working capital and capital spending. Our estimated tax rate for the first nine months of fiscal 2010 was approximately 28% and we expect the full year rate to also be 28%. This is compared to 30% for the prior year. This next slide shows best how Eagle has performed over the last 12 difficult months. Because we continue to generate meaningful cash flow from operations, our net debt to cap ratio was 38% at December 31, 2009 down from 45% at the same time last year. Thank you for attending today’s call, we’ll now move to the question and answer session.

(Operator Instructions) Your first question comes from Analyst for Trey Grooms – Stephens, Inc. Analyst for Trey Grooms – Stephens, Inc.: My first question is on wallboard volumes, it looked like the trending you guys saw there was a little bit better than the industry during the quarter as well as the comp that reported today. I wondered if you could just give a little bit more color on what’s driving that? Are you taking share, is it due to geographic locations. Just if you could add any color there it would be helpful.

We’re really seeing wallboard volumes at typical low winter seasonality so in fact it is a struggle out there in the marketplace to find sales opportunities. In fact, we’ve actually seen a little bit less opportunity and have given up a little bit of market share during this period. Analyst for Trey Grooms – Stephens, Inc.: Then in terms of price, obviously it came down a little bit from last quarter. I wonder if you can talk about where that price is today and how it has trended since the end of the quarter?

With the amount of excess wallboard supply available in the market, essentially double the demand, it’s really very easy to understand the current and very competitive nature in the wallboard industry. The wallboard industry during this winter period has gotten a little more difficult. I know there was a price increase announced but typically these days price increases actually end up creating competitiveness as it has this time and pricing currently has dropped another $2 to $3 from the quarterly average. Analyst for Trey Grooms – Stephens, Inc.: So around $87 currently then, somewhere in that neighborhood?

Yes, somewhere in that neighborhood, $86 or $87. Analyst for Trey Grooms – Stephens, Inc.: At that level I guess to kind of just follow on, at that level we think that most in the industry are below breakeven. Are you starting to see any stabilization there or do you think we could have further to go? Kind of what are your thoughts there?

I don’t really comment about what my competitors are doing I just know what I need to do. We actually find this environment somewhat invigorating. We continue to optimize our cost structure, that’s one of the reasons why we shut down the plant, that gave us a little more flexibility in the way we ran our operations and reduced costs but the things that we’ve been able to achieve have effectively mitigated this current price reduction. So as things get a little more difficult we’re going to continue to find ways to drive costs down and we have and so we looking forward think where we are on a margin basis is about the same as we were this past quarter. So while I can’t tell you what is going to happen next month but I can tell you so far we’ve been able to offset most of these declines. Now, there are a few headwinds, paper prices are going up, we try and inventory ahead so the cost of OCC doesn’t impact us as severely in the front end but OCC is going up significantly right now and we know that’s something that we will realize a couple of months down the road.

Your next question comes from Todd Vencil – Davenport & Company, LLC. Todd Vencil – Davenport & Company, LLC: It looks like your cash cost if I am estimating right on DD&A in the quarter, it looks like cash cost in the Gypsum segment was up about $2.50 sequentially per thousand. Am I thinking about that right? And, if I am is there anything in particular going on there?

That does seem about right and really that’s a function of primarily lower volumes and we did have a onetime hit for shutting down the Bernalillo plant. Todd Vencil – Davenport & Company, LLC: How much was that hit?

Oh, just a buck or two. Todd Vencil – Davenport & Company, LLC: What are you guys looking at on gas at this point in terms of hedging relative to the amount you’re covered and costs?

We have chosen to minimize that as we talked over the last couple of quarters but currently we’re about 10% hedged at just slightly over $5 for the next 12 months. We feel pretty good that that is a good place to be right now. Todd Vencil – Davenport & Company, LLC: Other than OCC and then I guess what we can all look at on gas is there anything else moving in terms of wallboard costs that we should think about?

No. Todd Vencil – Davenport & Company, LLC: Switching over to cement, a little bit higher was that again sort of lowering of that fixed cash portion there?

That’s correct but cement is hard to look quarter-to-quarter, you have to think kind of on a rolling 12 the way you handle maintenance. As I look at the first nine months our variable cost portion is down $4 to $5 and the fixed is only up about $1 to $1.50. So we made a lot of improvements on the cement side as well. Then, if you take in the fact the purchased product our cost of sales is down well over $6. Todd Vencil – Davenport & Company, LLC: On the cement side, prices sort of continue I think the price I’ve heard you use before is leakage in the price. Is that basically still a good way to think about what’s going on competitively there?

