Feb 2, 2012
Operator
Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 Eagle Materials Inc. Earnings Conference Call.
My name is Diana, and I will the operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Mr.
Steve Rowley, President and CEO. Please proceed.
Steven R. Rowley
Thank you, and welcome to Eagle Materials Conference Call for the Third Quarter of 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.
Steven R. Rowley
While U.S. construction activity remains at historically low levels, we are beginning to see initial signs of improvement across all of our major business lines.
As highlighted in today’s press release, our third quarter results were impacted by the several non-routine items. Excluding those items, Eagle performed well during the third quarter.
Increased sales volumes in our cement, wallboard and paperboard businesses, and higher wallboard and paperboard sales prices drove a 19% increase in revenues and a 19% increase in our segment operating earnings. Excluding the non-routine items in the earnings per share, year-over-year comparison would have been a very favorable $0.20 versus $0.12.
Steven R. Rowley
With regard to the non-routine items, first we incurred a large arbitration loss that was totally unexpected. This ruling does not impact our ongoing operations, and we continue to pursue our growth strategy with regard to our California aggregates business.
Second, the transaction cost associated with the debt repurchase will be paid back of less than 1 year and further improve our financial flexibility. Third, the interest and tax benefits that we received resulted primarily from the expiration of a federal statute of limitation.
Craig will have more on these items towards the end of the presentation.
Steven R. Rowley
A 13% increase in our cement sales volumes was the primary driver of the increase in Eagle’s comparative order rate of cement, concrete and aggregate revenues. Volume improvement occurred in all 3 of our wholly-owned cement plants, as previously awarded bit work began to materialize and the relatively mild winter weather allowed construction activity to continue.
While our Texas cement volumes decreased slightly for the quarter, we continue to see strong demand from the energy sector for oil well cement which we expect will continue. Our third quarter cement cost was impacted by approximately $2.5 million of maintenance costs that did not occur in the prior year’s quarter.
Steven R. Rowley
Average net sales prices have remained relatively stable for the past year in all of our markets. Cement price increases from $5 to $8 per ton had been announced in most of our markets for the spring.
Increased wallboard and paperboard average net sales prices and increased sales volumes drove a 24% increase in our wallboard and paperboard revenues. Our paper mill remains sold out for the year by supplying multiple grades of paper into alternative profitable markets.
Operating earnings in our wallboard and paperboard business improved to $5.4 million for the quarter versus a loss of $400,000 last year. As we mentioned, during our last quarterly conference call, in September, American Gypsum announced a two-pronged approach to improving the profitability of our gypsum wallboard business.
Steven R. Rowley
First, American Gypsum eliminated the practice of job quotes, and second American Gypsum announced a 35% price increase on all of our products to all of our customers effective January 2. The January wallboard price increase has been successfully implemented.
While our January sales volumes are slightly reduced, this was anticipated and is acceptable. Price remains more important than volumes.
Steven R. Rowley
Now let me turn this over to Craig for more details on the financials.
D. Kesler
Thank you, Steve. Operating cash flow during the quarter was $16.2 million, up 45% from the prior year with capital spending of approximately $15.4 million.
Majority of our capital spending during the quarter was used to acquire additional sand and aggregates reserves. During the third quarter of fiscal 2012, income taxes and interest expense were positively affected by our participation in state amnesty programs with the states of Arizona, Colorado and California, as well as the expiration of the federal statute of limitations for certain items related to the 2004 through 2006 tax years.
These events were treated as discrete items in the tax provision and interest calculation and a benefit totaling approximately $2.8 million, or $0.06 per diluted share was recognized. Excluding the impact from discrete items, the effective tax rate for the 9 months was 23%.
D. Kesler
On this last slide, you can see our highly competitive low cost position has allowed Eagle to generate meaningful cash flow from operations, which we’ve used to reduce debt and improve our financial flexibility. Our net debt to cap ratio improved to 37% at December 31, 2011.
During the third quarter, we completed the repurchase of approximately $88.1 million of our senior notes. The purchase of the notes was funded with cash and lower cost borrowings under our bank -- revolving bank facility.
The transaction was completed with a slight premium and resulted in a loss on debt retirement of approximately $2.1 million or $0.04 per diluted share. As a result of the debt repurchase, we were able to modestly reduce our outstanding debt, lower our financing costs and improve overall financial flexibility.
