Eagle Materials Inc (EXP) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the third quarter 2014 Eagle Materials incorporated earnings conference call.

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

(Operator Instructions)

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

I would now like to turn the conference call over to your host for today, Mr. Steve Rowley, president and CEO of Eagle Materials.

Please proceed.

Thank you.

Welcome to Eagle Materials conference call for the third quarter of FY14.

Joining me are Craig Kessler, our Chief Financial Officer and Bob Stewart, Executive Vice President of Strategy Corporate Development and Communications.

There will be a slight 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 the cautionary disclosure regarding forward-looking statements made during this call.

These statement 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.

We are very pleased with the progress we have made during the past year integrating our newly acquired cement concrete and aggregates operations in Kansas City and Tulsa.

We are also extremely pleased with our wallboard and paperboard businesses, as they both continue to operate at very high levels of operational efficiency, and our sales opportunities continue to increase as the demand for wallboard increases during the construction recovery.

As a result of all of this, is a record-high third quarter revenues which increased 39% and a 70% increase in earnings per share, our third highest, third quarter EPS in our history.

Record cement sales volumes increased concrete and aggregate sales volumes and improved pricing were the primary drivers of the 50% increase in Eagle's quarterly comparative of cement concrete 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.

Cement prices increased year-over-year in each market, and our average net cement price increased 5% for the quarter, reflecting price increases successfully implemented early in 2013.

Cement demand reminds strong in this winter.

To put this into perspective, two winters ago, the weather was very mild and cement shipments in January, including the acquired assets, were 235,000 tons.

This past month, our cement shipments were 270,000 tons, a 15% improvement in spite of very difficult winter conditions.

We have announced cement price increases for 2014 in all of our markets.

Our $8 per ton price increase is holding in the early implementation markets.

In the majority of the markets our price increases are scheduled to be implemented on April 1st.

Increased wallboard average net sales 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 51% to $37.4 million for the third quarter.

On January 1st, wallboard price increase -- our January 1st wallboard price increase is holding.

January wallboard demand in our marketplaces is up slightly year-over-year even with the large amount of December pre-buying and stockpiling wallboard.

Now let me turn it over to Craig for more details on the financials.

Thank you, Steve.

Operating cash flow during the nine months increased to $144 million, up 35% from the prior year.

Capital spending of approximately $43.2 million was used primarily towards the build out of our frac sand mine in Northern Illinois and maintenance capital.

Excess cash flow was used to pay dividends and reduce outstanding borrowings.

During the third quarter alone, we paid down $63 million on our bank credit facility, quite an accomplishment.

Interest expense increased to $4.5 million during the third 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 35%.

As this last slide reflects, Eagle is generating meaningful cash flow from operations, as we benefit from improvement in market conditions across a larger foot print of operations, while improving on our low-cost competitive position.

We have primarily used this cash flow to reduce debt, as I mentioned, and improve our financial flexibility.

Our net-debt to CAP ration was 32% at December 31st, 2013.

Thank you for attending today's call.

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

(Operator Instructions) And your first question comes from the line of Kathryn Thompson from Thompson Research Group.

Please proceed.

Thank you for taking my questions today.

The first question is going to be on Frac Sand.

Can you give an update on progress of the build out?

Quantify the estimated cost in the quarter related to startup and any color that you can give on the permit?

The water runoff permit that is.

Thank you.

Sure.

We're very happy with the progress that we have made starting our plan up down in Corpus Christi.

We spent a lot of time fine-tuning the plant to make sure we produce a high quality product and making sure that sales is very lumpy, that the system will operate accordingly and be able to supply cement needed in a very fast fashion.

We've done that, and proved the system out, and continue to test the marketplace and are very happy with the way the system is performing.

As far as the permit is concerned, you know, it's progressing just normally through the normal approval processes.

We've been very responsive to support the IEPA in responding to the public comments that they received last quarter.

And while we're optimistic that we're nearing the end of a lengthy process, we cannot comment on the specifics of timing for the permit, but we can say that due process has been very thorough.

