Eagle Materials Inc. (EXP) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Eagle Materials Fiscal Year and Fourth Quarter Results Conference Call. My name is Bopendra, and I’ll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Mr. Steve Rowley, President and CEO. Please proceed, sir.

Thank you, and welcome to Eagle Materials conference call for the fourth quarter and fiscal year 2012. Joining me today are Craig Kesler, our Chief Financial Officer; and Bob Stewart, Executive Vice President, Strategy, Corporate Development and Communications. There will be a slide presentation made in connection with this call. To access it, please go to www.eaglematerials.com and click on the link to the webcast. While you’re accessing the slides, please note that the first slide covers our cautionary disclosure regarding forward-looking statements made during this call. These statements are subject to risks and uncertainties that could cause results to differ from those discussed during the call. For further information, please refer to this disclosure, which is also included at the end of our press release. Demand for lightweight building materials is beginning to improve while demand for heavy side construction products enjoyed strong demand associated with an exceptionally mild winter. Eagle’s fiscal 2012 consolidated revenues increased 7% year-over-year due primarily to improved sales volume of cement and paperboard combined with higher net sales prices across each business line. For the year, Eagle’s operating earnings improved 14% with increases coming in each business segment, except for concrete and aggregates. Eagle’s fourth quarter revenues increased 22%, and operating earnings and earnings per share increased dramatically as a result of seasonally strong cement sales volumes and much improved wallboard net sales prices. While the mild winter experienced across most of the U.S. certainly helped our quarterly cement sales volumes, we have also experienced greater than seasonal demand improvement in March and April, indicating that construction activity is beginning to pick up in most of our markets. We are very encouraged by improving housing fundamentals and homebuilder enthusiasm. Eagle remains well positioned as we enter a construction up-cycle. A 7% increase in annual cement sales volume was the primary driver of the decrease in Eagle’s annual comparative cement revenues. Volume improvement occurred in all 4 of our cement markets. Texas cement volumes continued to be buoyed by strong demand in the energy sector and we expect this will continue. Average net cement sales prices have remained relatively stable for the past year in all of our markets, with typical seasonal variations explaining the changes in the fourth quarter. Cement price increases from $5 to $6 per ton were successfully implemented this spring in the Texas and Rocky Mountain regions. Price increases are expected this summer in the West and Midwest. The fourth quarter wallboard price increase had an important impact on American Gypsum’s profitability but that only tells part of the story. Escalating costs of raw materials and increased freight, both inbound and outbound, continued to pressure margins throughout the year. However, I’m proud to say that we haven’t stopped working on lowering our costs. In spite of the fourth quarter being our lowest volume quarter during fiscal 2012, it was also our lowest cost quarter of the year. Additionally, our paper mill continues to perform exceptionally well and remains sold out. As a result of the increase in raw material transportation costs, American Gypsum took a multipronged approach to improving its profitability of its gypsum wallboard business. First, we improved operational efficiency through well-executed capital expenditures. We also streamlined our plant operations, reducing employee head count and focusing on quality, plant efficiency and cost reduction, not volume. With this streamlined approach to operations, price remains more important than volume. And second, we implemented a price increase on all of our products to all of our customers effective January 1. Now let me turn this over to Craig for more details on the financials.

Thank you, Steve. Operating cash flow during fiscal 2012 increased 38% to $60.9 million, with annual capital spending of approximately $26.1 million. Excess cash flow was used to reduce outstanding borrowings and further improve our financial flexibility. Interest expense during the fourth quarter was $3.3 million, including a benefit of $500,000 related to reduced IRS interest. Excluding the benefit, interest expense on borrowings was $3.8 million, down from the prior year’s fourth quarter as a result of lower cost borrowings under our bank credit facility. The effective tax rate for the quarter was 29% and is a reasonable rate to use for FY 2013. This final chart is unique for a company in the building materials and construction product space, declining debt and an improving capital structure and this has all been achieved without the issuance of equity. We are currently starting to come out of a deep cyclical trough and Eagle’s low-cost producer position, strong cash flow from operations, quality products, exceptional people and our growth initiatives well position us for increased prosperity in the next up-cycle. Thank you for attending today’s call. We will now move to the question-and-answer session.

[Operator Instructions] Our first question is from the line of Trey Grooms from Stephens.

So can you talk a little bit, Steve, I mean you touched on it as far as kind of how March and April kind of looked. But can you maybe quantify a little bit more kind of what the trends were kind of as you move through the quarter and then obviously April and what you’re seeing, thus far, in May?

