May 15, 2013
Operator
Good day ladies and gentlemen and welcome to the Quarter Fourth 2013 Eagle Materials Incorporated Earnings Conference Call. My name is Steve and I’ll be your operator today.
At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference.
(Operator Instructions). As a reminder this call is being recorded for replay purposes.
Now, I would like to turn the call over to Steve Rowley, President and CEO, please proceed sir.
Steve Rowley
Thank you and welcome to Eagle Materials conference call for the fourth 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.
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. Increased demand for our products, combined with higher net sales prices resulted in a 30% year-over-year increase in Eagle’s consolidated revenues and 190% increase in Eagle’s earnings per share this past year.
During our fourth quarter, segment operating earnings and earnings per share were impacted by adverse weather and major maintenance cost at two of our recently acquired cement facilities. These repair adages lasted twice as long as a normal major maintenance adage and were more extensive than Eagle generally experiences.
We’ve put in place our rigorous maintenance programs to bring these plants back to like new condition. Excluding these maintenance costs, we are very pleased with the performance of all of our businesses with cement, wallboard and paperboard achieving year-over-year earnings and pricing improvement.
We’re also pleased to announce that our new frac sand business Northern White Sand Company completed construction of its first processing facility at Corpus Christi during March. The plant has been commissioned and in April we started selling products into the marketplace.
A 21% increase in our annual cement sales volumes, and a 3% increase in our average net cement sales price with the primary drivers of the increase in Eagle’s annual cement, concrete and aggregates revenues. For comparison purposes, Eagle’s annual cement sales volumes increased 12% from the prior year excluding the Tulsa and Sugar Creek sales volumes.
Cement price increases were realized in all of our markets during this winter and spring. Increased wallboard average net sales prices and increase gypsum wallboard paperboard sales volumes resulted in a 29% increase in our annual comparative of wallboard and paperboard revenues.
Those same factors resulted in a 307% increase in our annual wallboard and paperboard operating income. Our Lawton, Oklahoma paper mill continues to perform exceptionally well and remain sold out.
We went through our annual routine maintenance outage at the mill during the fourth quarter which negatively impacted our operating cost and shipments during the quarter. Now let me turn this over to Craig for more details on the financials.
Craig Kesler
Thanks Steve. During fiscal 2013, Eagle generated $124.4 million of cash flow from operations, a 104% increase from the prior year.
The cash flow from operations combined with proceeds form an equity offering completed in the fall and borrowings under our bank credit facility. We utilized to fund the acquisition of the Lafarge cement, concrete and aggregate plants in Missouri, Oklahoma.
Build the frac sand processing facility and make sustaining capital expenditure investments. In addition we paid dividends of $18.5 million.
Interest expense for the year totaled $15.8 million down 5% reflecting lower average borrowing levels and lower borrowing cost under our bank credit facility. After considering the impact of the acquisition funding, interest expense should run near $5 million per quarter in this year.
Our effective tax rate for fiscal 2013 was 31% reflecting improved earnings. This final slide reflects our balance sheet post the transaction.
Our net debt-to-cap ratio was 41% at March 31, 2013. Thank you for attending today’s call.
We’ll now move to the question and answer session. Steve?
Operator
Thank you. (Operator Instructions) Standby for your first question which comes from the line of Trey Grooms from Stephens Inc.
Please go ahead.
B.G. Dickey
First question is on Wallboard; a while ago there was some noise out in the investment community that there might actually be some slippage in wallboard pricing. Obviously, you guys didn’t see anything like that in the quarter in order to do other public competitor but can you talk about what wallboard pricing has done since the quarter’s end, is it still sticking in the range, you reported for the March quarter.
Steven Rowley
Sure. The January price has been fully implemented and the demand remains strong.
Q over Q order demand was up 9% in the fourth quarter and orders since then actually remain robust. We have actually finalized at least our April financials in interim financials for Wallboard and the mill mix actually up slightly, it’s up to $148.
B.G. Dickey
Then switching to cement, you called out I believe 14 million in annual maintenance expense for these new facilities, does it sound like that’s a good run rate going forward, I think you said it was kind of double what it normally is. But can you kind of give us some help in terms of what we should expect for annual maintenance going forward on these facilities.
Steven Rowley
We are very rigorous with our maintenance programs; they are very routine and very extensive. We usually perform just one a year and expect the plant to run for another 12 months after we finish it.
So, there would, may be a minor outage here and there but nothing major. And so when you pick up a new plant that is kind of may have been in a little different mode may be a little more episodic in their maintenance programs that initial maintenance is going to require a little catch up work.