In a couple of markets they stabilized and you finally get down to a point where that’s your competitive position in the market and the freight from the next guy gets in the market you kind of get to the point where you just can’t go any lower. In a couple of our markets we’ve kind of achieved that and those are in markets where there are little or no sales opportunities right now. In a couple of our markets though there are still a little one off price competitiveness and you just handle it one customer at a time and you work through those issues as they come up. So our price in December however was not that much different than the price for the quarter, essentially about an $84 price in our December months. Todd Vencil – Davenport & Company, LLC: Last thing, would you mind telling me which of the markets have stabilized and which ones are still a little more competitive?

The far western one, that’s California and Nevada, you’ve heard me talk about this being a very, very difficult marketplace, that’s stable. The mountain region has been fairly stable for us and the Illinois had been stable, with all this new capacity that’s just come up it’s starting to have some competitiveness in that market again. Although, the competition has a tremendous amount of transportation freight to get there so it’s not a full fledge attack but they certainly are nibbling around the edges. In Texas we’ve also seen just right around the first of the year or middle of December some price reduction kind of in the southern part of the state as well as the northern part of the state. Todd Vencil – Davenport & Company, LLC: Final clarification there, in Illinois you talk about the new competition, is that the big plant on the river?

That is correct.

Your next question comes from Kathyrn Thompson – Thompson Research Group. Kathyrn Thompson – Thompson Research Group: Just going back to your cement, just to clarify your cement price at the end of the quarter at $84, that’s a good number to focus on in looking forward and modeling?

It is. Again, it’s still competitive and there will be the one off or price adjustments that are made throughout the quarter but it is not a across the marketplace decline in price. Kathyrn Thompson – Thompson Research Group: In terms of momentum of pricing, are you seeing more of a stabilization in that market or do you still see some pricing pull back for cement?

I would still say it’s not only that one big plant, there really are two other plants that came online within the last year to year and a half so you really have three plants that have come online but they are to the Chicago market quite a ways away, much closer to the St. Louis market. The more difficult market would be St. Louis and a secondary implication would be the further markets. When you’re on the river not only can you go to Chicago, you can go to Minneapolis, you can even go to Pittsburg and you can go down south as well and even end up in Nashville if you wanted so there are a lot of places to go on the river and eventually the river pricing will settled out. But, when we started this process the Chicago marketplace was one of the lowest priced markets on the river so you would anticipate that it would have less leakage than some of the other markets. Kathyrn Thompson – Thompson Research Group: What is your current capacity utilization for both wallboard and cement?

Our current capacity utilization is in the 80% range. Kathyrn Thompson – Thompson Research Group: For cement?

For cement. Kathyrn Thompson – Thompson Research Group: And for wallboard?

Wallboard about 50%. Kathyrn Thompson – Thompson Research Group: Also, could you give a little bit more color on the OCC headwind and we assume it’s potentially harder versus the energy headwind that we’re facing? Just a little more color about the dynamics and what you’re doing to mitigate that impact?

OCC prices for the first of the year went up about $30. They are anticipated to go up another $20 next month and $10 the following month. That is the general lay of the land for OCC. As I mentioned before we try to build inventory ahead of that which helps somewhat. We do have the ability to pass some of those costs through both to our Gypsum company as well as implemented a $40 price increase in the container board marketplace and we’re sticking to it. So either we get the price increase or we lose the volume but that’s the way we look at that part of the business. Kathyrn Thompson – Thompson Research Group: Speaking of price increases the January wallboard price increase failed and some of the feedback that we were getting from the field is that really there’s going to be another attempt, it will be later this spring but the thought is with higher energy prices it will be somewhat easier to pass on price increases. What’s your opinion on that statement and then does the OCC situation complicate matters somewhat?

That’s a little difficult to talk about but what I would say is this price increase that was attempted in a declining volume and when you have a seasonality period where you’re still chasing customers and your customers are losing share, you don’t know whether you’re losing share, your customers are losing share, that is an extremely difficult time to try to even attempt a price increase. In the spring things should be different, you should see that volumes are picking up with seasonality and that is at least a better environment to attempt to put a price increase through. Kathyrn Thompson – Thompson Research Group: Also just finally, I know it’s difficult to pinpoint but wet weather was obviously an impact on the quarter weather impact really had an effect of pushing sales in to the current quarter?

