Eagle Materials Inc. (EXP) Q3 2009 Earnings Report, Transcript and Summary

Ladies and gentlemen thank you for standing-by and welcome to the Eagle Materials Third Quarter Fiscal Year 2009. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct the question-and-answer session. (Operator Instructions). As a reminder this conference is being recorded, Thursday, February 5, 2009. I would now like to turn the conference over to Steve Rowley, President and CEO. Please go ahead, sir.

Thank you, and welcome to Eagle Materials conference call for the third quarter of fiscal year 2009. Joining me today are, Mark Dendle, our Executive Vice President of Finance and Administration and CFO; and Craig Kesler, our Vice President, Investor Relations. 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 risk 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. Exceptional business performance is always magnified during difficult economic periods. Eagle Materials wallboard, paperboard and cement operational performance during the third quarter was outstanding. Our third quarter financial results were better than expected and reflect the incredible performance of our plants, sales and customer services organizations. When building materials, the construction products sales opportunities become difficult and when the outlook for future sales opportunities continues to trend down, Eagle Materials knows how extremely important it is to rapidly redefine the focus of every valued Eagle employee towards completely new and different challenges that will improve our competitive position in a weak marketplace. This may sound easy but in reality it requires a lot of hard work and flexibility. Eagle’s positive results show the amazingly swift transformation of our smart, loyal and dedicated employees. The willingness to quickly accept new direction has greatly benefited our shareholders. I have been asked to pass along a message from our employees to our shareholders. Rest assured that we realize that the current austerity…

Thank you, Steve. Eagle's financial position continued to improve during the quarter, thanks to operating cash flow improving significantly from the previous quarter to $41.2 million. Capital spending in the quarter was approximately $1.8 million. We anticipate our capital spending to remain at these low levels during the current economic downturn. As of December 31, 2008 our net debt to capital ratio improved from 48% in the September quarter to 45% in the December quarter. We are in the process of repurchasing $100 million of our senior notes. The purchase will be funded by borrowings under our revolving credit facility, which currently has a lower cost of debt than our senior notes. In addition to lower cost borrowings, the purchase of the senior notes modestly reduces our outstanding debt and improves our financial flexibility with the combination of fixed term debt, variable revolving debt in cash, while at the same time, maintaining a large amount of readily available liquidity. Thank you for attending today’s call. We will now move to the question-and-answer session.

(Operator Instructions). And our first question comes from the line of Kathryn Thompson from Avondale Partners. Please proceed with your question.

Hi, thank you. First on the wallboard segment, where did pricing end up at the quarter end versus the quarterly average that you stated?

Very near the average, right around the $105.

Okay. And then also given that your, there's already been some capacity takeouts over the past couple of months, do you see additional capacity coming out of the industry other than that’s been announced. And if so where geographically do you think it should come out?

We have not seen or heard of anybody announcing capacity coming out of the marketplace. The only thing that we know, the majority of the new capacity that’s been added in the last one to two years is all been predominantly in the Mid West or East predominantly in the East. So that’s where the biggest supply-demand imbalance currently resides.

Okay. Moving to cements. Did you saw your cement volume out of your plants in the quarter and what are your prospects for the current quarter?

No, we have not sold out our Illinois cement plant for some time for at least fall of this year. I think in the quarter this year we sold that plant out of that exception. Go ahead.

For excluding Illinois which is running at two-third capacity as you said earlier excluding Illinois have your other plants sold all its volume.

We continue to sell out our volume, although we have grown some inventory out there.

Okay. The same question on cement side as did in wallboard, what was pricing at the end of the quarter, does it include the average, and kind of tagging onto the previous question, do you anticipate idling any facilities in '09?

The price was about the same as the average right here at $95 range. And if business does not pickup in the west we certainly will consider having to idle some capacity out there as well.

And as far as pricing goes, we are hearing that if you include transport, import pricing is about on par and taxes as current production. Could you confirm if that is a similar trend that you are seeing?