And that’s in fact what we did. So the majority of the catch up work always occurs initially, when you finally get into you may find a few other things that you know you are going to need to perform, the next time that you put the plant in condition where you are expect it to run, generally for another 12 months.
And you may have a few other little things to catch up throughout the year but not dramatic like this, the initial catch up.
B.G. Dickey
So would it be fair to say for about plants kind of 5 to 7 million annualized number would be more in line with…
Steven Rowley
Typically it depends on the type of the plants and the size of the plant but those are numbers that we see at our other plants on a routine basis for the major maintenance.
B.G. Dickey
And then the frac sand opportunity, can you just kind of give us some update on overall opportunity besides Eagle Ford and how we should think about start-up costs associated with that business.
Steven Rowley
We commissioned the plant really early this quarter and we are very pleased with the results that plant operates easily at rated capacity, quality and customer service goals have been achieved. We have a very high quality Northern white products out in the market place and the ability to load trucks extremely fast, and not have a line of trucks waiting to get loaded that has improved that as well, so very excited with the initial commissioning of the frac sand plant.
We also additionally have some more products now the river coming down to Corpus Christi. As we progress throughout the year, we anticipate spending more capital and expanding our footprint beyond the Eagle Ford to other major shale play markets.
B.G. Dickey
My next question was, another E&P company recently said in one of their earnings call that they were lowering cost in Haynesville by pushing more white sand. That’s historically been a ceramic market.
Logistically, is that good basin for you guys to move into?
Steven Rowley
Which basin did you say?
B.G. Dickey
The Haynesville?
Steven Rowley
The Haynesville, that tends to be a dry gas place, don’t know that there is a lot of activity in that market right now; it has not been really one of our targets.
B.G. Dickey
And then lastly and I'll pass along; talking about the increased capacity in the Eagle Ford. Any concern there on pricing pressure?
Steven Rowley
No, none whatsoever.
Operator
Your next question is from the line of Kathryn Thompson. Please go ahead.
Kathryn Thompson
First on the frac sand, now you are selling third party frac sand as of April; could you discuss the ROI CLD sales versus Eagle's current core business and also additional clarity on the product that is going to be processed out or pulled out of Illinois property and when you will be selling that?
Steven Rowley
We can tell you that we are very pleased with the margins on the initial sales. They are really meeting or beating expectations of buying third party sand and processing it to get the plant initially up and running.
We still believe that our plant in Illinois will be up and running middle of the summer time frame, same getting down to Corpus kind of early fall and that's when the margins will improve further.
Kathryn Thompson
In terms of return on that return on equity ROIC; is ROIC on the third party sales at least equal to or above core Eagle returns?
Steven Rowley
That's really hard to; and we're just in the early stages but the sales price in the margin and the costs to buy the sand and move it down the river; all as expected. So, nothing's changed, this is a very high return project and it’s a reasonable return even with purchase product.
It's an exceptional return with our own product.
Kathryn Thompson
And just to clarify on your expansion into other fracs and opportunities. I assume these are going to be barge opportunities say you can continue to take advantage of that cost differential; the arbitrage.
Steven Rowley
It will be a combination of both of those and it’s really all about the best logistics to each market that we’re chasing. So clearly the Eagle Ford that makes sense that the best logistics and the best customer service was by barging that in Eagle.
There is not any barging facilities that I know of up in the Dakotas so that one will have to be handled most different logistically. I have not made a final decision on the Utican Marcellus, that one will be a close call which gives us the best logistics.
Kathryn Thompson
And once again on the $0.21 maintenance costs, would you guess it about to a half to a third or is this really more one-time?
Steven Rowley
Certainly more than a half it would be one-time; would be my guess.
Operator
And your next questions is from the line of Jerry Revich of Goldman Sachs. Please go ahead Jerry.
Jerry Revich
Can you gentlemen talk about the frac sand ramp with the third party cement perhaps give a sense for it; how many truck loads you are shipping in; what the initial customer use have been like?
Steven Rowley
So the June quarter frac sands sales will be minimal; we're just testing now at the plant and kind of feeling the plant and the market out and but we do have sand now on the river and we plan to progressively ramp up our sales going forward this summer. So the current quarter that we are in will be fairly minimal starting to increase in the second and third quarters, ramping up throughout those quarters.
Jerry Revich
And Steve how long do you need to be running operations before you feel comfortable opening up the product to your pull runs for your bigger customers particularly to the likes of Halliburton? What do you need to see before you're comfortable ramping up and supplying in volume; how long the test period are you looking for?
Steven Rowley
So we are going to be doing that this summer. Once we had our sand down there and our sand in the market place that's when we are really going to ramp it up.