Excluding the loss of debt retirement, our third quarter interest expense was $4.2 million.
D. Kesler
Thank you for attending today’s call. We’ll now move to the question-and-answer session.
Operator?
Operator
[Operator Instructions] And the first question comes from the line of Garik Shmois from Longbow Research.
Garik Shmois
First question is, Steve, you mentioned the January volumes in wallboard were slightly reduced, I know it’s just a month into this quarter, and you don’t want to probably provide too much guidance, but do you think that this is from you loosing share as a result of the price increase, or do you think the industry started the year down because of the pre-buy that occurred in the prior quarter ahead of the price increase?
Steven R. Rowley
I really think it’s a combination of the 2. We ended the year very strong with a strong December and stronger than last year’s December by about 10%.
So clearly there was some pre-buying but we anticipated that we would lose some market share as we took a very strong approach to this price increase.
Garik Shmois
Okay. And do you take any downtime in the wallboard, in your wallboard plants the last quarter or at least enough to have a material cost hit to margins?
Steven R. Rowley
We did have some major downtime, it kind of bridged the last quarter and this quarter. So it was kind of during the holiday period, the end of December and early January.
So there would be a little bridge, not tremendous but there was some maintenance costs that did occur.
Garik Shmois
Okay. And your wallboard prices, it ticked up sequentially in the quarter.
Can you provide some color as to what drove that. Was that the price increases that were now early in calendar year 2011 flowing through or it’s just a strategy being more disciplined on price during the quarter?
Steven R. Rowley
Okay. So that the Q2 to Q3 price increase improvement was primarily a function of product, geographic and customer mix.
So certainly being a little more selective.
Garik Shmois
Okay. And then just lastly, just switching to cement, can you provide some color on the 22% volume growth in the wholly-owned business are there some geographies that stood out in particular, just what’s happening there, that was a strong?
Steven R. Rowley
A very nice winter. So, and that really impacted the northern part of the country, and all 3 of our cement plants have a lot of seasonality.
So we’ve a plant in Chicago on a year ago that the weather was much different. They have a plant in Laramie, Wyoming and that serves Wyoming and the Denver market, the weather has been fairly mild there.
And our plant in Northern Nevada, right now the same thing, a very mild weather. So that was the major reason for the volume increase.
Garik Shmois
Okay. If I understand from prior comments, you’re going to be selling oil well cement from the Illinois facility.
Could you provide an update on your progress there, and if we should anticipate some volumes in at those in calendar ‘12?
D. Kesler
Yes, that -- it’s a little premature. It’s a difficult, certainly the product that is in greatest demand, and certainly performs the best as a Class A.
And we continue to work at producing that product at Illinois. We’ve been doing it for many years, and very successfully down at Texas Lehigh.
We’re still on the learning curve. We’ve got one more burn.
We think we’re very close, we’ve completely cross trained our employees at Illinois Cement with our Texas Lehigh operation. And we believe that sometime this quarter, we should have that Class A cement qualified at Illinois Cement, and able to enter the market then kind of half way through the year.
Operator
And the next question comes from the line of Trey Grooms, Stephens Inc.
Trey Grooms
First off, congrats on a good quarter. My first question is, back to the wallboard and the pricing there, so $95 mill net in the quarter, did you end the quarter about in that same range or was it more or less?
Steven R. Rowley
No, we ended about in that same range.
Trey Grooms
Okay. And so, if I understand right, the 35% increase from my understanding, thus far, it’s kind of shaking out to about $40 [indiscernible], is that about right way to think about it?
Steven R. Rowley
No, I guess you’ve been doing some channel checks. As far as we’re concerned, all of our new business is priced up $40 effective by January 2.
And in the month of January, approximately 75% of our book of business was new business; the rest was some old job quotes that we still had on the books.
Trey Grooms
Okay. That’s all, real helpful.
Thank you. And then on nat gas, so with the move in nat gas lately, can you kind of talk about how this could impact the Eagle both from wallboard and if there was -- if there would be any impact at all on the cement side as well?
Steven R. Rowley
It would be a minor impact in cement. Gas, in a couple of areas might be getting close to the cost of a solid fuel like petroleum, coal or petroleum coke or coal.
But where it really impacts us is in both wallboard and paperboard. So to put it in perspective, our wallboard plants consume 1.7 million to 1.8 million BTUs per MSF, and that’s a full product mix average, not a half [ H ] number.