Yeah, I think you have to take that on a case-by-case basis in the board and in the marketplace. So that would be hard for me to discuss. I can just tell you, I know that in Texas even though the import prices come down dramatically, it is nowhere near our cost of manufacturing.

Okay, perfect. Also to the aggregates, I have seen that there was a bit of a mix that continued to be a factor in your pricing in your just reported quarter. Do you expect mix to continue to be a factor in the current quarter?

Yes, this quarter maybe not as much because a lot of that had to do with a base or a sub-base job in Northern California with the weather being difficult, now there is very little work taking place this quarter. Maybe that will moderate in the fourth quarter, but again a large volume of our current sales are less than aggregate is going into base month.

Okay. All of it seems to equal on in terms of aggregate pricing in California. I understand mix was an issue in this quarter and the previous quarter, but all things equal for your California aggregate pricing. What has pricing done sequentially and year-over-year?

It essentially hasn’t moved much, it may move a little on a specific job, but in reality even if you build some inventories in aggregates. You don’t have a tremendous amount of capital tied up in the inventory build. So it’s much easier just to be patient and wait till the market turns rather than to try to dump that inventory into the marketplace.

So would you characterize I guess flattish year-over-year?

That’s correct.

Okay. And what about Texas?

Texas, the same thing. The issue always in Texas is because the deposits are fairly poor. There is a fair amount of base that has to, it will be mined when you are producing the washed aggregates. And so the base tends to get pretty competitive whereas the pricing on your concrete aggregates and asphalt aggregates tends to remain pretty stable.

Okay. What was D&A for the quarter?

Deprecation and amortization?

Yes.

For the quarter ended December 31st it was $12.7 million.

Okay. And then also I guess your interest expense on annualized basis will be about $1 million below on a quarterly basis from the Q3 run rate, is that a correct assumption?

That's correct.

Okay. That's all I have for right now. Thank you.

And our next question comes from the line of Trey Grooms from Stephens, Inc. Please proceed with your question.

Good afternoon. Just a couple of questions, one Steve, with cement volume and demand obviously down, can you talk about how you guys are running your cement plants differently in this environment. And then also how you see plant cost trending in '09?

It's really important to properly maintain cement plant as we said all along. We stay ahead of that instead of getting behind it. If properly maintained, these plants are very efficient and they generate tremendous amounts of free cash flow. But when the market turns and they have to operate not at full capacity, it really requires a completely different mindset throughout the entire organization. Cost reduction versus producing that incremental tonnage capacity becomes paramount, but you have to do that not at the extent of maintenance. So you force the efficiencies to be better and the cost of the materials that you use as well as you find ways to use less energy and less fuel and ultimate fuels that may cost a little less to produce the products. So tremendous amount of energy that goes into that, you also minimize your maintenance cost as opposed to really bringing in a lot of outside help to have an outage instead of being , get a ten day outage performance in eight or seven days, that gives you a lot of contract, lot of contractors they are coming in to help out, you just go ahead and accept that your maintenance is going to be 10 or 11 or 12 days and you do perform all the maintenance with your own employees.

Okay. And so with all that said, looking at cement cost or plant cost on a per unit basis, would you expect that to trend down somewhat in '09 given what you just said?

The answer is yes, we believe that’s going to be the case.

Okay. And then for wallboard, would you mind giving us a kind of your best guess on where you see wallboard consumption shaking out in '09?

It’s pretty difficult right now and if I had to put a guess, the front half is going to be annualized at less than $20 billion per annual basis. Let’s hope that the second-half of the year is a little higher and maybe we come in near that $20 billion square feet of demand for '09? But the front half is definitely less than that and trending down.

Okay, and then last question is, with all of the distress assets in aggregates in cement industry we are seeing out there right now. Are you guys seeing anything interesting, that you think you could possibly make a run at some point this year.

We are always open to look at opportunities, but it has to be the right opportunity, I think it's a little early but if things continue to decline from an economic perspective maybe something becomes available that peeks our interest.