So, it's kind of a two-step process here; first step would purchase product and then the second step once we get our sand down there; really ramping it up. But having a nice customer base with good high quality purchase product and coming right behind that with very high quality, the Illinois product in the fall.
Jerry Revich
And you had excellent cement volumes in a really tough quarter here from a weather standpoint. I wonder if you just update us on, when you think full out across your footprint you'll be at full capacity utilization and if you could just give us a sense for the extent to which price increases are sticking across your regional foot print.
Steve Rowley
So cement prices, cement price increases they're all holding firm we're very, very pleased with that. Sales even during a fairly rough winter have not been rough down here in Texas, we've been very strong.
Sales have also remained very strong in the mountain region. Sales are actually starting to improve a little bit in Northern California, Northern Nevada, that's very encouraging.
First we've seen that in five years and winter weather certainly has impacted sales in the Midwest. However customer backlogs are strong and what we're seeing is very strong demand in between the storms, and I think hopefully the storms are behind us, but even during the winter when we had a narrow window and the weather broke we had very strong sales.
So while our sales were less than last year in the Midwest, they were very strong when the weather was good. So we're very confident that sales are improving in all of our markets.
Jerry Revich
And Steve, from a pricing standpoint, can you just remind us what price increases you're thinking about for mid-year or maybe even sooner by market if you could.
Steve Rowley
It's a little early; you're just initially digesting a couple of these price increases. Okay maybe the ones, some of them were in January those are fully digested.
The April ones are in the initial stages. But there still are price increases, increase announcements starting to come out for the fall, for a couple of the markets we’re starting to see that out West and in down in Texas.
Operator
Thank you, and your question is from the line of Garik Shmois of Longbow Research, please go ahead.
Garik Shmois
First question is on frac sand, you mentioned you're going to be spending small capital for expansion. Just wondering if you could talk about your potential appetite for making acquisitions in that business at this point.
Steve Rowley
Yes, right now we're really on track with just expanding our current footprint. We do have in additional to the very large reserve in Illinois; we do have options on other properties that make sense logistically for some of the other shale plays.
So if we get the entitlements or feel comfortable about our ability to get the entitlements, we'll move forward and expand those options. But additionally we're going to build processing facilities that can easily take stand from our existing mine in Illinois.
Garik Shmois
Okay thanks and I guess switching to cement, is there any planned maintenance in the June Quarter that we should be aware of at this point?
Steve Rowley
So this is our typical, just the schedule that we’ve got on for our routine maintenances has been landing in, in this first quarter. So we performed major maintenance in our Texas plant.
We performed major maintenance in our Illinois plant, major maintenance at our mountain plant, and major maintenance at our Nevada plant, all this quarter. So this is a, from a comparison perspective we did the same last year, so on a two over two, it should be about the same.
Garik Shmois
Okay, thanks, and then just lastly on paperboard you also singled out some maintenance expense in the quarter. Could you quantify how much of an impact that was and also you had some decreased sales to external customers on paperboard?
Just wondering if there was any margin impact from that as well?
Steve Rowley
So the impact that we did we have a longer maintenance took us a little longer this year. We had a lot boiler work we had to do on the machine quantify the cost, year-over-year our maintenance cost at the mill are up a little over a million, a $1.1 million or something versus last year so that was the impact of the maintenance cost at republic.
And because the machine was down a little longer we did have to back away from some of our external sales. They tended to be the lower margin sales.
Operator
And your next question from the line of Neil Frohnapple from Northcoast Research, please go ahead.
Neil Frohnapple
Your wallboard volume growth in the quarter outpaced the industry again and just wondering if you continue to attribute this to faster growing markets to your end or if there is something else you can point to?
Steve Rowley
We counting our blessings that we’re in some very, very strong housing markets.
Neil Frohnapple
And then, you mentioned mill net for April 148. What allowed the jump from the March quarter?
Steve Rowley
That’s a combination of mix in logistics and when sales are strong, you can kind of pick and choose a little bit. You don’t have to ship quite as far as the logistics coming a little bit less.
So, it’s really just a function of picking and choosing the sales.
Neil Frohnapple
And then have you seen a snapback in demand in your concrete and aggregates business in the city area as the weather has improved from the adverse conditions we saw this past quarter?
Steve Rowley
Just as we speak, in the last week or week and half we’ve seen the snapback, up till then it was very, very slow.
Operator
And your next question comes from the line of John Baugh from Stifel Nicolaus. Please go ahead.
John Baugh
Could you give us a gypsum update, number one and then number two, maybe some color around wallboard, where you’re running capacity wise in any cost, energy cost and other cost updates on wallboard and paperboard.