And any quantification of costs in the quarter related to some of the startup?

Yes.

The majority of that, as you're ramping up, it's primarily just fixed costs.

Increased depreciation and manpower costs as we're ramping up and getting ready to, in preparation of commercially selling frac sand once we get our mine up and running.

So on the cement side of business --.

So Catherine, I guess the only thing that I would add to that is in the press release we quantified for you at that $2.1 million (multiple speakers) rates -- Steve's comments.

Okay.

Great.

Thank you.

On the cement side of your business, could you -- you've done a nice job in the past of giving capacity utilization of each of your plants.

And some appear to be getting -- some are at full capacity utilization, but some are getting close.

Would you be able to go through each of your major plants and where you are because we want to get a general sense of where we are in terms of getting that much closer to full utilization for your plants.

So we continue -- of course this is the wintertime and things slow down up north in the winter, especially with this kind of weather.

In between storms, sales are very strong.

Once the storms hit, things slow down a little bit.

But, you know, the two plants that we have set in the last year or two remain sold out, that is in Texas and the mountain region.

We do steadily continue to increase sales volume in the Midwest, both in the marketplace near Chicago, as well as out of the new plants that we have in Tulsa and Oklahoma.

Whereas in the far west, things have improved.

But we are still not running anywhere near full capacity in the western part of the country.

And out west, would you say you're at 75% capacity utilization?

Roughly.

Once again on cement, how does the announced merger of Martin and TXI impact your business, particularly on the pricing dynamics?

Yes.

We're -- it's a little too early to speculate on that.

But, you know, we're -- happy to see that both parties were able to come to a nice agreement for themselves.

And then finally, you mentioned some good acceptance of the January $8 increase.

How have the early discussions been for the spring increase?

This real strong demand that we're having even in the bad weather really makes us feel very positive about the spring price increases, as well as the fact that in the early markets we did not have any problem implementing the price increase.

All right.

Great.

Thanks so much.

Your next question comes from the line of Garik Shmois from Longbow Research.

Please proceed.

Thank you.

First off on the comment around January cement demand being up about15%, just want you to provide a little bit more context around what markets you're seeing this type of growth?

And what end markets you're seeing this type of recovery come into?

So the nice thing is, it's really almost universal.

So, you know, again, we have two plant that's are sold out.

That's a little different.

But one plant is in the north and so demand has been very strong for a while there.

It's really been all of our markets.

And so that actually makes us feel pretty good that the demand for construction is starting to become a little bit more broad-based as opposed to just isolated to certain marketplaces.

Okay.

And then just one more question on cement.

Last year, I believe, in the March quarter you had a number of maintenance projects and some outside costs.

I think there was about $7 million of costs roughly that were one time in nature a year ago.

Just wondering if you could update us on what kind of maintenance expense we should be expecting for the current quarter?

You know, we may have a few outages that start.

I think we have some that almost may start in this quarter and actually trail into April.

So it's a little hard to quantify when you have part of an outage at the end of -- at the end of March that will go into April.

We will have some outages but not near the extent that they were a year ago.

Okay.

And then just one question on wallboard.

Was there any impacts from rise in natural gas costs on margins in the December quarter?

And what is your expectation with respect to raw material inflation when looking out for that business over the next nine to twelve months?

You know, the wallboard, we had very little impact in January with gas.

We did have a little bit of impact in pricing and in cost.

It was a $1 or $2.

But it -- that's the most.

And I'm not even sure if that was -- I think that was mainly repair parts that we had some issues.

So we just spent a little bit more money in maintenance.

And that would be it.

But we're talking roughly to a $1,000 increase for costs for the quarter.

Okay.

Thank you so much.

Your next question comes from the line of from Trey Grooms from Stephens.

Please proceed.

Good morning.

Just real quick.

On one of your comments earlier, Steve, you mentioned wallboard volume up slightly in January, after the prebuy.

Do you expect this trend to improve as we progress further away from that prebuy period?

And maybe into a more stable weather environment as we get into March -- you know, February and March?