And our paperboard machine consumes about 4.5 million to 5 million BTUs per ton. That’s also a mix, and the greater range there is because we have a big swing in the products that we make from the 40 pound basis weight down to a 15 pound basis weight.
So there is swing, but on average 4.5 million to 5 million BTUs per ton is a good number you use for the paperboard.
Trey Grooms
Okay. And then on, my last question is on potential M&A.
I guess, in the past you guys have talked about focusing a little bit more on the heavy material side of the business, so aggregates and cement. Can you talk a little bit about maybe what the pipeline looks like there, as you kind of look out into those markets?
Steven R. Rowley
Yes, there are still some opportunities out there, none that seem very appealing at the present time.
Operator
The next question comes from the line of Jack Kasprzak, BB&T.
Jack Kasprzak
Wholly-owned cement prices were down a little from the September quarter to the December quarter. Was there anything in particular happening there?
Steven R. Rowley
Yes, it’s just a little mix. Again, a shift from our level of pricing in the Midwest, so as volumes were up a little bit in the Midwest, it’s really just a mix issue.
Jack Kasprzak
And all to your knowledge, your competitors out with the similar $5 to $8 ton price increases for cement?
Steven R. Rowley
So as far we have very, very good traction for cement price increases in all of our markets with the exception of the Midwest. So yes, all of our competitors are out in the other markets, the Midwest is still the difficult market.
Jack Kasprzak
And on wallboard, I guess we are to assume that all of the competitors, well we know they all announce the same price increase, but as we sit here today from the beginning of January, so sitting here today seems like everybody is holding the line as far as you guys can tell?
Steven R. Rowley
Yes. Well, I can’t speak for our competitors.
I can just tell you that we are very confident in the prices that we’re getting. And we’re also very comfortable with the volume levels that we have in the third sector.
So as far as we’re concerned, it's steady as she goes moving forward.
Jack Kasprzak
As Steve you said, you mentioned you’re beginning to see initial signs of improvement across your business lines, and obviously you mentioned your volumes were up, but out there in the economy, what are you seeing that’s driving the volume growth in terms of types of projects and are you surprised or is this kind of what you might expect, have expected to see?
Steven R. Rowley
So you get to a point where volumes start rocking along the bottom, but then they start to tick up a little bit, you get where you’re along the bottom and you really refine your -- the way you do business, you continue to drive cost out of the business, and you start to get very comfortable at that level. And then, when things start to improve, you start to realize the fruits of the hard that’s gone on.
And so just a small amount of improvement that you start to see a big difference in the bottom line of the company. So it’s really a combination of that, but you’re starting to see volume improvement not great, but a lot of jobs that are opening up for us to supply product to not necessarily in a single family housing, multi-family housing, though is fairly starting to get very strong.
Jack Kasprzak
All right, okay. The press release mentions, and you guys talked about some of your moves on the balance sheet, so what would be the quarterly run rate for interest expense now?
D. Kesler
Projected to be about $4 million range after this most recent repurchase with lower cost borrowings under the bank facility.
Jack Kasprzak
And would you think, Craig, corporate G&A, I think you’ve said in the past $16 million to $18 million annually, I mean is that still a good walking around number?
D. Kesler
Yes, that’s pretty good.
Operator
Your next question comes from the line of Kathryn Thompson from Thompson.
Kathryn Thompson
I just want to dig a little bit further on the volume trends with wallboard. We’ve had very mild weather.
And November, December that is carried into January. How much of the third quarter volume increase is driven, not just by pre-buy, but by mild weather.
And as we look into January and seeing some improvement not just in wallboard but also in your cement operations. How much of what you are seeing and relative improvement in trends is driven by weather versus real demand?
Steven R. Rowley
We know that weather has a huge impact outside in the northern climate for concrete, you just can’t pour concrete when the temperatures are low and there is a lot of frozen ground and snow and ice on the ground. And you can’t even dig foundations once the ground freezes.
So the biggest improvement seasonally is always in the --– it’s in the cement side of the business or the biggest problem is in the cement side of the business, during the winter times. When it’s time to finally put the wallboard into a home, the roofs already on and so if you are going to see any impact associated with slower construction it would have to do, really there is a lag of 3 months from when the housing -- when the house actually starts to be built before you put the wallboard in.
