Aug 2, 2012
Operator
Good day, ladies and gentlemen, and welcome to the First Quarter 2013 Eagle Materials Earnings Conference Call. My name is Keith and I will be your operator for today.
At this time, all participants are in a listen-only mode. Later on we will conduct a question and answer session.
[Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. And with that, I would like now to turn the conference over to your host for today, Mr.
Steve Rowley, President and CEO. Please go ahead, sir.
Steven Rowley
Thank you, and welcome to Eagle Materials’ conference call for the first quarter of fiscal year 2013. 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.
Steven Rowley
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 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.
Steven Rowley
Demand for our heavy construction products and light weight building materials continued to improve during the first quarter. As we have mentioned in the past, Eagle is geographically very well advantaged with respect to early recovery construction market.
This quarter's results illustrate this advantage. Eagle's first quarter revenues increased 29%.
Operating earnings and earnings per share increased dramatically as a result of much improved wallboard net sales price and strong volumes across all business lines. We are encouraged by the improving housing fundamentals and Eagle remains well positioned as we enter this up-cycle.
Steven Rowley
A 26% increase in our cement sales volume was the primary driver of the increase in Eagle's quarterly comparative of cement, concrete and aggregate revenues. Volume improvement occurred in all of our Cement market and our Wyoming cement facility now joins our Texas plant in being in a sold-out position.
We continued to see strong demand from the energy sector for oil well cement, which we expect will continue. As we pointed out in the earnings release, our first quarter cement costs were impacted by approximately $8 million of maintenance costs that did not occur in the prior year's quarter.
Steven Rowley
Cement price increases from $5 to $6 per ton were implemented this spring in the Texas and Rocky Mountain regions. Price increases have been announced for later this summer and fall in the West, Midwest, and Texas regions.
In addition, there is an $8 percent [ph] price increase announcement in the Mountain region for January 1st.
Steven Rowley
Much improved wallboard average sales prices and increased wallboard sales volumes drove a 27% increase in our quarterly comparative of wallboard and paperboard revenues. Operating earnings in our Wallboard and Paperboard business improved to $19.3 million for the first quarter versus $1.3 million a year ago.
Additionally, our paper mill continues to perform exceptionally well and remains sold out. Now let me turn this over to Craig for more detail on the financials.
D. Kesler
Thank you, Steve. Operating cash flow during the first quarter increased dramatically to $19.1 million with capital spending of approximately $4.7 million.
Excess cash flow was used to pay dividends and reduce outstanding borrowings to further improve our financial flexibility. Interest expense during the quarter declined 18% to $3.8 million, reflecting lower borrowing levels and lower cost borrowings under our bank credit facility.
The effective tax rate for the quarter was approximately 30%. This final chart reflects our efforts to improve financial flexibility which positions Eagle for growth in this upcoming up-cycle.
Thank you for attending today's call. We will now move to the question and answer session.
Keith?
Operator
(Operator Instructions) Your first question comes from the line of Trey Grooms with Stephens, Inc.
Trey Grooms
First off, Steve, can you talk about how wallboard demand has kind of progressed through the quarter and also one of your competitors mentioned that they had seen kind of a pause in some of the demand for -- in some of their end markets. Can you talk about how your July is trended there and kind of what you're seeing?
Steven Rowley
Yes, our volumes again, we just remain pleasantly surprised at the level. Again, we think a lot of that has to do with our geographic position.
Those housing markets are stronger than some of the others in the country but we really are in a very nice position and our backlog of orders has steadily grown since January 1. So we started with backlog of maybe 5 million and now it's up to over 35 million for the backlog and continuing to rise since the beginning of the year.
Trey Grooms
So I guess, sequentially, from June to July there's been a continued improvement then, it sounds like.
Steven Rowley
That's correct.
Trey Grooms
Okay, great. And then on the Cement side, you pointed out Wyoming is sold out.
Can you talk a little bit about what's behind that? What's driving that strength in Mountain cement?
And then also can you kind of touch on how your other plants are doing?
Steven Rowley
Sure. The Rocky Mountain region is just recovering faster than some of the others.