What's your take on that?

We certainly do.

So like I say, volumes are a little better than last year, but there was a little prebuy, I don't think as much, a year ago.

So we anticipated there might be a little slower start this year.

But that was not the case.

What makes us feel good is our customers are positive about their calendar year 2014 opportunity.

The demand is out there.

We feel very, very good about wallboard demand next year.

Okay.

Great.

And then -- okay.

So you paid down about 63 million of debt in the quarter?

Obviously, impressive.

You had said you would be de-lever after LaFarge Asset deal, which obviously you are living up to that.

But now with your debt to EBITDA at pretty low levels, how do we think about use of cash flow as we look going forward?

You guys are going to be generating a pretty impressive and sizable amount of free cash over the next few years.

We obviously look for opportunities.

Of course we're going to continue to build out this frac sand business for the next 3 to 4 years that we've been talking about.

It will not consume the cash flow that we're generating, but at least there will be some cash that will be continued to be spent in those regards.

And then just like anything, we remain opportunistic to ways to grow the business, that both things that make sense for Eagle, things that we understand and know, and that provide a return for the investors.

We're not just going to go ahead and acquire something if it doesn't make sense or it doesn't have a return.

We think in those instances, we have other ways to return money back to the shareholders.

Okay.

Thanks for that.

And then -- I'm sorry.

I dropped off the call for just a second.

If I missed this, I apologize.

You know, you quantified the startup costs in the quarter and so forth.

But just to be clear, when that frac sand startup cost, Craig, should we be continuing to expect similar level of startup related costs going forward until you are actually shipping out of your mine?

Is that the way to think about it?

Yes.

So, here, I think, as Steve mentioned in the process of working through what we need to up in Illinois and hopefully having the mine open at some point in the near future.

But, for at least the foreseeable future those fixed costs will remain while we slowly work into the business.

Okay.

And just housekeeping, Craig: 35% tax rate in the quarter, higher than what we've seen, higher than what I was expecting.

Can you give us an idea one, what was behind that?

And then secondly, what we should be thinking about when we're running our models going forward?

So the tax rate for the quarter as you mentioned, 35%.

We've been running at about 32% for the last few quarters.

That rate increase really impacted by two things.

First, we put pretty decent amount of equipment in service during the quarter.

Primarily, frac sand equipment and so that's actually impacting our -- lowering our manufacturing deduction.

So that will bring a go-forward rate of about 33%.

But then we also during this quarter file our tax return.

And when you do that, you have some basic true-ups that you go through to look at actual deductions versus what we had estimated a year ago.

So that impacted the rate.

It kind of would be the difference between the 33% and the 35%.

So all of that being said, I think in your model I would use in that 33% range.

Thanks for clearing that up and thanks for answering my questions.

Your next question comes from the line of [Jerry Fitch] from Goldman Sachs.

Good morning.

Good morning.

Good morning.

Steve, in past we have seen your cement business, you've prebuilt demand by selling third party cement to the levels of within your capacity that you're bringing along.

Can you just update us how much third party frac sand have you shipped to date and what have your impressions been of the Eagle Ford market, relative to initial expectations?

So we really haven't shipped that much.

As I mentioned, at this point we are really just sticking our toe in the water, testing the marketplace, learning the marketplace.

We don't want to go into the market and not understand the marketplace.

And make sure that our system works well and we can handle clumpy sales.

On occasion we have sold for, you know, a week or so a lot of frac sand just to make sure that the system works.

That's really been our plan all along, to make sure with the third party sales that the system works and that we get a feel for the marketplace.

So we're very happy with the plant.

And we really understand the marketplace.

And we feel very good about our business plan going forward.

In terms of the strength that you're seeing across your cement business, can you talk about what is the mix of public versus private projects?

Are you seeing a pick-up in public yet?

Really I could say that's probably been lower in most marketplaces.

It's really just been other business.

And it's really hard -- very little -- very little work is done direct anymore.

It's done through local Ready Mix businesses.

