Eagle Materials Inc (EXP) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2014 Eagle Materials Incorporated earnings conference call.

My name is Tawanda, and I will be your coordinator for today.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr. Steve Rowley, President and Chief Executive Officer.

Please proceed, sir.

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

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 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 second-quarter revenues increased 53%, and earnings per diluted share doubled as a result of much improved pricing across nearly all of our businesses, strong improvement in sales volumes across all of our business lines and the successful integration of the recently acquired Smith concrete aggregate and [flash] operations in Kansas City and Tulsa.

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

Sales volume improvement occurred in all of our cement markets.

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

Year-over-year prices increased in each market, and our average net cement price increased 3% for the quarter, reflecting price increases successfully implemented this spring.

The quarter-to-quarter change in our average net cement sales price reflects changes in regional mix of our cement sales volumes.

We have announced additional cement price increases for early 2014 in most of our markets.

Increased wallboard average sale prices and increased sales volumes drove a 24% increase in our quarterly comparative of wallboard and paperboard revenues.

Operating earnings in our wallboard and paperboard business improved to $36.8 million for the second quarter versus $24.2 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 details on the financials.

Thank you, Steve.

Operating cash flow during the first half of fiscal 2014 improved to $79.3 million.

Capital spending of approximately $31.6 million was used primarily toward the build-out of our frac sand mine in northern Illinois and maintenance capital.

Interest expense increased to $4.8 million during the second quarter, reflecting higher borrowing levels resulting from the acquisition of assets in Missouri and Oklahoma last year.

Our effective tax rate for the quarter was 32%.

As this last slide reflects, our solid, low-cost competitive position allowed Eagle to generate meaningful cash flow from operations, which we have primarily used to reduce debt and improve our financial flexibility.

Our net debt-to-total-cap ratio was 37% at September 30, 2013.

Thank you for attending today's call.

We will now move to the question-and-answer session.

Operator?

(Operator Instructions)

Trey Grooms, Stephens Inc.

Steve, could you update us in regards to the frac sand rollout?

Number one, an update on the permitting process and the timing of that?

And then, also, the timing of when you now expect to start shipping internally-produced material?

And then, secondly, if you can just comment on -- the third-party sand you are utilizing now, it seems like it has similar logistics to what you will be doing once you are shipping out of your own mine.

If you could just comment on how that is working out relative to your initial expectations?

And, how that's going?

Thank you.

Sure.

Let me respond to the first part of that question, Trey, with a brief discussion regarding the permitting process and the current status.

All permits to mine and operate our frac sand in Illinois are in hand with the exception of one permit, and that's our water discharge permit.

We have submitted our application to comply with all the regulations to the state.

The state has deemed the application substantially complete, and the state has issued a draft permit based on our application.

So, we are currently in a very normal and very appropriate part of the permitting process where the public has a chance to comment on the draft permit.

Legitimate comments concerning water discharge will be addressed by the state and ourselves before a final permit is issued.

We had an open public comment period late last summer where people could write in comments.

We had a permit -- we had a public meeting early October, and -- where the public was again allowed to make any comments with regards to the water discharge permit.

Now, we are in a 30-day period post that meeting where written comments can be submitted as well.

Once that period is over, all comments and any concerns will be addressed before a final permit is issued.

And, in respect to the rollout, it is -- once that process is complete, we will finish construction of the facility and would expect that would take a couple of months and then start the process up.

In respect to your last question, we continue to really just stick our toe in the water as far as operating the drying plant down in Corpus Christi but are very pleased with the operation and pleased with our ability to produce a quality sand and get it into the marketplace.

Todd Vencil, Sterne, Agee & Leach

Steve, you mentioned the Cement price increases that you have announced for early 2014 in most of your markets.

Can you talk about the magnitude of those?

And, can you talk about where you may not have -- not be planning on getting increases?

There are $6 to $8 that have been announced in most of the markets.

Where there is a little delay is we had some fall price increases announced in some of the markets, and generally there was not as much traction as we anticipated.

So, you are seeing those fall prices be kicked down the road as well for about the same amount in the next year.

With the exception of we have found some traction in a few of our markets, and primarily those are Central and South Texas.

Garik Shmois, Longbow Research.

Steve, just wondering if you can comment on Wallboard?

And, if you're thinking of managing the business any differently here ahead of the January price increase?