So you really don’t necessarily see that in the winter from a seasonal perspective. From the fact that every, end of December, you get into a holiday season period, that’s always slow but that happens every year.
Kathryn Thompson
But when you are looking at trend right now, because still the trends being a little bit better, how much you think that is being driven by weather? Tell me would it be like a 20% impact maybe 30%?
Steven R. Rowley
So, on the cement side, our sales are up greater than 20%. And through January they up greater than 20%.
And so we really had a very nice January. We enclosed the book that our sales reports show, cement was very strong in January, wallboard was down about 10%, paper is up about 10%, concrete is flat, and aggregates is up about 2%.
So those are -- and some preliminary January numbers that we just have from the sales report.
Kathryn Thompson
Okay. Are those sales or those volume figures?
Steven R. Rowley
Volume figures.
Kathryn Thompson
Volume figures. Okay.
As far as the -- I know you said that, you felt like the price increase was successful. As far as peers in the market, what other type of feedback are you getting about the wallboard price increase acceptance?
Steven R. Rowley
We are -- very difficult for me to speak of what a competitor or what their approach is. We just know that it was very, very important for wallboard, especially for us.
The price pressure still remain out there to produce wallboard. Diesel prices are with the exception of natural gas, OCC has gone back up again now, diesel prices were up.
All the raw material cost that we talked about before, the starches and the emulsions and the retarder and dextrose, those cost all continue to go up. So our American Gypsum’s position is they had to have the price increase.
Kathryn Thompson
Okay. And given what you’ve talk about earlier in terms of the most recent volume trends in wallboard, does that give you any doubts about the acceptance of the price increase?
Steven R. Rowley
We are very, very comfortable with the volume levels that we have now. And so we certainly are more than willing to run at this level.
Kathryn Thompson
Okay. And what are your projections for wallboard industry shipments in 2012?
Steven R. Rowley
Probably flat. We don’t see new residential housing improving a whole lot, multifamily it’s up a little bit.
So this past year, we sold little over $17 billion, it should be a little bit higher than that next year.
Operator
The next question will come from the line of Todd Vencil, Sterne Agee.
Todd Vencil
Lot of my questions have been knocked out. I did have one follow up for you there Steve.
Talking about the January volume sort of haven’t come off a bit, you said you thought that was sort of a combination of both the impact of the pre-buy and there maybe a little loss of market share. Do I take that to imply that, did everybody out there isn’t adhering to the return, but where is the amount adhering to the price increase or is there some other reason that you might have lost share?
Steven R. Rowley
Yes, we’re like I say, we’ve struck hard to our guns with the price increase and therefore we are getting x amount of orders associated with that $40 price increase. And the levels are acceptable.
Operator
And the next question will come from the line of Jim Barrett, CL King.
James Barrett
Steve, could you talk a bit about the wallboard pricing across your various geographies? Are you achieving somewhere around $40 across your market areas or is there wide regional differences?
Steven R. Rowley
There is not wide regional differences in the price increase. We are up $40 to all customers, on all products.
James Barrett
Perfect. And on a related note of your external paperboard shipments, can you tell us roughly what percentage of those shipments are going to wallboard manufacturers.
I know CertainTeed is a big customer, but can you provide that information?
D. Kesler
We're selling, roughly right now I would say, about half of what we sell internally, externally to wallboard customers.
James Barrett
Okay. And then could you just talk specifically about Texas Lehigh.
My recollection was that was sold out last quarter. What were the reasons for that business being a bit soft in the quarter?
D. Kesler
It was not soft at all. We still remain sold out, sometimes that’s just a little inventory movement and the amount of inventory you have in your silos.
Operator
And the next question will come from the line of Brent Thielman, D.A. Davidson.
Brent Thielman
Yes, just a nice contribution from the paperboard business in terms of operating earnings, it looks like a little lower volumes than where you were average Q2. Maybe just walk me through, again a nice jump in earnings there, how you got to that?
D. Kesler
The biggest difference is, we have a higher percentage of sales of higher margin products, not just i.e. mix.
So we were able to shed some of the products that we were selling at very low margins and replace them with higher margin products. In addition to that, we had a couple of months of lower OCC cost this past quarter, and of course natural gas costs had helped as well.
Brent Thielman
Okay. And then, Steve, I know you said, you’re just filled out for this year.
Is it too early to say, whether you are filled out into next year?