You have to understand then what each customer is doing.

So it's really hard to put that together.

Some of it is local, some of it is state, some of it is state federally funded.

Bidding is up a little bit but -- in some states, but other states it's still a little slow going.

In your wallboard business, you've really led the market in terms of moving away from job quotes in this cycle and last year you provided your customers with pricing visibility I believe it was early as April?

Should we think of a similar thought process in terms of how much visibility you're going to provide your customers for 2015 pricing?

We are starting to get requests for that as we have the last two years.

A little too early to be thinking about that.

But over the next quarter, you know, we will kind of get a feel for where the market is.

And clearly we've only provided surety of pricing through the end of this calendar year.

When work starts to bid for the following year out, we'll think about how to respond to that when those requests start coming in.

Thank you.

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

Please proceed.

Thanks.

Good morning fellas.

Good morning.

Good morning.

Steve, you mentioned that the $8 price increase in cement had stuck in the early implementation markets and you were looking forward to implementing it in April in some other markets.

Can you tell us which were which?

Which were the early implementation markets and which come in, in April?

Sure.

So really the mountain region is the one that really started off for us.

Most of the other regions are an April price increase.

Got it.

And you've given some guidance in your slide deck and things like that about where you think you can get in terms of selling the various grades of oil well cement as a fraction of what you're selling out of each of your plants.

Can you kind of walk us through -- obviously you've been 50% or so out of the Texas plant for a while.

But can you walk us through where you stand on those other plants?

Yes.

So we're -- we have successfully made quality product in the two new facilities.

And we're very happy with that.

We have made quality product in Illinois.

And as -- demand opens up and as -- a lot -- again, just a lot of our work at the two plants that we have right now is through long-term contracts, 2 or 3 year contracts.

So that's -- it's not unexpected that -- in the other markets that there are already contracts in place that the oil well cement is being sold to.

So we're there.

We produce a quality product and have been able to show it to the major oil surfaces providers.

And we're ready.

And when an opening comes, we will be ready to bid to go after some of the larger volume work versus just selling into spot market in those marketplaces.

It doesn't happen overnight.

We have a very good quality product available in those plants.

And look forward over the next 2 or 3 years to a steady increase in sales into those marketplaces.

So it's fair to say that if you've got a 25% of sales bogey in every place except Texas and Tulsa and then 50% in those places, except for Texas, you're pretty -- you know, you've still got a pretty long ramp to go to hit those targets?

That's correct.

Okay.

Good.

And then can you talk about what you're seeing on input costs in cement?

You talked about wallboard and thanks for that.

Can you tell what you're expecting in cement, cost-wise?

Yes, our cement costs really this third quarter were flat.

So we didn't have any surprises.

We didn't have any major maintenance or anything.

Maybe a minor maintenance or two at a couple of plants.

For the third quarter they're flat.

We know we have some work coming up in the next quarter but would not nearly be the magnitude of work that we had a year ago.

Got it.

But just as far as ongoing input costs, does that seem pretty tame to you at this point?

It is.

Okay.

Good.

Final question.

On the freight side, particularly on wallboard, are you seeing any movement there, expecting any increases?

Yes We're expecting an increase in a month, month and a half from now.

A pretty substantial increase.

A couple bucks, a thousand maybe?

Yes.

Not quite that.

But in that range.

Okay.

Thanks a lot.

Your next question comes from the line of John Baugh from Stifel.

Please proceed.

I think it's John Baugh from Stifel.

Hey guys.

Quickly, could you update us on the EPA as it relates to production of Portland cement?

In terms of implementation by not just you, but more importantly, your competitors?

Where are we in the process?

I know awhile back, you talked about expecting some players not to ante up and some capacity to fall out and then over time with the increased cost of production would be to those producers.

Any color there would be great.

Thank you.

So it's really hard for me to speak directly about what the competitors are doing.

We know that our plants can comply in a timely manner when those regulations are promulgated.

So we're on track to have all of our plants to continue to operate with -- without spending a tremendous amount of capital to make sure that happens.

