Eagle Materials Inc (EXP) 2014 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q1, 2014 Eagle Materials Inc.

earnings conference call.

My name is Stephanie, and I will be your operator for today.

At this time, participants are in a listen-only mode, and we will conduct a question and answer session towards the end of this conference.

(Operator Instructions)

I would like to turn the call over to Mr. Steve Rowley, President and CEO of Eagle Materials.

Please proceed, sir.

Thank you, and welcome to Eagle Materials conference call for the first quarter fiscal year 2014.

Joining me today is Craig Kesler, our Chief Financial Officer.

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 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.

Eagle's first quarter revenues increased 47% and earnings per diluted share increased 94% as a result of much-improved pricing across most of our businesses, and strong sales volumes across all business lines.

Our recently acquired operations in Kansas City and Tulsa performed well during the quarter, also contributing to the earnings increase.

Cement sales volumes were a quarterly record for Eagle Materials.

Also during the first quarter, we sold our first frac sand into the marketplace.

We are excited about our entry into this business, and look forward to opening the Illinois mine later this year.

The good news is that construction is improving in all of our markets.

Our cost reduction capital improvement project hopper remains full and is keeping our engineers very busy.

Likewise, our business development hopper is very full and is keeping many of us busy and our legal department very busy.

Record cement sales volumes increased, concrete aggregate sales volumes and improved pricing were the primary drivers of the increase in Eagle's quarterly comparative of cement, concrete, and aggregate revenues.

Sales volumes improvements occurred in all of our cement markets, excluding the midwest, which endured an extremely wet spring.

We continue to see strong demand for the energy sector for the oil well cement, which we expect will continue.

Consistent with the prior year we performed our typical annual maintenance outages at all of our heritage cement plants during the first quarter.

Average net cement sales prices increased 6% reflecting price increases successfully implemented this spring.

We have announced additional cement price increase for later this year in the range of $6 to $8 per ton.

Increased average wallboard net sales prices and increased sales volumes drove a 28% increase in our quarterly comparative of wallboard and paperboard revenues.

Operating earnings in our wallboard and paperboard business increased 83% to $35.3 million for the first quarter.

Our wallboard plants continue to perform exceptionally well.

Now let me turn this over to Craig for more detail s on the financial.

Thank you, Steve.

Eagle's operating cash flow during the quarter was comparable with the prior year, reflecting improved earnings offset by an increase in working capital.

Capital spending of approximately $21.2 million was used primarily towards the build-out of our frac sand mine in northern Illinois and maintenance capital.

Our effective tax rate for the quarter was approximately 32%.

The last slide reflects Eagle's capital structure which remains flexible with improved earnings and cash flow from our low cost operations.

Our net debt-to-cap ratio was 40% at June 30, 2013.

Thank you for attending today's call.

Stephanie, we will now move to the question and answer session.

Thank you.

(Operator Instructions)

Please stand by for your first question.

The first question comes from the line of Trey Grooms from Stephens Inc.

Please proceed.

Steve, can you give us a little color on kind of what the reception has been like in the market there since you started shipping?

I missed the first part of the question.

Sorry, just if you could give us some color on kind of what the reception has been in the market to the frac sand you guys have been shipping out now that you have opened that plant up and it's in operation.

Yes, quality and customer service is really outstanding in that operation, so it has been very well received as we continue to ramp up that operation.

Okay.

So looking at -- now that we have started shipping or you guys have started shipping out of that plant, is there any way that you can kind of help us kind of think about the economics of that business at this point and kind of how you see that?

You know, you are -- we're just entering this business so it would be a normal slow ramp-up like you would with any new enterprise and really we'll kick in earnest once we get our sand mine up and running later this year in Illinois.

So we would -- should expect you guys will be selling, I guess, pre-bought material up until that point?

That's correct.

Third party --

-- purchased material I guess?

Yes, third-party sands at lower margins until we get our mine up and running.

Great.

And you know, you've got -- your logistic structure is a little bit unique for that, you know, in the industry.

Can you give us kind of a sense of how you see yourself being positioned as far as in the cost curve there?

Yes, so the design from the get-go was to be the lowest delivered cost producer in the marketplace and we are very, very comfortable that, that model works.

Okay.

That is helpful.

Thanks for that.

