Eagle Materials Inc (EXP) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2015 Eagle Materials Incorporated earnings conference call, hosted by Mr. Steve Rowley.

My name is Tracy, and I'm your operator for this call.

(Operator Instructions)

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

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

Please proceed, Sir.

Thank you.

Thank you, and welcome to Eagle Materials conference call for the second quarter of FY2015.

Joining me today are Craig Kesler, our Chief Financial Officer, and Bob Stewart, Executive Vice President, 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.

Eagle's second quarter revenues of $253 million were an all-time quarterly record.

And operating earnings and earnings per share increased significantly as a result of much-improved net sales prices and improved sales volumes across nearly all business lines.

We began mining at our Northern Illinois frac-sand mine during the quarter.

And the first barges of our sand were shipped to Corpus Christi during September.

We are very pleased with the progress of our frac-sand operations, and we eagerly await final approval on our pending acquisition of CRS Proppants.

Finally, as we mentioned in the press release, during the quarter we incurred costs related to the pending acquisition of CRS Proppants, as well as litigation costs that impacted our quarterly EPS by approximately $0.03.

A 6% increase in our cement sales, net sales prices, and improved cement and concrete sales volumes were the primary drivers of the increase in Eagle's quarterly comparative of cement, concrete, and aggregates revenues.

Quarterly cement earnings of $38.5 million represent an all-time record high.

Cement shipments this quarter continue to be impacted by rail congestion in the Midwest.

Year over year, our second quarter cement prices increased $5 per ton, as last year we successfully implemented price increases across all of our cement markets.

We also just recently implemented a $10 price increase in Texas effective October 1. And cement price increase announcements have been made for early calendar 2015 for all of our other cement markets.

Increased wallboard average net sales prices and increased wallboard and paperboard sales volumes drove an 11% increase in our quarterly comparative of wallboard and paperboard revenues.

Operating earnings in our wallboard and paperboard businesses increased 22% to $45 million for the second quarter.

Second quarter revenues from our oil and gas profits business continue to represent third-party sand sale levels.

During our second quarter, we began mining operations at our frac-sand mine in Utica, Illinois.

And the first shipments of our own sand from Illinois to Corpus Christi occurred this quarter.

We have begun ramping up production in sales and expect our Corpus Christi operation to be at full capacity by the end of our fiscal year.

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

Thank you, Steve.

Cash flow from operations during the first half of the year were $118 million, up 48% from the prior year.

Capital spending of approximately $40 million was used primarily towards the continued build-out of our frac-sand business and maintenance capital.

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

The effective tax rate for the first half of the year was slightly over 32%.

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

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

Our net debt-to-cap ratio was 25% at September 30, 2014.

Thank you for attending today's call.

We'll now move to the question-and-answer session.

Tracy?

Thank you.

(Operator Instructions)

Trey Grooms, Stephens Incorporated.

Hey, good morning, guys.

Congrats on a good quarter.

So looking at the frac sand, thank you guys for breaking that out.

That's helpful.

And if I heard you right, Steve, you said that you expect to be running at about a full capacity run rate by the end of FY15, and that's on the 1.5 million tons there in Corpus, just for clarity?

That's, correct.

Okay.

And since you guys broke out the revenue and EBIT contribution there, which, obviously, isn't very meaningful now.

But just as we're kind of thinking about our models and looking forward with this run rate that you're describing here, can you give us some sense of how to think about the cost profile there as we're looking into the, at least the 1.5 million tons that were talking about?

I think we said that -- and I'll just say what I've said all along.

We expect that to have very strong margins, and margins at least as good if not better than typical margins in our cement operations.

We don't see any reason not to believe that that's going to continue to be the case going forward and, hopefully, be even a little stronger than that, especially with the logistical advantage.

Okay, great.

And then on the acquisition that you guys did in the sand space recently, can you talk a little bit more about the acquisition?

Obviously, that gets you into the Permian, but any other advantages you guys get from that acquisition?

