Eagle Materials Inc. (EXP) Q1 2009 Earnings Report, Transcript and Summary

Welcome to the financial results for first quarter Eagle Materials fiscal year 2009 conference call. (Operator Instructions) I would now like to turn the conference over to Steve Rowley, President and CEO.

Welcome to Eagle Materials conference call for the first quarter fiscal year 2009. Joining me today are Mark Dendel, our Executive Vice President and CFO, Art Zunker, our Senior Vice President and Treasurer and Craig Kesler, our Vice President 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 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 risk and uncertainties that could cause results to differ than those discussed during the call. For further information please refer to this disclosure which is also included at the end of the press release. Eagle Materials’ first quarter results were disappointing. Rapidly escalating energy and transportation costs severely and negatively impacted our wallboard operations performance and while a wallboard price increase was successfully implemented during the quarter, it did not occur until the last week. Therefore, it had very little impact on this quarter’s results. Our response to this changing environment has been decisive and swift to right size our capacity utilization of our plants and to professionally manage reducing our presence in the marketplace going forward focusing on core markets and opportunities that make financial sense. While currently the wallboard industry is suffering from dramatically reduced housing construction, the impact of minimal spec homes currently being built will have a positive impact once the inventory of new homes decline. Additionally, our first quarter cement results were impacted by adverse weather conditions in the Midwest and a shift in the timing of our annual major maintenance at our mountain cement plant. The impact of all of these items caused Eagle’s quarterly comparative…

In addition to lower quarterly earnings, increased inventory of cement, clinker and aggregates associated with lower quarterly sales volumes combined with increased spare parts inventory at Georgetown and Illinois Cement reduced Eagle’s quarterly operating cash flow. Capital spending during the quarter was limited to minor projects throughout our operations. We continue to negotiation with contractors on the new auto cement modernization project therefore no capital was spent on that project during the fourth quarter. As of June 30, 2008 our net debt to capital ratio was approximately 49%, essentially unchanged from March 31, 2008. Interest expense from the first quarter of fiscal 2009 includes approximately $1.4 million for an outstanding tax item with the IRS.

Thank you for attending today’s call. The operator will now move to the question and answer session.

(Operator Instructions) Your first question comes from Garrick Schmoies – Longbow Research. Garrick Schmoies – Longbow Research: I was just wondering if first off you can quantify the maintenance expenses at the [inaudible] cement plant.

Yes, that was of the $2 million plus or minus range. Garrick Schmoies – Longbow Research: Steve, could you talk a little bit about your confidence in your ability to sell out your cement plants for a 23rd straight year this year especially given volume weakness and a cutback on imports and the weather issues you had in Illinois here in the last quarter?

I feel confident in three of the plants that we’ll be able to achieve it but the very slow start in the Midwest is going to be difficult to overcome although we continue to work at ways to make that happen. Garrick Schmoies – Longbow Research: And are you concerned at all about potential price weakness?

No, as we continue to work our way through that volume clearly, our first and foremost way to move the volume is in a matter that’s not disrupted to pricing.

Your next question comes from Glenn Wortmann – Sidoti & Co. Glenn Wortmann – Sidoti & Co.: Just excluding the weather issues in Illinois, how much of the volume impact do you think was from lack of demand?

That’s a little hard to understand. The state of Illinois has had some budgeting issues that they have just been unable to pass a capital plan in Springfield. So, some of it is associated with that, some of it is associated with the weather and it’s a little difficult to tell which is which. Glenn Wortmann – Sidoti & Co.: Then just as far as the wallboard price increases can you comment on if you see this price increase sticking unlike the last ones and where you see prices going over the next few months to a year or so?

The June 23 price increase is holding very firm. It’s a little too early to know about the August price increase but the June 23 is holding firm and we’re looking forward to see what happens with the August price increase. Glenn Wortmann – Sidoti & Co.: Then just as far as the industry dynamics of wallboard, just on a national basis do you know where the current capacity is and how much capacity is expected to come online over the next year or so.

I think the majority of the capacity has come on line with the exception of one plant that will come on later on this year up in the northeast. So, I think all of the new capacity is online. We’re estimating that we’re operating at about 65% capacity utilization. Glenn Wortmann – Sidoti & Co.: Then with the continued weakness that we’re seeing in the residential side and then just the outlook on non-residential is deteriorating as well. Do you see that capacity utilization coming down much further?