And then can you talk about -- so obviously weather impacted the quarter, and I'm sorry I got on just a little bit late, but if you've touched on this, I apologize.

But can you talk about how the quarter trended out, end of June and July if you could and the different markets there in cement?

So, we had a little slow start that was a little cold and wet in the month of April and even lingering into early May, but extremely strong sense then, and really in all of our markets.

And in the markets that weren't impacted by weather, supply is very tight, demand is very strong.

So the really good news is that we're seeing construction pick up in all of our markets.

The pace of the pick-up varies from market to market, and the type of construction varies from market to market.

So, in some places, housing is strong, and other places commercial may be strong or infrastructure may be strong.

In some places, all three of them are strong, so it varies from market to market.

But the good news is that construction activity is picking up.

The strongest activity, obviously, is associated near the energy plays.

Okay.

Thanks for that.

And then, my last question is, you mentioned business development hopper is full.

I have to ask if you wouldn't mind elaborating on that a little bit more, tie it to things you may be looking at.

Any types of details there would be helpful.

Thank you.

So, obviously we're looking at -- we have a very strong balance sheet and a lot of energy here in Dallas and some of our other operations.

But we are planning to fully build out a complete network for frac sand within three to four years across the country.

So a lot of effort in those areas as well as a few other items.

All right, great, thanks a lot.

Good luck.

Thank you.

The next question comes from the line of Kathryn Thompson from Thompson Research Group.

Please proceed.

Thanks for taking my questions today.

First, I wanted to focus on cement volumes.

Could you quantify the impact of high precipitation in Illinois and Kansas operations, and what impact this had in the quarter?

I assume that these are just simply pushed-out sales versus lost sales.

Thank you.

So the answer is that they definitely appear to be pushed-out sales because sales are very strong and almost ahead of our ability to meet the marketplace demand, so which is what happens.

You've got -- you have a system designed to produce your cement and clinker and designed for a normal season -- seasonal pattern.

Then all of a sudden that season -- the shipping season gets shorter and you have a hard time meeting the demand because of it.

Working very hard, and you know, the plants -- went through maintenance on all of our plants.

So we're running very well, not having any downtime issues.

But the demand is very strong, so that feels very, very good.

And, in general, compared to a year ago or two years ago, demand in all of our markets is much improved.

As I mentioned earlier, exceptionally strong near the energy plays.

And exceptionally tight to where we're really nervous about our ability to get cement to those markets, which is the reason for pricing -- transportation to waterfall these things.

You know, you can waterfall cement a certain distance but if prices aren't up, you run out of margin pretty quickly.

So, that is the reason for a lot of strong pricing for all of our products to be able to waterfall into these strong demand markets.

And then, just in terms of volumes, was a greater impact from precipitation or was there an impact with the ramp-up of Lafarge or any other factor just to take into consideration?

The only factor at all was the precipitation.

And, of course, a year ago, we had just the opposite.

So there -- it was a very mild winter and so the -- our fourth quarter, the first quarter of the calendar year last year, was strong and so you didn't have the initial ramp-up like you would normally have in the spring.

So, you just have to realize seasons do impact these northern markets dramatically as to how they play out.

But we are very busy right now.

Okay, second question on cement segment again is on the margin side.

Could you better clarify the cost going into the fully owned cement operations.

In other words, how much did lower utilization from the higher precipitation versus maintenance cost versus any other factor that we should take in consideration impact overall margins?

Because essentially what we're trying to do is to get a better sense of the incremental cost structure going forward as Lafarge is -- continue to ramp into the system, but also taking into account one-time factors that obviously are difficult to predict.

Yes, so it is going to be some pretty tough comparisons until we have a full year of the Lafarge assets integrated into the financials.

But, the best way to look at it is -- especially on the maintenance side -- this quarter is always when we try to get ready and ahead of the busy shipping season to make sure our equipment is in good shape.

So we have a lot of maintenance.

I don't think the maintenance this year was any greater than it was last year in our plants.

We got a lot of work done, but I think the costs were similar.

But the best way to look at maintenance, because we try to do it very religiously, on an annual basis, is to look at more of a trailing 12-month look at your total cost.

That takes the lumpiness out because every once in a while, maintenance might shift from one quarter to another quarter, either instead of being on an annual basis, it may hit the next year, or it may hit the quarter ahead of time.