The Denver market just commercial and housing seems to be improving faster than some of the other markets that are out there. And there's also the energy impact to the Laramie, Wyoming plant with the development required for the oil wells.
So that's really what has impacted the Laramie plant and we're excited to finally have that plant back in a sold out position.
Steven Rowley
If you go out West, it's still a little weak in Northern Nevada. Starting to see things pick up maybe in the Bay Area.
That may be starting to trickle out into Sacramento. Although it's still a little weak once you get out from the Bay Area and Silicon Valley.
But those areas are starting to improve. It's just a little far reach for that plant to get into the Bay Area.
Steven Rowley
And Texas, as we had mentioned, we are in a oversold position in Texas. When you get to the Midwest, there's work out there.
The work that we have been getting, and our volumes are up dramatically, is bid work that we bid over the last couple of years so it's a little lower priced work, but it does contribute cash to the business and we're happy to have that volume.
Trey Grooms
Okay. And then my last question is for Craig.
The wallboard costs, if you kind of look at them year-over-year per MFS, were up a little bit. Can you kind of talk about if there's something specific going on there.
I would have thought that with the higher volume it might have come in just a little bit.
D. Kesler
Yes. I'm sorry Trey.
So for this quarter total costs were about $88, a 1000. Looks to be down $6 from the prior year, from the June of 2011.
The significant benefit there is natural gas, is the vast majority of that improvement and then with the higher volumes the improvement in the fixed cost absorption.
Trey Grooms
Yes, I'm sorry. I must have been looking at my numbers wrong.
Thanks for clearing that up, Craig. and I'll jump back in queue.
Operator
Your next question is from the line of Kathryn Thompson with Thompson Research Group.
Kathryn Thompson
Just looking, I'm going back Cement segment. Two different things.
One, can you delineate what portion of demand increase is driven by the energy sector? Both at the JV, which would be the same as the at least half but maybe clarify that and then also in Wyoming.
And just finally could you give an update with the Illinois plant in regards to making well based cement there. Thank you.
Steven Rowley
So demand there is very, very strong in Texas, both for construction grade cement as well as for oil well cement and it is, again, a very large part of our manufactured volume is going to oil well cement and it may not be at 50% but it may be approaching that of the manufactured product at Texas Lehigh. And in Laramie, we're at 25%, maybe approaching 30% being oil well demand driven as far as the product is concern.
And as far as the oil well cement at Illinois, with the development continues on plan and we still plan to introduce that product into the marketplace later this fall.
Kathryn Thompson
Okay. In terms of the -- there's been some talk, according to our industry contacts, about price increase in early calendar 2013, January 2013 and you guys have given a little bit look ahead and there's certainly other talk from manufacturers in the field.
What are you doing to curtail the potential excessive pre-buy activity going into 2013 and can you make any comments from your customers about a potential price increase. In other words, are they supportive, or not, or just a general commentary?
Steven Rowley
It's a little hard to hear. Is this about wallboard that you're asking?
Kathryn Thompson
Yes. Yes, this is for wallboard specifically.
Steven Rowley
Yes. Well, earlier this year we gave guidance on pricing for calendar year '13 and many commercial jobs have long lead times and this guidance has actually helped many drywall contractors to secure jobs next year at higher prices.
So that was the reason because we had given a price just for the year of '12 and then as you got very early into this year realized there were a lot of jobs that we're bidding into the following year. So we went out and gave guidance, and we can tell you we've had very positive feedback from a lot of contractors that say that by giving them guidance they've been able to secure jobs next year at higher prices.
Kathryn Thompson
Okay. And, once again, tailing off the previous question about current wallboard volume trends.
How much of that do you think is core demand versus a little bit of pre-buy?
Steven Rowley
Yes. I'm not sure.
This would be a little early. Typically you think about pre-buy in the month right ahead of a price increase and we gave a price increase announcement that was just for calendar year '12.
So if you're thinking about calendar year '13, this would be certainly a little early for pre-buying.
Kathryn Thompson
And probably really more reflective of current demand? So this is probably, what you're seeing now is more reflective of what you're -- just for core demand in the market?
Steven Rowley
That's correct.
Operator
Your next question is from the line of Todd Vencil with Sterne Agee.
