Eagle Materials Inc (EXP)

[Democritus_of_Abdera]

2010 Q1 EXP CC ...

1: Regarding CFO vacancy: One of the most remarkable features of the recent EXP conference call was the total absence of any reference to the company’s lack of a CFO. ... Two months ago (in June), Mark Dendle resigned from his position as EXP CFO to become CFO at ECOM Trading. He had served EXP for less than a year when he made this decision to leave. (ECOM Trading is a privately held company in the International Trade and Development Industry located in Dallas.)

Based on the signature sheets of the 2010 Q1 Q-10, current CFO responsibilities at EXP have been assumed by William R Devlin who is described as Vice President and Controller (principal accounting officer). Bill Devlin has been Vice President and Controller at EXP since 2005. He was Director of Internal Audit from 9/04 to 9/05. Prior to that he was Senior Manager of PricewaterhouseCoopers LLP (7/99-8/04).

2. The major theme of the CC: EXP is maintaining profitability through strict cost control. Costs that are falling industry wide (i.e. natural gas, transportation, etc) are translated into reduced selling prices by all concerned and do not contribute substantial profits to the bottom line.

One cost reduction strategy that gives EXP an advantage over its competition is that EXP has been using its positive net cash provided by operating activities (about $20M/quarter) to reduce debt (and the associated interest expense). Whereas its major competitor, USG, has needed to sharply increase its debt, notably through issuance of a $400M 10% convertible note in Nov 2008.

EXP’s current long-term debt is $325M with interest rates ranging from 5.25-6.48%. Net interest expense in Q1 2009 was $5.6M which includes interest to the IRS (see #msg-26577461). This compares to a net interest expense in Q1 2008 of $8.0M, which was before the repurchase of $100M private placement debt in Feb 2009.

3. Miscellaneous points raised in the EXP CC ...

a. With respect to wallboard pricing, the critical sentiment expressed by Steven Rowley was

“We are very keen on keeping our customers competitive in the marketplace. So our pricing is really associated with how do we partner with our customers, so that they remain competitive with gypsum wallboard stock on the job side.”

I interpret this as an effort to differentiate EXP from the cold-hearted competition. USG for example, had the following exchange in its July 22 2009 CC Q&A,

<Q – Ivy Zelman>: ... What we hear in the marketplace is that L&W is definitely under-bidding relative to others, especially on new jobs -- commercial jobs, with respect to trying to realize price appreciation where L&W is coming in 20, 25% below what the current pricing is. We’re hearing a lot of negative feedback in the market. And distributors that clearly see you as a price leader and you’re not supporting your own price increases. There seems to be a lot of backlash that it may even cost you some customers as a result. So from a strategic standpoint, volumes are improving at L&W as a result of that. And please correct me if that’s not the case because we certainly hear it in many markets beyond just one or two. So I’d like to understand how you mitigate the loss of potential customers that are frustrated or definitely have seen it as a negative for the company’s strategy?

<A – William Foote>: Well Ivy, first, we don’t comment on pricing. So that’s as you know in previous calls. But let me make a couple comments. L&W is a profit center and the key with L&W is returning to profitability and we balance our customers that are non-L&W customers with L&W. We’ve been doing it for 37 years. They are – we’ve taken out over 60 locations now. We will turn that side of the business around.

And I can’t comment on the pricing activities that you are hearing. But I will say that the number one priority for L&W short of safety is to be profitable....

b. Demand in all cement markets is continuing to weaken. The weakest is California and Nevada. There is not a lot of desperation type pricing in the cement marketplace, but bid work is extremely competitive with the prices for bid work being much lower than the average in the marketplace. Historically, EXP did not participate heavily in bid work. However, EXP is now actively pursuing bid work, particularly in the Illinois market.

c. Natural gas prices will continue to come down a little bit over the next quarter or so as some of the gas hedges are worked off. Paper prices will continue to rise a bit as will freight costs. So margins are likely to remain the same. Currently, EXP has about 30% of its gas needs hedged at slightly under $5.50 for the rest of the fiscal year.

d. EXP’s current overall customer mix: 20% residential construction, approx 17% commercial construction, 48% public infrastructure, approximately 15% repair and remodelling.

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Sources:

Mark V. Dendle as Chief Financial Officer at ECOM Trading: http://www.linkedin-ech3.com/in/mdendle

SEC filing for Dendle resignation: http://www.sec.gov/Archives/edgar/data/918646/000119312509107374/d8k.htm

SEC filing for USG convertible: http://www.sec.gov/Archives/edgar/data/757011/000095013708014115/c47965e8vk.htm

EXP’s current debt and net interest expenses: http://www.sec.gov/Archives/edgar/data/918646/000119312509155019/d10q.htm