We had some wet weather in Texas, really wet weather in Texas in September/October so that kind of spanned a couple of quarters for us with the wet weather that we had here. But, once it quite raining volumes picked back up in Texas that we’re pretty happy with the volumes that are in Texas right now so very little impact I would say on average in the quarter. Kathyrn Thompson – Thompson Research Group: So as far as going from the quarter you just reported to the current quarter it would seem like you have some sales that have been pushed in to the quarter that we’re currently in. Is that a fair assessment?

If you were in the southern half of the US where the weather isn’t an iceberg. Kathyrn Thompson – Thompson Research Group: Outside of the Illinois market.

Or even in the Wyoming market or the Denver market it’s tough to pour concrete when it gets cold. Even the Reno market is fairly cold in the winter time. It’s hard to push that stuff forward in to a cold marketplace.

Your next question comes from Garick Shmois – Longbow Research. Garick Shmois – Longbow Research: Steve can you talk about your volume expectations for wallboard for this year? You mentioned that you hope to see a pickup seasonally when we get to the middle of the year but right now we’re at about a 17 billion square foot run rate. A competitor earlier today suggested a forecast of about 19 billion square foot implying about 5% increase, where do you stand on that? Does that seem reasonable to you?

We’re rocking along a very low bottom. I can tell you that I don’t think home building goes any lower, you’re sitting at very minimal starts so there really is only upside from there. The commercial market is off but it’s been weaning down and we’re approaching the bottom of the commercial construction as well. It’s near this area, don’t anticipate a big uptick in commercial construction so it’s really your feel or your take on what’s going to happen in the home building industry and that is really a function of how much support the home building industry is going to continue to get out of Washington. Garick Shmois – Longbow Research: Do you have a view on repair and remodel?

Repair and remodel unfortunately for the wallboard industry that is the number that after you take hard facts you subtract and you guess what’s left so that is a really difficult number to take a swing at. Garick Shmois – Longbow Research: Can you talk a little bit about industry capacity and maybe try to project a little bit maybe both the industry and maybe your behavior with costs on the rise? You mentioned OCC obviously and natural gas and diesel creeping up, other than your capacity reduction in 2009 there’s very little movement. Would you think that higher energy cost would lead to a meaningful shutdown in industry capacity this year? Secondly, we just saw you close down one of the New Mexico plants, could you theoretically take down more capacity during the downturn should these cost trends continue?

If you look at our plant structure we had to decide what’s the best way to balance the capacity we had with the opportunities that are available and so the real reason is we’re sitting in New Mexico with two individual plants both running about 50% capacity utilization. We knew we could lower our costs by running one plant at 100% capacity utilization and have no impact to the marketplace. They are about the same size plants so you’re feeding the market with the same volume that you were except for now you have lower costs because you’re only running one facility. That is the primary reason for it. The secondary reason is it gives us more system flexibility. You ship out of a plant 360 degrees, it’s in the middle of the country not on a coast where you might have a semicircle that you can ship from so it allows us then to take advantage of the lowest cost wallboard plant in the nation is by far our Duke Oklahoma plant. So it allows us to use that for any flexible opportunities that take place in the marketplace. So the market gets better, we’ll ship more from our Oklahoma plant back to the west and then we’ll ship more of the Albuquerque plant further back to the west. It just gives us a much more flexible system to operate and a lower cost system to operate. Garick Shmois – Longbow Research: Just lastly on the last call you talked about your plans to move forward with the Nevada cement plant modernization, is that still on track?

It still is on track and as I mentioned earlier in this call that marketplace is just very, very difficult so we do need to see some improvement, at least the start of improvement in California and northern Nevada but we are absolutely committed to and ready to move forward with that project.

Your next question comes from John Baugh – Stifel Nicolaus & Company, Inc. John Baugh – Stifel Nicolaus & Company, Inc.: First on cement, I think you made a comment that you believed that the cement demand will be up in ’10 versus ’09 and that was relating to stimulus. First of all did I hear that right and then kind of take me through the pluses there and how you see the offsets on both private residential and private commercial side?