L. Vencil
Craig. I think last, first quarter you guys told us you had $3 million of maintenance that was your half of what you spent, or the impact anyway at the JV plant.
So if I take the $8 million greater sort of comment from this year, was the absolute level of maintenance in the quarter about $11 million?
Steven Rowley
I think the stuff at Texas Lehigh had more to do in the last quarter with some finish mill [ph] maintenance. The major maintenance on the kiln really occurred this quarter and actually we have major maintenance as planned in all 4 quarters.
Sometimes they'll move a month and move forward a quarter, or back a quarter. I think this year they all just moved -- some moved back, some moved forward and they just all hit in the same quarter.
L. Vencil
Sure. Fair enough.
And did that add up to about $11 million this quarter?
Steven Rowley
No. I mean, when I look at the maintenance costs, they're closer to what we would normally plan for annual maintenance for all of our plants.
Steven Rowley
So I don't think it was $11 million.
L. Vencil
Okay. How far out do you feel like you guys can get, and I know the kiln tells you when it needs to come down, but I mean are we looking at probably a couple of quarters now before we have to do any major maintenance again?
Steven Rowley
Yes. So when we perform these routine major maintenances, especially when you get into a sold out position, it's a once a year thing and you plan it and maybe it's 11 months, maybe it's 13 months but, typically, you kind of plan this somewhere around an annual cycle and you just get busy and you shut the plant down for about 1/2 a month and bringing in a lot of contractors and work a lot of overtime and you get the plant back in like-new condition.
Steven Rowley
When you're in a sold out position, it's critical that you have that because you want to have the cement available when the customers need it. You can't be up and down.
When you're not sold out, maybe you'll say, okay I'm going to skip maintenance, or I've got to have a short inventory control shut down. So you shut down for a month.
In the middle you do a little work. It gets a little erratic.
But once you're up and fully utilized, then you get under these planned annual maintenances.
L. Vencil
Makes sense. Looking at the cement, price came down sequentially.
We had a model [ph] going up just because we needed a price increase. Was the decline due to some of the lower cost bid work that you guys did in the Midwest and maybe some other geographic type shifts?
Steven Rowley
Absolutely. that's what it was.
We had very high volumes in the Midwest and a lot of that volume was associated with bid work.
L. Vencil
What was the -- can you talk about what the utilization was on the Illinois plant?
Steven Rowley
The utilization was low on the Illinois plant so we did have our maintenance outage and we had run our plant a little longer than we had the year before during the winter to build up some inventory. We were in the middle of some labor negotiations and we wanted to make sure that we had plenty of inventory for these bid works when the construction season started and therefore we were kind of bulging at the seams so when we shut down for the major maintenance, we also took an extended downtime to get the inventory level back to normal levels.
L. Vencil
Got it. Got it.
And then I guess the final one for me. We've heard a couple of cement guys talk about starting to use natural gas to fire the kilns.
Is that something that you guys have looked at or can do and can't do?
Steven Rowley
The answer is yes. And we are doing it where it makes sense.
L. Vencil
Okay. Any color on how many of your plants that might be available to?
Steven Rowley
Currently, I think we're burning it at 2 of our plants.
Operator
Your next question is from the line of Jack Kasprzak with BB&T Capital.
John Kasprzak
Is it possible to break out the $8 million of cement maintenance between the wholly-owned plants in Joint Venture?
Steven Rowley
I don't have that off the top of my head but we did a very, very thorough job at Texas Lehigh and, of course, then that becomes -- we'll subtract half of that because the JV. Craig would have to look into how those numbers -- I have not looked at it on that basis.
But I can tell you we probably put more money and time into that maintenance than the others, especially with the demand in Texas and the demand for oil well cement. We want to have surety of supply available for our customers there.
John Kasprzak
Okay. What is the capacity of that Texas plant now?
Steven Rowley
The Texas plant manufacturing capacity is about 1.4 million.
John Kasprzak
Okay, that’s fine. Back to the issue of cement prices, it sounds like you’re more confident on the price increases.
There are more of them, so would we expect to get more of an impact on our average cement sales price in coming quarters from these price increases versus what we’ve seen where it’s been a little more, I guess, flattish, maybe somewhat erratic from quarter to quarter?