Okay, thanks a lot, and congratulations on a good quarter.

Thank you.

Our next question comes from the line of Glenn Wortman from Sidoti. Please proceed with your question. Glenn Wortman - Sidoti & Company: Good afternoon, guys.

Good afternoon. Glenn Wortman - Sidoti & Company: Aside from, yes, the cost controls you just discussed is there anything going on in cement that’s allowing you to preserve margins?

That’s really the lever that we are pulling. Glenn Wortman - Sidoti & Company: Okay. And then looking to the paperboard segment, what's behind the profitability improvements there, because it looks like you are seeing some volume declines as well but margins look like they are going higher.

Very similar to what we talked about in cement; we were able to buy fiber that’s nice right now, that’s something that’s just happening because the economy fiber costs are lower but we dramatically reduced the freight to bring the fiber in. We have reduced our natural gas consumption by 27% that is a huge impact to the cost of producing paper. We reduced our waste quality product by 75% versus last year, and we have reduced our chemical spend by more than 34% by operating that machine better. So, it’s really that focus on cost control that is making the difference. Glenn Wortman - Sidoti & Company: Okay. And then finally with respect to cement pricing, it came down a little bit in the quarter. Was that due to weakness across all your markets or was that in any particular market?

It is primarily in the Midwest and the West, although things are starting to get difficult in all markets. Glenn Wortman - Sidoti & Company: Okay. Alright, thank you very much.

And the next question comes from the line of Todd Vencil from Davenport. Please proceed with your question.

Hi guys, how are you? Nice job on the margin performance in the quarter.

Thank you.

Remind me the magnitude of the January wallboard price increase?

The magnitude was 10% to 15% on labor, (inaudible) about 10%.

Okay. And only part of that sales, would you want to venture a guess as to how much of that’s held?

It's still a moving target, less than half though. But it's still a moving target.

Okay. And when you think about wallboard, do you have a feel for how much of a benefit you are getting from lower energy cost at this point?

Sure do. From a sequential perspective, we have had about a $7 or $8 benefit. Year-over-year I think we have had a benefit of about 2.5 months or so I think.

Okay. And do you have those numbers for cement as well?

For cement it’s a minor benefit there. I think and in fact just the opposite power cost are up about a $1 and fuel cost is essentially flat.

Any outlook for that to change or is that basically where you think you are going to be for a while?

No. I think we can improve on that. We are working on alternatives that will help improve those costs.

Alright. Steve, I have realized this is a question everybody shun to answer, but I would love to hear your thoughts on it, as the most educated of the two of us who are talking right now, anyway. With demand continuing to fall off, I am thinking specifically about wallboard, demand continuing to fall off. And with a really nice decline in your energy cost, looking at something like a 50% capacity utilization number, how is it that the competitive situation is allowing for you guys to continue to get price in that business? And that’s what I am really scratching my head. But I am glad you did it and you are doing a good job, but do you think you can continue to do that this year?

You just have to look, now you are talking about maybe some regional differences. The majority of this price increase as I mentioned a little bit earlier on the prepared comments was in some markets that were just irrationally low in the pricing, just made note of that. And people were at or below cash cost on average in those marketplaces. So, it makes sense to get some price increase there and we are achieving that. As you go forward, it's really a function of each competitor and how efficient they are. But as I look at wallboard, I am looking at all of our plants here and I see waste in the 1% level, the low 1% range. That’s incredible performance. And that’s what gets your cost below and gives you that advantage over the price in the marketplace. So, when you get to capacity utilization in the 50% level, it’s more a function of what is your delivered cash cost in the marketplace, and if you are more effective at that you are going to make money, if you are less effective at that or there is some transportation costs that impact that, then you have an advantage and you have a chance and if those costs move in, you are not going to continue to operate below cash costs, so you will have price improvements when those things occur.

Okay, that makes sense. Have you seen any in the areas maybe where the price increase isn’t holding, where the pricing wasn’t as irrationally low, are you seeing any discounting behavior by the competition, or is everybody kind of hanging in there?