The pluses are primarily related to the infrastructure which is a function of the stimulus so the real pluses there are we are going to see a little increase in residential, I’m not going to predict how much but we will see some increase in residential construction so there’s a little plus there. Commercial construction that is private in nature is next to nothing but we’ve already seen the weaning of that ahead of here. While a lot of people look at commercial construction they just look at the dollar test and they still see dollars coming down but that’s concrete that was poured almost two years ago. So as far as the concrete and the cement that goes in to commercial construction we’ve kind of hit the bottom of that maybe five or six months ago so we shouldn’t see much more decline as far as cement demand on the commercial piece. The uptick really then comes from a little bit of residential, not much less in commercial because we’ve already hit bottom there and an uptick in infrastructure once the stimulus starts to kick in, once the weather warms up a little bit. John Baugh – Stifel Nicolaus & Company, Inc.: Craig could you maybe help us with some cash flow assumptions? D&A this coming year if revenues were down X percent you would generate how much in working capital, your cap ex plans, etc.?

I’ll just briefly for this quarter $12.8 million for DD&A which will put us on a run rate for FY ’10 of about $51 million. We don’t expect that to change materially in FY ’11 so it should remain in that $50 to $51 million. Capital spending you’ll see for the nine months we’ve spent $12.2 million in FY ’10 I think FY ’11 should come in at that same $10 to $15 million range for all of FY ’11. Then working capital we’ve done a good job of managing our inventories and certain finished goods and receivables and payables we’ve done a good job of managing those working capital items. Over the year that certainly fluctuates certainly around the inventories as well as you build cement inventory through the December and March quarters and then you’ll see inventory work itself down typically in June and September as those are the busier months. But on the whole you might call working capital neutral from the end of FY ’10 to the end of FY ’11.

Your next question comes from Glenn Wortman – Sidoti & Company. Glenn Wortman – Sidoti & Company: It looks like the operating margin for your joint venture was up pretty significantly sequentially. Can you just tell us what went on there and is that 38% to 39% a good number to use going forward?

The improvement at Texas was primarily due to the maintenance that occurred in the prior quarter relative to this one. Glenn Wortman – Sidoti & Company: Was that 38% to 39% margin number a good number to use going forward?

I think as Steve has talked about before you have quarterly fluctuations because of the maintenance work that happens at a cement plant on an annual basis but the Texas plant continues to operate very well and it’s still a very good margin plant for us. Glenn Wortman – Sidoti & Company: Then just secondly on the paperboard margins where do you see that trending over the next couple of quarters?

Even though the paper cost we see and in fact we’ve been able to go out and find some – the Gypsum demand is obviously down, we have found some other markets to play in that have pretty decent margins so we really see that being pretty flat going forward even with OCC going up as we’re able to sell in to markets other than the Gypsum liner board market.

Your next question comes from [Justin Buaso]. [Justin Buaso]: I was wondering if you could talk a little bit more about your inventory levels? It looks like inventory in the balance sheet was down about 2% on a 24% decline in sales year-over-year. What’s behind that and where would you expect that inventory to turn to the next 12 months?

We really made a concerted effort this year not to build too much inventory. We knew that it was going to be a difficult year, we started last year and we really made a very concerted effort to reduce the amount of what we call materials in progress and cement inventories. We get a lot of money tied up in to both of those items. We also knew that we could have a very difficult winter so we just didn’t want to build a lot of inventory that you’re going to have to double handle. When you double handle it, when you put it back outside and you take it back inside it raises your cost every time you handle the stuff so we just made an effort really for about the last year and a half to try to manage those inventories and not let them get out of control. [Justin Buaso]: Would you say these are levels that you feel comfortable at? You wouldn’t necessarily expect those to go down in other words?

These are reasonable levels. What will happen is here it’s the dead of winter so they’re going to swell a little bit because you always build a little bit of inventory in the winter and then the spring shipping sales season starts and you deplete them down. If we were in a normal market by Thanksgiving you’re essentially empty and that’s the way you’d normally run the business. Unfortunately with the market of 30% this year by Thanksgiving we weren’t empty and the year before we had an issue with a customer up in Illinois and that created a swell from the year before but typically you would actually have lower inventories than this this time of year.

There appears to be no further questions. At this time I’ll turn the call back to you. Please continue with your presentation or closing remarks.

Thank you for calling and we look forward to talking with you at the end of our fiscal year.

Ladies and gentlemen that does conclude today’s conference call. We thank you for your participation and ask that you please disconnect your lines.