Okay.

So we'll see some CapEx from you but not a tremendous amount.

That's correct.

Would you speculate that the pricing that you're seeing relates at all to this issue?

Is it just demand in general being strong, capacity really not changing?

I think we're finally starting to see construction pick up in the US And I think that is the main driver right now.

Okay.

And you mentioned project work seeing optimism from your wallboard customers.

I was curious, could you put that in any buckets, commercial, residential, repair-remodel, new construction, et cetera?

I really think it's across the board.

And it varies from market to market.

So some markets that have started this recovery a little earlier, you know, they have a broader base of sales than the others.

So they might be ticking all the boxes.

Whereas some of the other later construction market recoveries you might be in the early stages and you might just be starting to see some general building and housing starting to pick up.

Great.

Thank you.

Your next questions comes from the line of Brent Thielman from D.A. Davidson.

Please proceed.

Good morning.

Good morning.

Most of my questions have been asked.

Just had a question on the frac sand side and it may be too early to say, but I think one of your arguments in terms of getting into the business has been you have worked with these oil services companies for some time through being an oil well cement supplier, obviously, for quite some time.

I'm wondering are you seeing some evidence yet of being both a frac sand supplier and an oil well cement provider as you're trying to gain some traction on the frac sand side?

I think we're too early there, to get into that.

Especially we're not wanting to try to, you know -- a relationship is two ways.

You have to be sure you can deliver and until we have our mine up and running, it's a little hard for us to get that close as far as making long-term commitments.

Okay.

Thank you.

Your next questions comes from the line of Jim Barrett from CL King Associates.

Please proceed.

Steve and Craig.

Steve, could you talk a bit about the wallboard cycle?

Any -- I know the industry is consolidated a bit over the last several years, but any differences between this cycle and last?

Especially, A, given how early we are in the cycle in terms of volumes and your margins are already approaching where they were back in 2006 or thereabouts?

Yes So I don't know what -- I don't -- as far as the cycle, the cycle is really related to opportunity and that is related to housing.

So I don't think there's anything different as far as the wallboard and as far as the demand for wallboard because it's predominantly a function of the housing starts.

You're right, we are early in recovery.

Housing is starting to recover.

We're early there and yes, profitability is up.

I don't think that has to do with the cycle.

It has more to do with how we go to market.

We go to market a little different now.

We stopped giving job quotes.

We didn't think it made any sense because it was a one-way job quote not really a two-sided agreement.

That has truly made a difference this go-around.

Okay.

And that explains why the pricing power of not only Eagle, but your competitors, seem a bit more robust than it was, let's say, several years ago, even when housing was healthy?

Hard for me to speak for our competitors.

For us, you know, we didn't like the way we were going to market.

Decided to go to market differently.

And, again, to us at that point in time we said pricing is more important than volume and we're still committed to that.

Okay.

And then on frac sand, should we assume given the fact that you're in a startup mode, that it's a 3 to 4 year time horizon to reach full capacity in that direction?

Or, would you directionally expect to be somewhat earlier than that?

That really makes sense.

It's a new business.

And, again, you don't enter these things with both guns a-blazing.

But you do enter it in a fashion that you think makes sense for the marketplace.

And we're very comfortable with that.

And we're not in this business for next year or the following year.

When we get into businesses or we expand one of our existing businesses, we make sure that we have the material supplies in place for 40 to 50 years.

So we get into a business for a very, very long time.

And we're happy with the plan and our position, and have made a lot of progress this last quarter in developing all the pieces that are required to get to where we plan on being 3 to 4 years out.

So all of that requires a lot of work and a lot of work both, you know, at this level, as well as a few levels below, as well as our legal and environmental teams making sure that all of the entitlements are in place to get this business to where we plan to have it in 3 to 4 years.

Thank you very much.

That was helpful.

This concludes our question and answer session.

I will now turn the call back to Mr. Steve Rowley.

Thank you very much.

Looking forward to the end of our fiscal year on the next call.

Thanks.

This concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.