In those cases, I don’t think we achieved much benefit, but I don’t think we gave much back this time. In November, we actually did get some back, but the October-November price increase was little difficult, this one I have not seen a lot of give back from the original price.

Got it. And on the cement side, I mean any kind of regional pricing or competitive differences any place standout has been either. You have talked about what the demand situation looks like, is anybody really pushing down on price in any of your markets?

We are not seeing that in any markets?

Okay. And then final question I guess, in the concrete business, can you just talk a little bit about how the sort of price cost dynamics are sort of playing out there where you guys are operating?

That’s difficult and the further in the value chain, you go down the tougher the competition you always get. So that’s very difficult for us in both the Texas market as well as in Northern California market. So margins are pinched down very-very small in both of those businesses.

Has your material spread declined in the last quarter?

Maybe not in the last quarter but they are pretty low.

Got it. Okay, thanks a lot.

Next question comes from the line of Mike Betts from J.P. Morgan. Please proceed with your question.

Hello?

Hello?

Hi, Steve. I had a number of questions. Can I just firstly clarify, you talked about $7 to $8 in terms of the natural gas benefit, that’s per 1000 square foot or is that some of the unit?

No, that’s correct.

Okay, could I ask then firstly, how much hedging you had in the quarter, I mean if you had a little benefit now with the natural gas prices or was there any hedging in place?

We had some hedging in place, not a tremendous amount, but we had some hedging in place, less than half maybe 40%. And then going forward we are about that same level 35% to 40% hedged and it's fairly low numbers. Okay, less than $7.

Okay. And the decline in waste paper costs and therefore I guess in liner board paper cost. Was that a benefit in the quarter in terms of a significant dollar saving there as well?

Absolutely.

Are you able to quantify what the saving was?

The fiber cost is down from about $165 to about $110.

That’s ton a fiber?

Per ton of fiber, that’s correct.

And how many tons of fiber did you use per size and square feet of wallboard?

I would have to get, I will get back with you on that.

Okay, thank you. And maintenance cost, I don’t think there were any in Q3, correct me if, in terms of major cement plants down for maintenance in Q3. Are you expecting any in Q4?

Yes, we will have a long kind of maintenance inventory shutdown at Illinois Cement. Even though we have been running that reduced capacity for winter, has been very difficult there. So we do have some maintenance to do, and with sales very-very weak, we are going to take an extended outage and perform some maintenance.

So will we see a cost that was much different from in terms of maintenances in Q4 as this year versus Q4 of last year?

I would have to check and see if we had maintenance at another facility last year’s Q4, but I am not certain. I am guessing you will see it little different.

Okay, and than I had a question if I could just on the financial side. I guess this one is for Mark. Are you using some of the committed credit facilities to refinancing this bond? What do you now have left in terms of committed credit facilities from the banks?

Well the bank credit facility is a $350 million facility and we will be drawing down $95 million for the purchase of the notes and then we have about $15 million outstanding on letters of credit which also goes against the facility.

And how long is it committed for?

Through June 2011.

Okay. And I really mind when I guess but I just wondered why the tax rate increased in the quarter? Is that the nine-month tax rate a pretty good guide to what you would expect for the year? And why did it go up?

It went up for a several minor reasons and adjustment in the depletion factor also true up of the state taxes and once we follow-up the return, the actual return in December 2008 for the prior year, we were also able to true up the rates for any return to accrual differences.

Okay. That's good and then last one just for Steve. From your comment earlier Steve, the $15 cement price increase, the industry stride in some market I mean no sign at all of that’s sticking in any of your market by the sound of it, would that be a fair judgment?

Absolutely.

Okay. Thanks very much.

And our next question comes from the line of Garik Shmois from Longbow Research. Please proceed with your question.

Hi, good afternoon. Thanks for taking my call. Just first off on aggregate prices, just wondering if you have any price increases in the market right now for first of the year?