Steven Rowley
So, as the volumes adjust to more regular construction, or regular day-to-day work versus some of the bid work, the answer is yes, the price should improve.
John Kasprzak
Steve, your comment on housing with regard to encourage by the improving fundamentals, and you mentioned your geographic exposure there, but what -- is it, your backlog is building and you’re seeing customers doing more in the housing area? There are more conversations on the ground about projects starting?
Is that how you’re gauging it or are you just looking at macro numbers, which are also encouraging? What’s kind of increasing your confidence in what’s happening with housing in your business?
Steven Rowley
It is really in the core markets that are close to our plants. Our plants just are fortunate to be around markets that are a little bit better off than the national average.
Some of our markets are obviously close to some markets that we mentioned, that really helps us cement the energy sector. Well, in addition to that, you need infrastructure to go with all of the construction activity associated with the energy sector and the improvement in that area.
Steven Rowley
Clearly, that works very well for our plant in Oklahoma down into Texas, and our plant in Colorado into the Colorado/Rocky Mountain Region, where there’s these huge energy plays. Demand has also been pretty strong for our plant in South Carolina, so we’re really happy with the weighted [ph] demand.
Then, out of Mexico, Phoenix is starting to pick up a little bit, so we’re starting to see demand in markets that are very easy for our plants to ship to.
Operator
Your next question comes from the line of Garik Shmois with Longbow Research.
Garik Shmois
Just a couple solid [ph] questions for me, just on some net pricing and then the mix in the Midwest. Just wondering if you could maybe provide a little bit more color on how long you anticipate some of the bid work to be a negative mix impact on selling prices, all things being equal?
Steven Rowley
Yes. Well, at least, out of that one plant, we still have a fair amount of backlog.
But I think we shipped a higher percentage there in this past quarter than we did from our other plants. So, I think our other plant volumes are picking up now relative to that plant, and so the average for the company will get better.
Whereas the pricing in the Midwest should not improve that much, and should still be impacted by a fair amount of bid work that we haven’t completed yet.
Garik Shmois
That’s helpful. Then, just a couple more questions on the maintenance expense, just so we understand a little bit more.
Is it fair to assume that all of the maintenance that you are planning on doing as you see right now, your annual maintenance occurred in the first quarter, is there any lingering maintenance still left to be had?
Steven Rowley
Typically, in the winter we’ll do some finish mill maintenance, but the major maintenance has to do with the kiln systems, and that’s what occurred in the first quarter.
Steven Rowley
So, really it would be only minor. Usually, you plan to have your major maintenance, and you hope you make it a year.
Sometimes you might have a very small outage, where you’re just down for 2 or 3 days, and put a patch job on some refractory or a quick little fix to a cranker cooler if you had to, but that usually -- you kind of plan for it. You hope it doesn’t happen, and sometimes it does, sometimes it doesn’t.
But you might plan for one other small outage later on in the year.
Garik Shmois
Okay. Then, with the expense that you incurred this last quarter, the $8 million increase, is that, from a dollar standpoint, pretty similar as to what you spent on your annual maintenance in fiscal ’12?
Steven Rowley
Yes. Our maintenance is really -- we do it routinely, not episodically.
It’s very, very similar to maintenance. Now, every once in a while, some things cycle on a 2 to 3 year timeframe, but the majority of it is annual and the costs typically don’t vary that much from year to year in total maintenance.
Garik Shmois
I’m sorry if I’m beating this into the ground, but I was just wondering if maybe you could walk us through the normal maintenance expense that you saw by quarter in fiscal ’12, just so we have an apples to apples comparison going forward.
Steven Rowley
Yes. I did not go back and actually do that analysis to say what maintenance hit what quarter last year.
But I can just say, in general, if you look at a 12-month rolling average, looking at the 12-month rolling average, the maintenance spend isn’t any different than we normally see. Looking forward, and looking at our budget for this year, and looking at a re-projection based on the actual cost of maintenance in the first quarter, we don’t see any difference in a budgeted maintenance for the year.
Garik Shmois
I guess, just quickly on SG&A, it crept up year-over-year, just wondering if you can provide some color on what happened there, maybe a guide for SG&A going forward?