Is there a thought to how you would manage inventories at distribution?

Or, will you continue to run the business full-out to meet customer demands should it continue to materialize?

We have been running as hard as we can really for the last couple of years, and as demand increases, we have been adding people to maybe run some extra overtime or add an extra shift.

We might add an extra day of production with the existing facilities.

It really has been a careful balance to try to make sure that we are able to service the customers.

Really for this -- for the majority of this year, but especially the last two or three months, that's been a little bit of a difficult balance for us.

We've been happy to maybe shift sales from one plant to a different plant to make sure that we don't have too much delay in getting the product into the marketplace.

What we've seen is at the present time our backlog of orders is stronger than it was a year ago at this time, which indicates some prebuying.

So, we have ahead of this added a few more bodies at our plants where we can to maximize our production capabilities and to service our customers appropriately.

Is that the reason why Wallboard prices tricked down 2% sequentially?

Is that you were just -- maybe some geographic mix was involved there?

You're going to have some product mix and extra freight when you're doing that, and then, some of it is just a function of the products that you are selling.

Jerry Revich, Goldman Sachs

Steve, can you talk about, based on the visibility you have in Cement, when you expect to reach a sold-out position in Kansas City, Illinois, and Nevada?

And, I'm wondering, Craig, if you could just give us a sense for the earnings performance of the core Eagle business, excluding the Lafarge assets in the quarter?

How did the two pieces perform?

We are steadily marching forward to selling out the new businesses.

I think things are still somewhat weak in Northern California and Northern Nevada, so that may be the last piece that we end up being sold out.

What's happening now is, demand is so strong in the neighboring states.

As we mentioned a year ago, one of the nice part of buying these assets was that they neighbored our existing operations, which would allow us to waterfall cement from these plants into other markets when those markets were strong.

And, in fact, that is occurring, which makes that comparison a little complicated, because now you are taking cement from a plant in the neighboring market and putting it into a sister Company's marketplace.

So, we can give you a guess at that comparison, but it's not an apples-an-apples comparison.

I will let Craig finished the answer there.

Sure.

Jerry, this information will be in the 10-Q that we will file here shortly.

But, for the quarter, the new assets produced about $12 million in pretax profit, and the vast majority of that being in the Cement business.

Kathryn Thompson, Thompson Research Group.

Questions on Cement and somewhat related to frac sand.

On the Cement volumes, how much of the volume increase in the wholly owned was due to catch up due to wet weather in the previous quarter versus core demand?

And, how much -- how did higher utilization versus any other factor affect margins?

And, if you could also comment -- or give more color on the market demand for frac sand?

And, any change in the actual fracking process that might increase the demand for the volume in sand?

Thank you.

In Cement, really kind of hard to tell.

Certainly, there was some delay.

The majority of that was in the first calendar quarter last year, where there was some weather in our first quarter or the second calendar quarter, was not that significant for us.

We really saw kind of a more normal pattern this year.

However, sales were very, very strong this quarter, and probably you run up against some capacity issues associated with the finish variety, which limits your sales capability during the very strong shipping season, which is the summer and fall quarters.

We may have had some impact just associated with our ability to produce cement, not the kiln process, but the cement grinding process, during this quarter.

As far as development, yes, it appears that as the process for getting oil out of the ground through this fracking process matures, it does appear that more and more sand is being consumed as these methods are refined.

It's very exciting to see that the demand for frac sand is on an upward trend.

Jack Kasprzak, BB&T.

The Wallboard volumes in the quarter were up about 11%.

That was a little less than the June quarter, which were up 16% or so.

Can you talk about what's going on there?

Are you seeing a little slowdown in housing?

Or, anything else?

That's a pretty nice increase.

The industry was up a think about 6.5%, so I think we've been saying that we have been really been blessed with strong markets where our Wallboard plants are.

We're really up a little bit ahead of the industry, but I think it's really part of our geographic diversity and where the trends have been.

In our markets, we really haven't seen a real slowdown.

Brent Thielman, DA Davidson.

In Cement, you mentioned there was some change in geographic mix that may have impacted comparisons in the average price maybe quarter to quarter.

Could you identify what shifts you saw in those markets?

And then, I thought I heard you say that the fall price increases had trouble sticking?

Just any thoughts as to why?

Pricing has increased year over year in all of our Cement markets.