We do not.

Okay. Any thoughts on whether you might be able to secure some price increase in 2009.

I believe the aggregate inventories released in our market are pretty high. And so until the inventory levels come down, it will be difficult.

Very good. And just lastly most of my questions have been answered. Just wondering as we look at cement import and there has been a lot of discussion about whether or not they will make way into the US and most of the answers we have been getting is no, but one of the markets that may be vulnerable in our estimation maybe Northern California. Just assuming let’s say import do enter the Northern California market are lower priced and domestically produce cement. Would it pose a threat theoretically to your cement produced out of the Nevada facility?

We really have a very small amount of sales in Northern California and it would just have a minor impact.

Okay, very good, good quarter. Keep it up.

And your next question comes from the line of Alan Mitrani from Sylvan Lake Asset Management. Please go ahead.

Hi, thank you. Just to understand the debt buyback, looking at the trenches of the debts you have, you said you bought back the Series A from 2005 and the Series A 2007 issues, is that correct?

It’s primarily the 2007, it primarily came out of the 2007 Series.

If the trench A from 2007 was only $20 million and the trench A from '05 was only $40 million. So maybe you can tell us which are the trenches that were taken out?

It was primarily out of the 2007 Series A, B and C.

A, B and C?

A, B and C. with a little bit out of the '05.

Okay. And is the goal, maybe I can understand the goal because you were good at laddering these explorations throughout starting in 2012/2014, I understand you can get a little bit buying back at a discount, 5% discount or maybe save some by arbitrage and the LIBOR, because LIBOR is low now on the credit line versus the fixed rate here. But is the goal to push out maturities and then figuring you will be able to over the next couple of years pay down the bank revolver?

Clearly it’s just really to give us the flexibility that we need almost to the point of, if the world really has some very-very difficult issues, what do you do if these markets really collapse? We don’t have any worries there. We feel that we are able to maintain the current amount of debt, they used to be $400 million without having any issues with covenant requirements. But as the world remains uncertain you wanted to have the flexibility to not have a gross debt covenant but more of a net debt covenant. So switching over to having a piece of term debt, a piece of variable revolving debt as well as cash on the balance sheet it allows you to handle any situation that may potentially come your way.

Okay, so just understood. Thank you. I think I understand, basically what you are saying is this gives you the ability if you wanted to deplete down pieces of the debt. As you go to pull down your gross that were as before you could not pay it down because it was fixed and trenched out?

That’s correct.

Perfect. Also do you expect to stay profitable this whole year this whole coming year?

Yes we do.

Okay, and do you feel like because your wallboard business has managed to stay profitable basically throughout this downturn maybe one quarter out, didn't I think you came close. Do you think the wallboard business also can stay profitable for that even with permits and housing starts continuing to trend down?

Yes I do.

And then lastly commercial construction, you always had a decent crystal ball, seems like there's not much on the drawing board for the back half of '09 into 2010. What’s your best guess as to what kind of commercial construction declines you are going to see for calendar ‘09?

Commercial construction is really an 18 to 24 month build out. So far the last maybe, certainly 6 to 9 months we have been starting to align. So, another 6 to 9 months out we should kind of hit a very low level and then see whether anything new comes about where you might start to see an improvement, but clearly it's going to continue to wind for another six to about nine months.

And the Stimulus Package when it gets passed how do you see that impacting you?

Probably not a whole lot in calendar '09, the majority of that would start to impact us in '10.

And I realize there’s not much money around for acquisitions these days but what are you seeing from distressed sellers or how often you are looking at books from competitors or small assets and maybe just give us a sense to what the market is like?

Yes, I think it's still a little early while there are some assets that will become unavailable we haven’t seen anything that really has enticed us to do a lot of work, but more and more become available every month. And we will remain vigilant because we think there are somethings that will really improve our position.

Great, thank you.

Mr. Rowley, there are no other questions at this time. I will turn the call back to you.

Thank you. I look forward to talking to you again in next quarter.

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