It certainly has that potential and right now as a company we’re tailoring our operations to meet the demand in a declining market. Therefore, we’re focused on margin improvement which is a little more improvement than sales volume right now. We are also prepared to idle additional volume if needed. Glenn Wortmann – Sidoti & Co.: Then just also going back to the industry capacity, is much of the remaining capacity still the older higher cost variety?

That varies from competitor to competitor so that’s a little harder to answer.

Your next question comes from Jack Kasprzak – BB&T Capital Markets. Jack Kasprzak – BB&T Capital Markets: I was going to ask with regard to your wallboard mill net in the September quarter do you think with the price increase, the June price increase which the bulk of it you’ll first fully realize in September quarter, will that be enough to get the mill net higher from the June quarter even with costs on the rise?

Yes, that will be. Jack Kasprzak – BB&T Capital Markets: On the cement side with regard to the price of coal I think that’s up sharply this year. Can you remind us what you arranged for your coal purchases in advance and what situation would we be looking at if any change in 2009 with regard to coal prices?

We have some exposure to rising coal costs but in general we’re in reasonably good shape for the next 12 to 18 months. After that we have much greater exposure. We’ve got a little issue with a force majeure at one plant right now but we’re working our way through that. In general as far as coal we’re in pretty good shape. Jack Kasprzak – BB&T Capital Markets: So then through 09 as we know the world today maybe a little bit of an increase? Nothing that is going to seem like move the needle in a meaningful way?

Nothing that would move the needle in a meaningful way. Jack Kasprzak – BB&T Capital Markets: And it was mentioned that Northern California volume was down big in the quarter but some road projects started up recently, some large road projects, and I think a lot of people are aware that the state put through a bonding initiative a year and a half ago and maybe some of that money’s finally filtering through. But with the budget situation in California, how close are you to that? Is that a situation that we should be worried about? It looks like it’s deteriorating some. This money’s already been put in place. Is that California road situation something that’s of concern, do you think?

California is going through this budget issue. I know they’re talking about a number of ways to resolve it, one of which is raising taxes. So clearly you have to stay on top of everything that’s going on in California because it’s such a large state and has a large impact to the economy. But until you see where all that plays out, it’s hard to know what mixture it will bring. Jack Kasprzak – BB&T Capital Markets: I guess they haven’t even voted on the budget yet. Hopefully they’ll do that in early August.

That’s correct.

Your next question comes from Trey Grooms - Stephens, Inc.

The first question would be on cement price increases in Texas. There was some earlier in the year but it sounds like there could be some other price increases announced in cement for the Texas market. Could you give us an idea of what you’re seeing there and your expectations for that?

Sure. The price increases in April held and currently there is another price increase for Central and South Texas of about $5.00 per ton that was implemented in early July and it’s still a little too early to tell how well that’s sticking.

But just for your sense of the way the demand structure is right now in Texas, what’s your gut telling you as far as your feelings for the second price increase?

Demand is remaining strong and the cost of imports continue to go up, so that’s what we know and how that ends up is what we’ll find out in the next month or so.

And then on the volume on the cement volume fall off there, you spoke about weather in the Midwest and you also mentioned the demand continues to be weak in the Northern Nevada market. Can you give us an idea of how those two impacted the cement volume as far as maybe a closer look at tons or mix?

The majority of the volume that we lost in Nevada was purchased products so there’s not a huge amount of impact on earnings there. That’s in the 20,000 to 25,000 ton range. Then we also had some lower volumes in the Mountain region as well. That was really just a function of weather and as soon as the weather broke, the volumes started picking back up and the volumes are very strong there right now. But the vast majority was when we had all that rain in Illinois and the Midwest and surrounding states and there’s a lot of cement looking for a home right now. It’s pretty competitive trying to find a home but not too disruptive as far as trying to lower prices dramatically in these volumes. I think people are looking at larger swaps and other ways to move it which would minimize freight and also minimize any imports sucked into that market. So everybody’s working to resolve that in a manner that is not very disruptive to the market place.

Your next question comes from Mike Betts - JP Morgan.

Steve, I had three questions. The first two are probably quite brief. On Mountain cement and the maintenance, last year did that occur in the quarter that we’re now in or is it just brought further a quarter or what was the timing issue there?

It actually occurred in the second quarter, second or third quarter, kind of between those two.