Sometimes the maintenance moves a little bit.

But if you look at a trailing 12, that's a pretty good look at the direction of your cost in a cement facility.

So, assuming that you had maintenance in the first quarter last year, which you guys did, the greater impact to margins is just lower utilization from the weather impact.

That's correct.

That's helpful.

Thank you.

Thank you.

The next question comes from the line of Todd Vencil from Sterne, Agee.

Please proceed.

Thanks.

Good morning, guys.

Good morning.

I was going back to my transcript to try to see it, but could you just keep me from doing that and while I have you on here, Steve, do you have an absolute amount of what the maintenance was in the quarter?

You know, I didn't really add them all up.

I certainly watched all of them at all of our plants but it -- I don't think it, you know, year over year there's that much difference.

Okay.

Fair enough.

Can you talk about where you are in terms of capacity utilization at each of the cement plants?

At the cement plants?

We remain, again, sold out in our plant in Texas and in our plant in Laramie.

Oklahoma is getting very, very full right now.

Kansas City, we still have a little bit of product available there, if you look at it on an annual basis.

If you look at it -- the issue that we talked about, a shorter shipping season, that we just don't have any more finished grind left, so we're a little tight there.

We would love to waterfall more cement out of Sugar Creek to our other facility.

We can waterfall a little, but not as much as we would like to.

So we have been impacted by the weather and our ability to waterfall as much cement as we want.

We're looking at projects to rectify that going forward.

So, generally starting to get pretty full in a lot of plants.

Do you have any plans or even any sort of mechanism for being able to add capacity at any of those plants?

We are certainly looking at that and other opportunities to make sure that, that can happen, that we can take care of the customers.

And we're also purchasing a lot of cement.

And we'll continue to do so.

Okay.

Would it be possible for you to break out what the tonnage was from the acquired Lafarge plants?

Craig?

Sure.

I can work with you on that, Todd.

So, for the first quarter, it would be about 350,000 tons from the new facilities.

Got it.

Thank you.

And, sticking with cement, I think, sort of wrapping it up on that part.

Where -- you mentioned the cement price increases.

Are those in all your markets or specific markets?

They are in all the markets.

The timing varies a little bit from the fall to next spring, but it's pretty much $6 to $8 across the board, whatever market you are talking about.

Some a little sooner, some in the fall, and some in January and some next spring.

But in that $6 to $8 range.

Got it.

Thank you for that.

Switching gears, to go to gypsum, saw that the cash cost per thousand were a little higher than we were looking for, kind of hung in there, the way I calculated, above $80.

Were there any particular costs in the Wallboard business in the quarter?

I think our costs were pretty good.

If you are trying to look sequentially, they seem normal.

If you look year over year, I think natural gas is higher this year than it was last year this time, $3 to $4.

But I think that's the only thing that I noted in the financials.

Got it.

So it will probably hang around this level because of higher nat gas, that actually makes a fair amount of sense.

And then in Paperboard, as I am thinking about kind of the cost-price spread there -- and Craig and I went through this at one point.

Back in the middle of last year, you guys benefited from some OCC prices that had fallen, but sort of looking at $120 to $125, sort of, you know, margin there on a cash basis.

Is that about the right level?

I mean do you look for that to stay there?

Is there any reason price-cost --

It should -- this quarter we also had maintenance in the paper mill and that usually happens a couple times a year, and this is a four- to five-day outage.

So the -- any adjustment of that is again probably just like we talked about a few minutes ago, maintenance in a cement operation, it gets a little lumpy when you have maintenance in a paper mill as well.

But plants ran very well going into the maintenance, it's coming up and running exceptionally well after the maintenance outage in the paper mill.

Okay.

Thanks.

That's really helpful, actually.

And then on frac sand, and this will wrap this up for me.

What kind of timing are we looking at for the start-up in Illinois?

We are hoping it's about three to four months, that the timing has been delayed a little bit simply because it's taking longer than originally anticipated to get one final environmental permit.

We have been working very, very closely to put a proper plan together.

It's gone out for public comment.

That period is over now and now we're working with the state to respond to any of those comments and hopefully we'll get that permit in three to four months.

So, three to four months -- are we really thinking more like crank that thing up at the end of the calendar year?

Probably.