Cement has remained very, very strong. The volumes are 25% to 30% up for this first 6 weeks of this quarter. Pricing is -- we had a price increase in Texas of $6 that’s been fully implemented. Price increase of $8 in the Rocky Mountain region, and the majority of which has been implemented. So pricing and volume, volume’s strong in all of our markets; pricing improving substantially in 2 of our markets, and so very, very positive about cement going forward. On the wallboard side, volumes -- we’re just very pleasantly surprised with the current level of volumes and they’re trending higher than the first quarter. We just remain focused on quality service and quality products in our core markets. So again, as we’ve mentioned before, price remains more important to us than volume. Service to our core markets remains more important to us than volume.

And on that, would the wallboard pricing -- I mean, you guys did a great job implementing that and pricing up nicely in the quarter. Are you seeing any signs of it moving around at all here kind of as we’ve gotten into your fiscal first quarter?

So we’ve said before that we’re kind of really focused on price, and price, in fact, has really remained unchanged since the first of the year. So we’re very, very pleased with that, and again, pleasantly surprised at the level of volume with that same price.

Our next question is from the line of Jack Kasprzak from BB&T.

On wallboard pricing, do you think your average realization will improve a bit in the June quarter versus the March quarter? It was obviously up quite a bit in the March quarter, but maybe didn’t seem like it was in dollars up as much as the price increase.

So the pricing is just slightly better kind of -- if you look at March and April as compared to the average for the quarter. So I think pricing for us and we’ve really gotten -- gone through the majority of any backlog of job quotes we’ve had from the prior year. So pricing is pretty stable right now and we believe that it will stay that way. No reason not to because we still are very, very happy with the volume levels that we’re currently supplying into the marketplace.

So you’re obviously suggesting the June quarter in terms of wallboard volumes has a better trend than what we saw in the March quarter, but can you just talk about the factors that led to the decline in the March quarter for wallboard volume?

Certainly, a lot of that was ahead of the January 1 price increase. There was a large volume swing in December. So the biggest change in volume was January was a little slower. However, February picked up nicely; March improved nicely as well, but I can tell you it’s even improved beyond that in April and May. So volumes are improving and pricing’s the same as it was in January.

And the price increases in cement that you referenced for the summer in the West -- are those in the $5 range as well?

That’s correct.

Next question is from the line of Todd Vencil from Sterne Agee.

Steve, I understand the impact of the pre-buy ahead of the price increase. It does look like you guys, at least for the quarter, lost a bit of wallboard share. Can you talk about what might have been under that and whether you think that might be permanent or a temporary factor?

We just really are not focused on that at all. So we are really, as I mentioned in the earlier remarks, we really are focused on producing a very high-quality product and shipping it into our core markets. And the volumes we get are the volumes that we’ll get. We’re happy with these results, certainly much happier with these results than the results from the previous 2, 3 or 4 years.

Fair enough. Did you guys have much of an impact from job quotes that you brought into 2012 with you?

We started with a few, and in the early part of the quarter, we worked through the majority of those, so very little, if any, left there.

Any way to quantify what the impact was either as a fraction of your volume or as an impact on the average mill net in the quarter?

No. It would be hard for me to quantify that. Really haven’t done the calculations. Not substantial. But there’s probably more of an impact certainly in the earlier part with transportation costs. Transportation costs have eased a little bit now but they’re still high. Natural gas costs are coming up a little bit as transportation costs are coming down. That’ll probably end up being a wash in this current quarter. But just to kind of put transportation into perspective, if you look at over the last couple of years, that’s about a $6 change per MSF in mill net with increased transportation costs, whereas over that same period, natural gas costs have only reduced the production cost by about $2.50. So combination of diesel, combination of just trucking rates has had a huge impact on margins in the wallboard industry.

That makes sense. If we maybe come at a similar issue a different way and given that from your comments, it sounds like job quotes did have a bit of an impact on the wallboard average price, where do you think your mill net settles out now that those are sort of fully -- or almost fully out of the way?

So the implications with mill net are transportation, so my guess is that movements in transportation cost will have a much greater impact than any movement in job quotes.

Fair enough. The corporate general expense was a bit above what we were looking for it. Anything in particular in there in the quarter?

Really small kind of mostly one-offs. I’ll let Craig kind of go into some details there.

Thanks, Todd. So as Steve mentioned, there’s some one-offs, certainly a piece of that was associated with stock-based compensation. The other piece of it, the most significant one, would have been legal costs associated with our recovery efforts for the $100 million that we paid in our dispute with the IRS.

Can you -- do you have a number on that legal expense?