Also, there was some detail in the press release from when you guys announced the acquisition, about some of the historical EBIT and contribution and things.

But from a go-forward basis, can you talk a little bit about a pro forma EBIT potential for that business as it rolls out that 2 million tons?

Sure.

We can do this, and, obviously, there's some synergies associated with combining both businesses.

So we'll talk a little bit about that as well.

In reality, when we did the Lafarge acquisition, we talked about it being a perfect piece of a puzzle as far as combining our cement operations and allowing them to work, really, as one unit and flex from one market to another.

It was very difficult for us with a barging system to get to a lot of the shale plays.

It's just hard to barge out to West Texas, for example.

So we had been all alone targeting a play that in particular would be on the Union Pacific rail line.

And we're excited that we could get this and to be able to reach other very, very important shale plays with frac sand.

This was a perfect fit for us, and it allows us then to take advantage of the southern Texas market, primarily out of Corpus Christi, and then waterfall some of the CRS sales over into the West Texas market, which is very important, as well as just pick up in Wisconsin to go to a lot of other basins as the customer sees fit.

So we're really excited to be able to put these two companies together.

It's a great opportunity to watch these two companies together with all these synergies that we talked about.

As far as the go-forward, as far as financials with CRS Proppants, I think what we stated were, financially, their results for nine months.

The first three or four months were not near as profitable as the last three or four or five months.

And probably on average the last three or four or five months, an average EBITDA of about $2.5 million per month.

Okay.

That's helpful.

And my last one is just really just kind of a housekeeping, I guess.

But you guys had an impact on the cement side from rail congestion.

You saw it in the prior quarter as well.

Can you give us a sense for how many tons that impacted in the quarter?

And then that's all for me.

It was about the same as last, so let's say 50,000 tons to 60,000 tons.

And the rail, they told us in the spring that it probably wouldn't be until the fall until things would ease up.

It does look like the congestion is easing up a little bit, but we're almost near the end of the shipping season now for cement, certainly, in the northern part of the country.

Thanksgiving's just around the corner, and winter weather will hit.

Okay.

Thanks a lot, and good luck, guys.

Garik Shmois, Longbow Research.

Thanks.

Just wondering on your expansion program on the oil and gas side of the business.

Can you speak to with oil prices here in the low $80s, has that impacted your strategy at all, in how you go to market, whether it's for frac sand, how quickly you're looking to grow the business?

Obviously, you just recently made an acquisition.

Does it give you any pause?

And maybe how you're looking to target oil well cement as well?

Pretty easy question.

Thank you for the soft call.

We are not slowing down our frac-sand development plans one iota.

Okay.

I'll try to have some harder ones here.

With respect to the rail congestion issue on the cement side, you indicated that it's starting to ease a little bit just mainly due to seasonality, it sounds like.

Is this as you look out to calendar 2015, as demand continues to improve organically in the industry, is it fair to assume that these congestion issues will probably impact calendar 2015 as well?

It really was a separate issue, so over the winter there was a heavy grain season, then we had the terrible winter.

The rail yards in the Kansas City area just got full.

So full that they started filling up actually main rail lines with rail cars.

So you had this big build up of cars, and then they had to switch them all in and out.

That big buildup of railcars in the Kansas City area and on some mainline tracks has been slowly diminishing over the summer.

And it's getting to the point where the tracks are nearly empty again.

So I would not anticipate this going forward unless we had another crazy winter again.

Okay.

And then, I believe last quarter you were able to break out, to some degree, volume pricing with respect to the frac-sand business.

And you provided revenues in the operating profit again this quarter.

Is it possible to break out or give us a sense of what the volume tonnage looked like or what the pricing looked like in that business?

Sure, Gary.

This is Craig.

As Steve mentioned, we're still in start-up mode, selling third party purchased sand.

So the volumes were not all that dissimilar from where we were last quarter, so in that same run rate.

It's really now that we have the mine open, as Steve alluded to, the ramp-up.

So that's about where we were.