However, when all of a sudden you have seasonal businesses, and one market starts shipping more than it had relative to the last.

Or, in this case where we have new businesses versus last year, there's an impact of the actual price in those markets versus a year ago.

So, that's still for us some pretty tough comparatives when last year we did not have the new assets in the price mix.

And, as far as the fall price increase, yes -- there was some price increases announced in Texas.

And, as I mentioned, we were not too successful in the larger metropolitan markets of DFW and Houston.

Somewhat successful in Central and South Texas markets.

There were also some price increases announced in Northern California, which did not have any traction at all.

Kevin Money, Cleveland Research.

I wanted to get your thoughts on the pace of the non-residential construction recovery.

It seems like EXP is uniquely positioned having exposure to some of the heavy materials earlier in the cycle, as well as the later cycle Wallboard play.

I just wanted to get your thoughts on what you're seeing within the different buckets?

What's in non-residential?

Again, this is a case where we are very fortunate to have a lot of our Cement and Wallboard near where energy plays are occurring.

And so, demand for commercial, as well as housing is up where you see a lot of infrastructure needed to extract the energy out of the ground.

For example, Texas is very strong, and Colorado is very strong as far as the commercial, as well.

It's really associated with what's going on in the energy sector in those regions.

Glenn Wortman, Sidoti & Company.

If you have it, what was your organic volume growth in Cement in the quarter?

And then, do you anticipate any major maintenance expense for Cement in the current quarter?

There is a fair amount of market overlap, so I'm going to again caution you, it's not exactly apples-and-apples, but we do count those numbers.

So, Craig, why don't you respond to that.

Sure.

Glenn, again, just on a like-for-like basis this year to last year, Cement volumes in those markets would be up about 15% if you are on a like-for-like basis.

And, pricing -- you didn't ask about it, but would be a 4% year over year, as well.

Ivan Sichs, Private Investor

Well done.

Good results.

Question that I have is, obviously, you've got a large demand for concrete given the fact that asphalt and concrete has a much longer life.

Do you see much happening in that area where we could see Concrete and Aggregates showing a better profitability?

Certainly, as this is been a shift over the last year or two to where the concrete roads are gaining more traction than they have in the past versus asphalt, simply because the cost to put a concrete road down versus the cost to put an asphalt road down has changed dramatically.

And, I wish I could say that concrete road costs have gone down, but they really haven't.

It's that the cost of putting asphalt roads have gone up with the price of oil, and with the fact that refineries, then, have switched their process over to add cokers which limits the amount of asphaltic material that they have available to lay down for roads.

Jim Barrett, CL King & Associates.

Good morning, Steve and Craig.

Steve, will expanding your frac sand infrastructure absorb the majority of your anticipated free cash flow over the next few years?

Or, do you foresee other uses for that free cash flow?

We have a fair amount of free cash flow, and probably -- certainly more free cash flow than is anticipated for frac sand alone.

We clearly are looking for other opportunities to grow our major businesses and are chasing a few.

Usually, those are very lumpy, and they come in big sizes, not small sizes.

But, in some cases, for Aggregates, they can be in a little smaller bite-size acquisition.

We continue to look for those opportunities, and hopefully we will find one.

For example, this year for the first six months, we spent about $31 million or $32 million in capital.

Of that, about $20 million of its associated with frac sand and the rest is just sustaining CapEx for our other businesses.

So, clearly, the vast majority of the CapEx has gone to frac sand development.

John Baugh, Stifel Nicolaus.

I am wondering if you have any insight -- and I know it's out in the future.

But, what you are thinking in terms of Wallboard demand in your markets, not necessarily a national number for 2014?

Thank you.

This is a very, very difficult thing to follow, and if you look at what we present is usually a couple of the major economists' view, and we will when we put out information, it will follow either Mark Zandi or Ivy Zelman or some combination of them.

That stuff continues to be pushed out each quarter a little bit before you actually see a spike, but everybody realizes that the longer we go building houses below household formations, the bigger the eventual spike will be.

And, we don't feel that it's too far away.

At this time, there are no further questions in the queue.

I would now like to hand the conference back over to Mr. Steve Rowley for closing remarks.

Thank you very much.

We look forward to another great call at the end of our third quarter.

Thank you for joining today's conference.

That concludes your presentation.

You may now disconnect, and have a great day.