Steven R. Rowley
No, it’s not, we are sold out next year.
Operator
The next question will come from the line of Scott Levine, JPMorgan.
Scott Levine
Can you hear me?
Steven R. Rowley
Yes, we can.
Scott Levine
So with regards to the pricing in the wallboard, it sounds like the volume trends, you are fine with. I was just kind of wondering how things play out, if some of your share loss becomes unacceptable.
What type of changes might we expect to see with your behavior, you’d pretty much just looking a hold the line here and the signals you’re getting from your competitors, make you comfortable that things should play out as you anticipate. I’m just kind of wondering what happens if volume trends start to deteriorate beyond what you are willing to except?
Steven R. Rowley
During this December maintenance outage, we put some improvements into our plants. That has allowed us to reduce man power, again, by a number -- by double-digit margins or amounts.
So the reduction of manpower in our wallboard plant allows us much more flexibility with the volumes going forward.
Scott Levine
Got it. And then I think you’ve indicated previously that investment in the heavy side of the business is a priority.
Would you say, it continues to be the case at the same pace or just maybe if you could review your priorities for cash flow deployment?
Steven R. Rowley
Absolutely, investment on the heavy side, if the opportunity is there and the returns meet our hurdle, that’s where we want to invest.
Scott Levine
Great. And I don’t know if this is asked before, if it was I apologize.
Did you give a good go forward tax rate to assume?
Steven R. Rowley
Scott, we did not, the tax rate for the 9 months was 23% and for FY ‘13 somewhere in that 26% to 28% range is probably good place to start.
Operator
And the next question will come from the line of Keith Johnson, Morgan Keegan.
Keith Johnson
Just wanted to -- a couple of questions back on the cost side. When we look at wallboard, kind of sequentially looks like operating cost dropped from the second quarter around $98 through the third quarter to around $94.
I know you mentioned natural gas. Was the other piece of that OCC and then how should we think about that as we kind of look forward into the next quarter?
Steven R. Rowley
No. In fact, actually, paper cost remain high.
It takes a while for the -- an OCC price to flow into the paper. I’ll be honest, it was a very impressive turnaround in the wallboard operating efficiency.
They improved dramatically from our second quarter, really returning to our previous standards of excellence and then in many cases, it’s beyond our previous standards of excellence. We achieved the lowest average weight for wallboard in the American Gypsum’s history this last quarter.
We also have the lowest amount of waste produced, while we were producing this low weight Gypsum wallboard. So very, very impressive performance for the American Gypsum team.
Keith Johnson
Is this kind of partially -- any other transitioning over to the lighter wallboard products, just coming up the learning curve and now in a more -- just a more kind of a…
Steven R. Rowley
There might have been a little bit of that.
D. Kesler
That gets certainly.
Keith Johnson
Okay. And you mentioned that your paperboard operation got a couple of months of benefit on the lower fiber cost, and then, it’ll take a little part of the work into the wallboards side, but I think you mentioned that OCC prices have bounced back up here recently?
Steven R. Rowley
Yes. So in the last 2 months, its gone right back up.
Keith Johnson
And then just the same, I guess cost side on the cement, it look like it dropped off sequentially as well, even though you did have the maintenance expense, and the only thing outside of -- if there was any drivers there, we should think about going forward?
Steven R. Rowley
Yes, so cement maintenance really up. It can shift from quarter-to-quarter.
And so you might, so a year ago in the third quarter, we probably didn’t have little or any maintenance in any of our facilities. Whereas this year we had some in the third quarter, and we had more in the second quarter.
So maintenance just has a tendency to shift quarter-to-quarter. It’s kind of hard, and that’s the only change.
Keith Johnson
Okay. And then as far as maintenance turnaround we look forward going into, I guess March and on into the fiscal ‘13, is there a way to think about that?
Steven R. Rowley
Yes, I think we’re pretty good. We do have and we -- because we’re not sold out in our northern plants, we will have some downtime, later this quarter at a couple of our cement facilities for inventory control.
Operator
And this concludes the question answer portion for today’s conference. I would now like to turn the call back to your host, Steve Rowley, for closing remarks.
Steven R. Rowley
Thank you, and looking forward to our year-end call in another 3 months.
Operator
And ladies and gentlemen, this concludes today’s conference. Thank you for your participation.
You may now disconnect. And have a great day.