Okay, just my last question, you called out some litigation expenses in the quarter.

A large competitor of yours actually just last week settled a piece of litigation that you're involved in.

Can you comment at all if the settlement is a path that you're exploring as well?

Really, we don't have any comments at this time.

Okay.

All right, thanks so much.

Jerry Revich, Goldman Sachs.

Good morning.

Good morning.

Can you gentlemen talk about where capacity utilization is at your Corpus Christi processing plant today or in October?

And just give us a sense now that your shipping from Illinois, considering how much you have to build inventories, what proportion of your sales in the December quarter into the Eagle Ford do you expect to come from your own sand versus third-party?

I mentioned we are ramping up this quarter and next quarter to full production.

I can say, in the month of October, we're almost going to produce and sell as much as we did, in October, as we did last quarter.

Okay.

Thank you.

And in terms of in the Utica, I think you received permit approval recently for the sand processing facility there.

Can you give us an update on when the facility will be online for you to service that?

I think you were planning for the Utica and the Mississippi in from there.

Is that right?

That's correct.

We're in the final stages of design.

Effectively, it is designed and getting ready to apply for all of our permits and go out to bid.

I do not anticipate complications with the permitting here and don't see why that plant shouldn't be up and running within a year.

And lastly, in cement, can you just talk about the price increases by region a bit more, that you've notified customers about for 2015?

Pricing increases range from, let's say, $7 or $8 to $10 per ton across all of our markets.

And I think they're a little less out on the Western side.

So if you looked at the West Coast and the Colorado range, that's more in the $7 to $8 range and all other price increases are $10 or better.

Thank you very much.

Todd Vencil, Sterne Agee.

Thanks a lot, guys.

Good morning.

Good morning.

I don't think anybody's asked you about wallboard yet.

So let's talk a little bit about wallboard.

There are price increases out, letters out for next year.

I'm guessing that you're beginning to have conversations with your customers.

Can you give us any color at all on how those are going yet?

Again, not dissimilar than from previous years.

There's a very strong support from the customer base for next year's price increase.

Good, good.

All right.

I think I'm just going to leave it there.

Thanks very much.

Thanks, Todd.

Brent Thielman, Davidson.

Hi, good morning.

The wallboard volume's I guess a little slower than what you've seen in prior quarters.

Is this representative of the end market?

Or other logistical issues there that might be having some impact as well?

We noticed a summer lull, towards the middle to end of summer, but since then, in October, things have really picked back up.

And sales have really strengthened dramatically again since late September, early October.

So really pleased with where volumes are in that segment.

And is that within all your respective regions or some specific market?

That is across the board.

Okay.

And then CRS, the acquisition, are they experiencing any similar issues within the rail network that might be distorting the financials you guys have disclosed?

Clearly, in the first quarter, and I think we mentioned that the earnings were off in the first quarter of this calendar year.

So, yes, there was impact, as all sand companies up in Wisconsin were impacted with the brutal winter.

But once summer came around and things thawed out, things improved very rapidly as far as logistics and transportations out of Wisconsin.

Okay.

Steve, I'm sorry if you said this before.

The capacity that CRS itself is adding, when does that become available?

That will become available, I'd say, somewhere between March and April.

Got it.

Okay, thank you.

Jim Barrett, C.L. King & Associates.

Good morning, everyone.

Steve, could you just briefly talk about the Texas Lehigh JV?

You had 12% gross, as I recall.

Was all of that third-party cement?

On a related note, can you give us a sense as to what percentage of the production in that facility is now oil well cement?

Yes, we've been sold out of our manufactured product for four or five years there.

So any incremental increase in sales is through third-party purchases, either through some nearby competitors in this state or neighboring states, or we are maximizing the amount of cement that we are importing through our import terminal in the Houston area.

So the growth has been all purchased, and pricing has firmed up, as we mentioned, in Texas.

So margins and even our purchase product has improved for Texas Lehigh.