Can you -- would it be possible to sort of go through tonnage and price numbers on the frac sand for the quarter?

You know, it is really early to go through that.

Okay.

Fair to assume that the level of sales is pretty low just because there's no point in trying to force high cost third-party sand through there?

Yes, it's -- you want to be very careful when you are entering a market and you're going to be -- even when you have regular sand, you're careful when you are entering a market because you don't know what the real price is, right?

So you're careful in the initial sales of any product into any new market until you get an understanding of what the market really is.

Would you be -- between now and the end of the year, would you be thinking about possibly slow-ramping up that level of sales, or are you going to keep it basically at the level you had in the quarter?

You know, we clearly are going to ramp it up.

Okay.

And then, finally -- and I think I would be remiss if I didn't ask this question, even though I'm not sure you are going to want to answer it.

You said on -- response to Trey's question about capital projects and business development, that you are going to build out a complete frac sand network around the country.

I think I would be remiss if I didn't ask you, how many tons you think a complete frac sand network would provide?

We still think that is going to be into the 4 million to 5 million ton per year type of a business.

Okay.

All right.

Appreciate that.

Thanks a lot.

The next question comes from the line of Jerry Revich from Goldman Sachs.

Please proceed.

Good morning.

Good morning.

Steve, can you just flush out the environmental permit delay just to give us some more context and, you know, what's the risk that there is going to be a more significant delay to just help us understand the process from here if you could?

Yes, you know, there are a lot of permits required when you greenfield an operation, and some of them, you know, end up being easier than others and some of them harder.

Typically, this -- the one that is a little delayed is one that usually is not as difficult to achieve.

And this is a stormwater run-off permit.

But we have worked very, very closely with the state.

They are very happy with the plan.

And so, once we got [duff] onboard and had worked very closely with the state environmental engineers, we agreed on a plan to put forth for public comment.

That public comment period takes about 30 days.

It was over earlier this week.

We'll review those comments, possibly go to a public hearing in another month or so.

And then, after that process, review the whole due process and make sure that the plan is appropriate and has addressed all needs.

And then receive a permit.

And so, just to be clear, when you said three to four months, that takes you into November-December time frame, or did you mean three to four months from the initial application?

No, I think that's probably going to take us into that November time frame.

Thank you, the next question comes from the line of Gary -- Garik Shmois from Longbow Research.

Please proceed.

Hi, thank you.

First question, I think, maybe for Craig.

I was wondering, Craig, if you could provide us with the tonnage from the Lafarge plants for Q2 and Q3 in particular, just so that we have an apples-to-apples comparison as we model out for the next couple of quarters.

Is that possible to do?

So, you are talking about -- you know that would be on a prospectus basis for Q2 and Q3.

And so, certainly we can give you those details as we go through the rest of the year so that you can have apples-to-apples comparison.

The 10-Q has some incremental disclosures as well on revenues and operating earnings for the purchased assets.

Okay.

But you don't have the volumes right now in front of you as far as a --

Yes, for the prior year, no, those -- when they were owned by Lafarge, they would be in the prospectus supplement on an annual basis that we provided back in the fall as well.

Okay.

Just switching to the fracking business, is it possible to quantify the start-up costs that you are anticipating as you ramp up over the next several quarters?

Yes, we really haven't -- we don't really think they're that material to Eagle in general, so it really is not worth talking about.

It is some cost, but we are -- we do have some sales that cover those costs.

So I -- it is just pretty typical of any project.

Thank you.

The next question comes from the line of John Baugh from Stifel Nicolaus.

Please proceed, sir.

Good morning, Steve, Craig.

Yes, thank you.

Steve, Craig, I was wondering, could you give some thoughts around both what you are doing with your wallboard capacity and your philosophical or strategic approach to bringing additional capacity online.

What, if any, pockets of sort of supply constraints exist with strong demand?

And then, maybe make the same commentary on what you are seeing some of your competitors doing in the marketplace.

Thank you.

You know, we're doing the best we can to service all of our customers in all of our markets.

We've been a little more fortunate with our Wallboard business in that we are in the sunbelt, we are near a lot of the energy plays, so demand has been a little stronger there.

So we have been very fortunate to not have to ship very far and sell a lot of product.

It makes it easier for us to make those decisions to ship closer in than to have to try to ship further out and when transportation costs continue to go up and that doesn't make a lot of sense.