Steve Rowley
We continue to sell gypsum out of our Nevada operation. Demand is still improving in Northern Nevada and Northern California and in fact there is a price increase.
So that has been put in place for about $5 per ton in Northern California and Northern Nevada. So, we’re seeing that it’s just volumes are still slow relative to what we had anticipated when we started this many years ago.
But as that construction market and the early signs of strong growth and construction in northern California and northern Nevada, we’re starting to see, so, we look forward to that improving going forward. And you had a question about wallboard?
John Baugh
Yes. Where are you generally on capacity?
And then some discussion around key input costs or other costs?
Steve Rowley
We’re running in extra over time right now to meet demand. A couple of our plans are very, very effectively running wide open right now and two of our plans running three quarters to slightly higher than that to meet demand.
So, things are pretty tight for us right now. Not to the point where we’re ready to make a decision on firing up a new line or a shutdown plant.
John Baugh
So any input cost changes on wallboard?
Steve Rowley
Paper costs, I think we’ve talked about paper and our paper costs are fluctuating because we’ve a long term supply agreement with OCC. OCC has bounced back a little bit but it’s not near as high as it was a year ago.
So, the actual price of paper is down both internally and externally year-over-year, just the function of the contractual agreement. So, it was just related to the price of OCC.
Other than that all of the other costs are fairly flat right now.
John Baugh
And then finally just, could you refresh us on what you’ve done with pricing regarding your customers for ’14?
Steve Rowley
Yes. Once again our customers were looking for direction on pricing for 2014.
So, in early April we put another price increase announcement out there for 20% starting January 1, 2014.
Operator
And you next question is from the line of Kevin Money from Cleveland Research. Please go ahead.
Kevin Money
Just on the paper business, where we at them in terms of sort of the mix shift into selling more paper to the wallboard manufactures? What kind of upside is there?
Steve Rowley
Yes. Our gypsum liners sales were up 38% year-over-year for the paper business.
So, that’s really exciting and really improves our margins. And in fact I think this year the earnings from the paperboard business would be our second highest year ever from the public paperboard company.
Kevin Money
Okay. And just a similar question on the cement side, where are we at in terms of getting some of that mix to more of the oil well cements and how we should kind of look at the ramp getting into that goal.
Steve Rowley
So, oil well sales continue to prove especially strong in Texas. Also we are doing very well in the mountain region.
Illinois cement now has a high quality product ready for sale and we are really just now sticking our toe into that market. It will be a little bit of time before we have there some equipment that we need to install in Oklahoma before we really start producing Class H oil well cement in Oklahoma.
But that will be occurring, that capital will be spent some time during this year, it’d be about a year out before we feel comfortable entering that market, although that we do select Class C currently out of the Tulsa Oklahoma plant. And we will look towards, as we integrate the new plant in Kansas city and look for the best margins, we look to produce that sometime during the year and get the Kansas city plant qualified as well.
Kevin Money
And then just lastly kind of broadly looking, can you just give any kind of commentary on just the different end markets, what you are seeing on a (resi), commercial and public.
Steven Rowley
So residential, you are seeing really, really strong multi-family, I mean it’s very strong right now and in pockets you are seeking single family strong. In certain particular markets you are seeing residential strong.
Commercial is slow, however, when you look at public works in certain areas, Texas public works are very, very strong and growing.
Operator
And your next question is from the line of Jim Barrett of CL King & Associates. Please go ahead.
Jim Barrett
Steve, could you give us your expectations for incremental margins for cement and wallboard going forward?
Steven Rowley
I guess the easiest thing is to say, it’s great to see construction starting to turn in America. And it’s kind of hard not to feel very invigorated with both volume and prices moving up.
To actually quantify that increase is kind of hard to, but the directional trends are very, very encouraging.
Jim Barrett
Well we can certainly see that. And then if you can just talk about the Buda plant, then the joint venture specifically, considering that is sold out either the 12% volume growth reported for that plant in the quarter, is that do wholly to a imported product or you tweaking the production at the margin to get increased production?
Steven Rowley
It really is purchase product. And purchase product both imported and purchased from some other plant in the market place.
Operator
Thank you and now I would like to turn call over to Steve Rowley for closing remarks.
Steven Rowley
Thank you very much, it was a great quarter and a great year for Eagle Materials, very exciting as we started to do business and we are able to integrate to the cement plants and the Eagle Materials, we are really looking forward to a fantastic FY’14. Thank you.
Operator
Thank you for your participation in today’s conference. This concludes the presentation.
You may now disconnect. Have a good day.