It’s slightly under $1 million for the quarter. And as we’ve started the discovery phase and some of the depositions, that will continue a little bit here into FY 2013, but, again, just trying to recover after we’ve requested our refund of the $100 million.

And last one for me, you called out maintenance expense in cement, and you said it was up $2 million year-over-year. What’s the sort of absolute number on that and how should we look for that to sort of play out?

If you really looked at it, our maintenance costs were up $0.40 a ton. We had, I think fuel was up about the same $0.40 or $0.50 a ton, primarily that was transportation cost, rail rates just getting the fuel to the plants, and then some purchased raw materials were up as well. Again, a lot of that’s associated with freight once again.

The next question is from the line of Kathryn Thompson from Thompson Research Group.

Just tagging along with the G&A commentary you just had. How should we think about G&A expense for fiscal 2011 particularly assuming that if you have better results, you should see an increase in incentive comp?

Yes. So for FY2013, so we finished FY2012 at this $19.6 million, we’ll be in that range, maybe slightly higher if some of these other things improve, as you mentioned. And then the same thing on the effective tax rate. This quarter with the earnings improvement, we’re at 29% and, yes, so it should be about in this same range. But on the corporate G&A, it’s really should be close to flat or so for next year.

And we talked a little bit about job quotes throughout the Q&A today, but it’s our understanding that the percentage of job quotes you had were meaningfully lower than that of your peers. What percentage of your overall jobs going into calendar 2012 were protected by job quotes and how does this compare against your industry peers to the best of your knowledge?

We just don’t know and we try to minimize that and some of the quotes had escalators on them and I’m sure some of our competitors’ quotes had escalators on them. It’s a question of what was the better price at that point in time. But I can tell you, currently, we have minimal, less than 3% left.

Now that you’ve been working to get API approval for your Class H production out of your Illinois facility, classic cement, what is the status of that process?

We’re very pleased with the product that we’ve produced. Really, our current plans now are to introduce that product into the marketplace this fall.

So it will be similar like the August-September time range you’ll introduce?

Well that’s on the cusp of summer and fall so.

Just looking forward, how much reasonably out of your Illinois facility could you produce of this particular well grade product in calendar 2012 and into calendar 2013?

With this product, you have to gain a reputation and it takes a while for that to occur. So it’s a slow ramp up once you introduce it into the market. Once it’s accepted and it’s working well, and more importantly, it is consistently made and consistently delivered to the product as the same product every time, that’s when your reputation gets to the point where it’s very easy to sell this product. So I’m not going to say that this thing ramps right up, but I’m going to say that as we produced this product and tested it, we are very, very pleased with the quality of product and we’re also very pleased with the systems that we have put in place at Illinois Cement to be very, very consistent in having a uniform product produced as well. So now it’s up to -- for us to prove that in the marketplace.

You also had in your prepared comments that wholly-owned cement volumes or cement volumes, in general, were and possibly impacted by warmer weather. In particular, wholly-owned were up very strongly for the second consecutive quarter. How much of this demand was driven by warmer weather versus just pure increased demand or just pure market?

When January and February, we were having strong sales. We believed that was really weather-related and it clearly was. As we got into March and then April and now May, there’s something beyond weather impacting our sales volume. So there is -- and this is for construction grade. So there is improved opportunity for cement volumes in our markets, and this is really in all of our markets.

Would you say that maybe half of demand in the quarter was driven by warm weather and the other half just increased demand?

It’s hard to tell but I can say that the winter’s behind us now. We’re into spring and summer, and volumes are very strong.

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

Just a follow-up question on your cement volume outlook. Looking at the PCA’s forecast nationwide, they’re pointing towards about 3% to 4% volume growth, obviously you’ve been doing much better than that from the sounds of it. This quarter has gotten off to a much better start. I was just wondering, how is your visibility into cement demand? And maybe you could provide some color as to what end markets are providing that outsized this growth.

So we’ll talk regionally a little bit here, because, Bend is a regional business. Texas -- very, very strong, okay, not only do we have the strong demand for the well, but also the construction grades are very, very strong in Texas, as we speak, which also helped in the implementation of that $6 per ton price increase. And then when you go out to the Rocky Mountain region, volumes are very strong there as well. If you get out to the West, we have strong volumes. A lot of it is associated with bid work that we’d obtained over the last year or so, and the same thing in Illinois, we have a lot of the demand going to jobs that we had put in place over the last year or 2. But volumes are strong, those jobs are picking up, where sometimes you bid a job and they really don’t get after it and it’s a little slow-going as far as the volume to the job. It’s not the case this year, and those jobs are moving like they’ve got other jobs in their backlog so they want to get this job behind them and move on.