My second question is, and I’m sure you’ve seen the USG numbers as well. They’ve always got a bigger price increase in the quarter. Some of that we see regional differences, but also was there any impact on your price of the opening of the plant in South Carolina? Was that also a factor in what happened to that headline price that we see?

Clearly there was a geographic shift for us so we had more sales out of South Carolina and all the new capacity’s coming on in the East, so that’s where pricing tends to be the most difficult right now. So you’re absolutely right. That was a part of it.

In terms of covenants, in terms of debt, are there any covenants that you’ve got that sort of devise a net debt to EBITDA or interest cover? Could you just remind us what those covenants are if there are any?

We do have some covenants and it’s the net debt to EBITDA is 3.5 times and the interest coverage ratio is 2.5 times.

The ready mix concrete price was quite a lot lower than in the fourth quarter or the previous quarter rather. Was that caused by regional changes or was there anything else behind that?

That was really primarily regional changes.

Your next question comes from Michael Corelli - Barry Vogel & Associates. Michael Corelli - Barry Vogel & Associates: What can you tell us about your wallboard price currently?

Currently there is a price increase that went into effect June 23 as we mentioned and that’s holding firm. And again we continue to tailor our operations to meet demand of our profitable market while we’re maintaining a minimal presence in our secondary market. So we’re backing off a little bit from the market place and that is helping to support the price increase. Michael Corelli - Barry Vogel & Associates: So do you have an average price of where you would be now versus what you averaged in the quarter?

It’s a little early because there is some protection that takes place for a week or two with some customers and there are some job quotes so it takes about a month before you can really fully vet that out. Michael Corelli - Barry Vogel & Associates: As far as your price versus USG what they reported today, is this on the same basis? Are they netting out transportation costs the same way that you are or is their price being reported on a different basis?

I think their price is reported properly. Some of their plants might be a little closer to the market place. Michael Corelli - Barry Vogel & Associates: Could you just talk about what your plans are for CapEx this year?

Art?

Yes, Mike, we’re looking somewhere in the total of $40 million to $50 million for the year. Obviously that number’s come down from last quarter since we’re delayed. The Nevada project’s delayed. We’re still negotiating with the vendors there and obviously the spend. It will be pushed later into the year.

Your next question comes from [Sanjay Sinh - Rubergson]. [Sanjay Sinh – Rubergson]: You are the lower cost players in the industry and you’re now at break-even or a little bit less in wallboard. What are your thoughts on how the other guys, how much pain their under? We’ve seen reports in the past where people have said, “Well, you know people just sort of grin and bear it out,” or are they in real pain and at some point they will cut capacity? If you could just comment on that issue?

It’s hard for me to comment on my competitors’ pain but I can comment on our pain. We don’t like it which is why we’re going to change the way we’re going to market. We’re going to reduce our presence and get back in the markets where we know we can make some money. [Sanjay Sinh – Rubergson]: So you’d be willing to cut back capacity, is that right?

Absolutely. [Sanjay Sinh – Rubergson]: The second question is more of a bigger picture one. You can say whatever you want to say. It’s more like the housing starts issue and in the last I don’t know how many cycles, three or four, it’s typically bottom at about 1 million and we’re still through that and going down. When you think about this issue, do you think that we end up with 700,000 starts or something before we hit bottom given the excess out there and all that stuff?

I think those numbers are a little hard to quantify. What I would really like to see is the real estate pricing stabilize. As soon as that happens then the financial market stabilizes and this thing turns around.

Your next question comes from [Justin Wistle - Gates Capital Management]. [Justin Wistle - Gates Capital Management]: I just want to make sure I understood. You said CapEx for the year $40 million to $50 million, is that right?

Yes.

So that means basically you have no outstanding capital projects for the remainder of the year, right?

Actually the $40 million to $50 million includes a reduced bidding from Nevada. By the time we get that project started, it’s going to be the latter part of the fiscal year. So that number’s reduced from what we previously announced.

Your last question comes from Garrick Schmoies – Longbow Research. Garrick Schmoies – Longbow Research: I just wanted to follow up on a previous comment you made, Steve, about potential capacity closures on your part. Would it be mostly in the form of shift reductions or would you be willing to close plants if necessary?

For us it makes sense just to reduce shifts. Garrick Schmoies – Longbow Research: So it’d be more of the same of what you have been doing and how you’ve been responding during the course of this cycle?

That’s correct.

There are no further questions at this time.

Thank you and we look forward to the next call at the end of the second quarter.