And as far as percent oil well, we are now, as far as manufactured sales, going to approach -- at least looking forward into next year -- somewhere between two-thirds and three-quarters of our sales will be to the oil well cement market.

And is your pricing power on the oil well cement higher than it is on the Portland cement?

We say pricing is.

Typically, when Portland cement prices rise, the oil well cement prices tend to rise as well.

By a similar amount?

In other words?

Exactly.

Okay, well, that's helpful.

And thank you, again.

Jake Thompson, Odey.

Morning, Steve.

Morning, Craig.

Just a couple of quick questions for me.

Can you just run me through the cost economics of frac sands generally?

So if I take a ton of frac sands, roughly, what's the incremental oil production that might create?

That's the first question.

Thanks.

Yes.

We really do not have those numbers.

It's probably better to ask an E&P company.

Okay.

Fair enough.

And the second question, related to tracking costs or driver inflation and it's impacts on your wallboard pricing?

It's up year over year, so if you compare the quarter, it's up another couple of bucks and continuing to creep up in that direction.

Okay.

That's a couple bucks on the wallboard or taking off the wallboard price.

That's correct.

And sorry.

I'm not aware of the trend.

Is that better, same, or worse than what you're generally seeing over the year?

You know, I think we've seen this pretty steadily the last couple years, that general trend.

And it impacts all of our businesses, both on the supply side, as well as on customer delivery.

Okay.

And you expect that to continue going into next year, I guess?

Correct.

Okay.

Fantastic.

Thanks.

Kathryn Thompson, Thompson Research Group.

Hey, good morning, guys.

It's Chris calling in for Kathryn today.

Just one more question on your Wisconsin acquisition.

Could you drill down a little bit more on what you think your transportation advantages are in the area?

And then any other advantages you feel you have versus your peer in that region?

What we really enjoy with the CRS acquisition is that most of the sales are for customer pickup.

So we really don't have to worry too much about the logistics costs coming out of there and are very happy with the pricing, the pickup pricing associated with the contracts with the CRS acquisition.

And any other advantages you feel you have versus peers in the region?

For us the advantages are how we mix and match then the final delivery with stuff down in Corpus, so everybody wins.

The customer win, and we win together.

Great.

Thanks for taking the call.

Dillard Watt, Stifel.

Thanks, good morning.

Guys, wanted to ask a couple more frac sand questions.

One is, do you have any sense -- and I'm sure you do on CRS and, obviously, you do on your own -- of what percent of orders are under take-or-pay contracts?

Yes.

So I think we mentioned in our press release that the majority of CRS is under take-or-pay contracts, the vast majority.

Not only of the existing business, but as well as the expanded business.

We have a few contracts that we've entered into but not many.

And this is probably, as by design, while we were ramping up our business and in the process of this acquisition, realized that this was going to be the case.

So we wanted a little flexibility.

Is that something you think you'll increase as you go forward?

Or leave it where it is?

It's something that we'll review and see how it fits with the Corpus Christi operation.

We like our position at Corpus Christi and the fact that, typically, the way that we've designed with a very large stockpile of material in Corpus Christi, it gives us some advantages when other logistic modes of transporting the sand down to Texas fail in cold winter weathers.

We'll have a big stockpile of sand ready to supply it.

That bodes well for a spot market, so that's our thoughts at the present.

Got it.

And, lastly, have you disclosed what the reserves are for the CRS mines in terms of years?

We have not, but we're very comfortable with the reserves there and actually have some of our own reserves, or at least option land, in that area, that we've been working on for the last couple of years.

So we are comfortable that the reserves, while it may not be the 50 years that we have in Illinois, they're 25 or better.

Got it.

Thank you very much.

Thank you.

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

Please proceed, Sir.

Thank you.

Well, thank you, everyone.

It's been a very exciting quarter for Eagle Materials and just going to get more exciting as the next few quarters unfold as we develop this new business and as the demand for construction products and building materials continues to improve.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation, and you may now disconnect.

And have a very good day.