And I guess just to follow up in Texas. I’d imagine that plant remains sold out. Can you just talk about how you’re viewing your ability to import into the Texas market and if you would think that you’re going to scale up imports to meet demand?

So currently, we are having to do that. Our first choice is to provide additional product domestically whether it’s from Texas or neighboring states, so we’ll look there first to try to help the shortage that we’re seeing for our customers and our own internal consumption. And then we’ll also ramp up the imports into our terminal in Houston as needed to meet the demand.

Was there any change in the quarter with respect to the amount of cement that you were importing relative to the year-ago period?

Not the past quarter.

And then just lastly, a question for Craig on the interest expense, should we assume somewhere around $3 million, $3.3 million per quarter as the run rate?

Yes, as I mentioned it, this quarter we had a little bit of a benefit running through there. I’d used more in the $3.8 million a quarter based on where we are current at -- outstanding borrowings.

Our next question is from the line of Glenn Wortman from Sidoti & Company.

Yes. Just focusing on the paperboard business, your margins were up pretty nicely in fiscal 2012 versus fiscal 2011. Can you just kind of give us the, I guess, the full year review of what drove that margin improvement and then what’s a good normalized margin to use going forward?

Yes, so 2 things really impacted that. The first being we -- the prior year, we’d had a real high spike in OCC and that moderated a little bit. And the next was a shift in product mix to much higher margin sales product, both increased sales to the gypsum business as well as increased sales to the bag business. So both of those things really improved our margins on a revenue side and then a decrease in OCC cost helped us as well.

So just on a go-forward basis, maybe just kind of over a long-term,3 to 5-year period, what do you think a good normalized margin is to use for that business?

Well, the margins go way up as the mix shifts. We’re starting to feel and we’re starting to see and there’s a lot of people starting to talk about homebuilding starting to recover. So as homebuilding recovers and we shift to more gypsum liner, our highest margins are always where we’re producing gypsum liner on that mill. So we anticipate those margins and earnings from paperboard to go up dramatically with the housing recovery.

And then just one other question on your joint venture in Texas. Sounds like you’re sold out down there, so any increased volumes in fiscal 2013 would likely come from imports. Would you expect some margin degradation for the joint venture if, in fact, that is -- becomes the case?

No. No. So what we’ll see is on the incremental sales, there is smaller margin on the purchase, but it is so -- and that’s always going to be the case. But we have also had a very nice price increase that should offset. So you’re going to have the pluses and minuses of that curve, but things are looking towards higher profitability, both from manufactured product as well as adding to that with purchased product.

Next question is from the line of John Baugh from Stifel, Nicolaus.

Quickly on the wallboard side, pricing sounds fairly set, but I was wondering if you could sort of give us your outlook on OCC, natural gas. The transportation we sort of already talked about. Any other cost associated with wallboard trends, how we think about that for the remainder of the year or the coming fiscal year.

OCC has moderated a little bit. It’s really hard to predict. A lot of times you’ll have China coming into the U.S. purchasing OCC and that price moves around with the amount of OCC that’s being shipped overseas. So that’s a hard one to predict. Natural gas has eased up a little bit. We still have not seen a need to try to hedge to any great extent. We’re very happy with our consumption and just slightly hedged with natural gas.

And then any update on the Poswell [ph] situation?

That is a market that has been a little slower. Things are picking up as I mentioned as far as some bid work in Reno but the regular construction in Northern California remains very slow. So it’s just slow ramping up those sales.

The next question is from the line of Todd Vencil from Sterne Agee.

Just a quick follow-up. Craig, do you have a CapEx number in mind for the coming fiscal year?

Yes. Not dramatically different than where we’ve been. For sustaining capital, we’re still in that $15 million to $20 million. But we also are looking at some developmental capital and maybe in about the same range.

And then, Craig, I don’t know if you have it handy, can you break out DD&A for us by segment and then give us a total in the quarter?

Just for the quarter?

Yes.

So you obviously, you get the year-end stuff from the 10-K, but for the quarter $12.8 million for the entire company. Roughly a similar breakdown from where we’ve been previous quarters, $4.1 million in cement, $5.1 million in wallboard, $2.2 million in paper and the rest is Con/Agg $1.2 million, $1.3 million.

Does that answer your question, Todd?

Yes, it does.

That’s all the time we have for questions today. Ladies and gentlemen, this concludes your call. I’ll hand it over to the speaker for any concluding remarks.

Looking forward to the next call.

Ladies and gentlemen, that concludes your call for today. Thank you for joining. You may now disconnect.