D. Kesler
Garik, this is Craig. As you mentioned, we had a little over $1 million increase in G&A, in corporate G&A during the quarter.
Roughly half of that was associated with noncash equity compensation, and the other half was associated with legal costs related to our tax dispute as we prepare to go to court for our tax refund. I think I had mentioned it back in the fourth quarter conference call that we would see those costs into this year as well.
Operator
Your next question is from the line of Rodny Nacier with Keybanc Capital Markets.
Rodny Nacier
You provided earlier some month-to-month trends in your Wallboard business. I was hoping I can get some color on monthly activity in the cement and, into July, how volumes are faring?
Steven Rowley
Yes. Volumes remain very strong.
So, we had, again, another real strong month. We just got those numbers yesterday, and cement volumes have continued to be very strong for us.
Rodny Nacier
Okay. Then, I was hoping you could relate to the PCA forecast, which is looking nationally for cement volumes up 6%, which would imply some slowing down.
I realize you have some regional differences versus the national trends, but do you get the impression in your confidence that strong volumes are going to continue through the rest of the year?
Steven Rowley
Yes, we do.
Rodny Nacier
On the pricing side in cement, could you go over again what the dollar amount was in the West and the Midwest, and the timing, and also your confidence in getting those price increases realized versus a year ago?
Steven Rowley
The dollar amount in the West is about $5. The dollar amount in the Midwest is, I believe, $6.
Very strong confidence. I think everybody has a price letter out in the West, and in the Midwest not everybody has price increase letters out.
Rodny Nacier
Okay, that’s helpful. If I could just sneak one last in on cement, could you provide an update on some of the adjacent businesses that you’ve invested in over the past few quarters, specifically in the Midwest?
Steven Rowley
We are in the process, and you’ve seen -- if you’ve read the K, you may have noticed we’ve added some information over the last couple quarters in the Q’s and the K’s. We’re in the process of developing a new business for Eagle, and that’s frac sand.
We currently believe that we’ll be ready to enter the marketplace early next year, and we’re currently just finalizing a few details. Once we have finalized these details, we’ll be ready to make a more formal announcement.
Rodny Nacier
Okay, all right. You also had, I believe a barge loading facility.
Is that tied to the frac sand, or is that-
Steven Rowley
That is correct. That is correct.
Operator
Your next question is from the line of John Baugh with Stifel, Nicolaus.
John Baugh
Could you delineate the pricing that you’re seeing in cement between oil and construction and/or bid jobs, for that matter? I don’t know if you want to go by region.
You can just do it by the company if it’s simpler.
Steven Rowley
Yes, we really don’t give that kind of information out.
John Baugh
Okay. Then, you mentioned the guidance about pricing for wallboard.
Refresh my memory again on what you said?
Steven Rowley
20% to 25% increase.
John Baugh
That’s not just "for commercial"? That’s going to be for residential too?
Obviously, residential isn’t really looking that forward yet?
Steven Rowley
That’s correct.
Operator
Your next question is from the line of Scott Levine with JPMorgan.
Scott Levine
Just to clarify a couple points really quickly, you said 20% to 25% wallboard increase for calendar 2013 is the initial indication?
Steven Rowley
That’s the guidance that we gave, and that was based on January pricing.
Scott Levine
Okay. On the frac sand, when you have something announced, is that early calendar ’13 as well?
Is that what you said?
Steven Rowley
We probably will announce it before then. We should be into the marketplace in early calendar year ’13.
Scott Levine
Got it. Then, maybe a little bit of subjective help on the Cement business.
It sounds like some of the bid work, lower prices has been dampening maybe the reported price. How should we think about that work rolling off?
Maybe so, I guess we should be thinking about the cement pricing realized within your P&L coming up a little bit more gradually through the balance of the year? Is that directionally correct?
Steven Rowley
That is directionally correct.
Scott Levine
Maybe lastly, OCC trends have been down, I think the last few months. In terms of the assumption we should use, maybe for paperboard pricing, should that follow, and with what type of a lag should it follow?
Steven Rowley
Yes. That has been fairly stable, so I think the impact to the pricing shouldn’t be that different, even though it’s moved a little bit.