And transportation availability is hard, especially for longer hauls.

So, for us, it's -- let's stay close to home and focus on taking care of our customers.

Any commentary on what you see from your competition in terms of bringing any capacity out of moth balls, or how they're meeting shortages -- spot shortages here and there?

Yes, I really don't know.

I know -- I really can't answer that question on a factual basis.

I can answer it somewhat intuitively knowing that there are markets where we typically might not play where I know our competitors serve those markets, where we are getting requested to sell more and more wallboard.

So, it appears that there is need for wallboard in markets -- secondary markets, that we have to decide whether we can meet it or not, or whether it's worth the effort to go out and try to find the transportation and get to those markets, which is difficult these days.

And then, lastly, is there any concern, or just not an issue at all, as relates to synthetic gypsum and coal burning and all the pressures that seem to be mounting still on some of the coal-burning utilities?

Thank you.

I haven't seen any of that this year.

That was a phenomena a year or two ago, but I haven't seen any of that of late.

Great, thank you.

Thank you.

The next question comes from the line of Jim Barrett from CL King & Associates.

Please proceed.

Good morning, Steve and Craig.

Good morning.

Steve, could you talk a bit about your plant in Georgetown and the Carolinas?

Has the performance in that marketplace, the demand-supply dynamics in that marketplace, has it -- is it materially different than your other plants in your network?

No, I would say that plant -- the demand there is very strong as well.

And so, while that might not be near an energy play, the demand is -- remains very strong for that plant.

I see, and pricing in that market -- has it mirrored the national average?

Pricing has stayed very strong for us there as well.

We went up the same amount in that marketplace as we did in the other marketplace, and it's been very firm.

And, finally, on aggregates.

I realize it's a very small part of your business, but what explains the large increase in price in that business, and has it occurred just in Texas or has it occurred elsewhere as well?

As we move forward and as we ramp up the frac sand, the frac sand fields a much higher price than our normal aggregates.

And while it's still small, it still has some impact to that number.

I see.

Okay.

Well, that's helpful, and thank you very much.

Thank you.

The next question comes from the line of Kevin Money from Cleveland Research.

Good morning.

Good morning.

Morning, Kevin

Could you provide a little bit of an update on the oil well cement mix shift at Illinois?

Just kind of curious as how the customer acceptance has been and how those volumes are ramping up.

So, the volumes are slow there.

We are just really starting that process, but along those same lines, we have done a great job perfecting the oil well cement production in the two new plants.

So with -- so we're very happy that our -- again our goal to provide oil well cement in a much broader market than just the Texas market and the mountain market is moving forward quite nicely.

Okay.

And just on the wallboard price realization, how did that trend through the quarter?

Was it pretty stable or was there any kind of --?

So, it -- very stable.

Okay.

That's all I've got.

Thanks.

Thank you.

The next question comes from the line of Jerry Revich from Goldman Sachs.

Please proceed.

Thanks.

Steve, I'm wondering if you'd just flesh out the plan for the third-party sand and why you're not interested in just ramping that up sooner considering the cost advantage you have on the logistics side -- certainly could put up some pretty good financials as you wait for the permits.

Can you just flesh that out for us?

Yes, and we are ramping.

And that was the response, that we would continue to ramp it up.

Okay.

And, relative to the full capacity run rate that you have at Corpus Christi, when do you expect to hit that number?

And, I guess, given your logistics advantages, why does -- for the Eagle Ford, how long does it take to hit your earnings target for the segment, which you know, in your slide decks you have outlined as ultimately exceeding the earnings power of the cement business?

I guess, given that advantage on the logistics side, should we expect that as soon as you get to full production for the Eagle Ford?

So, you know, when we talk about being as big as the cement business, that's the broader scale, the whole build-out, the three- to four-year build-out over all of north America.

As far as this, we expect to really start ramping, you know, really start moving up steadily and ramping up sales rapidly as planned, kind of in the first quarter of next calendar year, and that really has been our plan all along.

Okay.

Thank you.

Thank you.

There are no more questions.

I would now like to turn the call over to Steve Rowley for closing remarks.

Thank you.

We're very excited, have a lot of good things happening here at Eagle Materials and looking forward to next quarter's call.

Thank you very much.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect and enjoy the rest of your day.