But if you think year-over-year, it’s down. But I think the lag in our contract is a 3-month lag, so I don’t anticipate a big change.
We saw a change earlier when prices dropped off dramatically.
Steven Rowley
But we’ve really been very fortunate to reduce our variable cost by about 10% at that facility, from roughly $340 per ton to $310 per ton. Part of that, about $15 of that, is fiber, roughly maybe 7% of that’s gas, 5% magnets, 3% power.
And it’s not all just pricing. A lot of that is efficiency improvement at that plant.
The plant will run much more efficient the more wallboard paper that it produces. So, very happy and very pleased with our performance at the paper mill.
Scott Levine
Got you there, and one more follow up, then maybe just try again on maybe the well. Can you remind us on the well cement as a portion of your total Cement business, what proportion that is now and remind us of the timing on the new plant hitting the market with product on grade H?
Steven Rowley
Yes. So, the new plant, we’re planning to introduce that this fall.
Out of our Mountain cement plant, it’s sitting at 25% range, 25% to 30% range. In our Texas plant, the joint venture, it is starting to approach 50% of our manufactured.
Not our total sales, because we do purchase a fair amount of product into that market.
Operator
Your next question is from the line Glenn Wortman with Sidoti & Company.
Glenn Wortman
Once the bid work is completed in the Midwest, would you expect to see a major volume drop-off from that plant?
Steven Rowley
The answer is, we’re going to hit the winner anyway. So, we would expect volumes just seasonally to drop off, but with no different than we have in the past.
Really, you’re just now getting into the time where you’re starting to bid for next year, so it’s a little too early to tell you about a backlog of work for next year.
Glenn Wortman
On your cash you use [ph], do you expect to continue to bid on debt? Are you still looking at some potential asset purchases?
Steven Rowley
We look at everything. Until we have found an opportunity, clearly we’re going to pay down debt.
Operator
Your next question is from the line of Jim Barrett with C.L. King & Associates.
James Barrett
Steve, given how early we may be in an up-cycle in Texas, and given the fact that the Texas Lehigh JV is sold out, is there any plans to allocate, any plans to increase capacity at that plant? How would you try to capitalize on what could be an improving marketplace there?
Steven Rowley
Texas Lehigh has 2 import terminals in the state. We always have the ability to bring exported product in and utilize those import terminals.
That would be our first plan as to more better utilize the import terminals. Now, we have not been doing that as much because some of our competitors haven’t been as fortunate as us, and we’ve been able to purchase product from some of our competitors, which makes sense.
We’d rather buy local product than import product from overseas.
Steven Rowley
As things get stronger and stronger in Texas, there’s less and less purchase product available for the market, which means we would have to ratchet up the imported product into the state.
James Barrett
That purchase product, do you achieve distributor-like margins on that?
Steve Rowley
It depends, right? We get better margins.
They’re obviously not the full cash margin that you would get out of a manufactured plant, but we do get good margins on it.
James Barrett
In Concrete and Aggregates, have you announced any future price increases in ready-mix in aggregates?
Steven Rowley
We have, and we’ve actually achieved some ready-mix price improvement in the Austin area. I think there’s another price increase announcement in the Austin area.
We also have incurred a very small increase in the aggregate pricing in the Austin area. Northern California still remains difficult, so not much improvement there.
James Barrett
How about the frac sand opportunity? Can you give us any sense as to what the capital commitment would be there?
Steven Rowley
It’s a little early for us to get into those details. We clearly have plenty of capital available to fund the project.
James Barrett
You may have semi-answered this already, but are you looking for acquisitions beyond that? If so, are sellers becoming more receptive as the market conditions start to improve?
Steven Rowley
Yes. This is a greenfield opportunity that we’ve developed.
We actually have another greenfield opportunity that we’re looking to develop as well.
James Barrett
Oh, interesting.
Operator
Ladies and gentlemen, we have no further questions at this time.
Steven Rowley
Thank you and we appreciate all the questions, and looking for to the call in the coming quarter. Thank you very much.
Operator
That will end our conference today. Thank you very much for joining us, and you may all now disconnect.
Have a great day.