Eagle Materials Inc (EXP) 2015 Q3 法說會逐字稿

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

My name is Denise and I'll be the Operator for today.

(Operator Instructions)

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

I would now turn the conference 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 third quarter FY15.

Joining me today are Craig Kesler, our Chief Financial Officer; and Bob Stewart, Executive Vice President Strategy, Corporate Development and Communication.

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 third-quarter revenues of $292 million were an all-time record.

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 are extremely pleased with the start-up progress of our frac sand business which contribute positive earnings during the quarter.

We completed the acquisition of CRS Proppants on November 14 and the integration process had been going very well.

An 8% increase in both Cement sales volumes and net sales prices were the primary drivers of the increase in Eagle's quarterly comparative of Cement, Concrete and Aggregate revenues and sales volumes have remained strong in January.

Cement price increases are currently being implemented in nearly all of our Cement markets for all grades of cement.

Increased Wallboard average sales prices and increased sales volumes drove a 16% increase in our quarterly comparative of Wallboard and Paperboard revenues.

Operating earnings in our Wallboard and Paperboard business improved 31% to $41.9 million for the third quarter.

Our paper mill continues to perform exceptionally well, setting a quarterly record for operating earnings.

Earnings and revenues from our frac sand business increased significantly in the third quarter.

However, these results do not yet reflect the earnings power of the business as we have been selling solely from our purchased sand inventories.

We will sell the remaining purchase sand at Corpus Christi by the end of the winter, and then we will move to exclusively selling internally produced product.

As mentioned earlier, we also completed the acquisition of CRS Proppants during the quarter.

While their impact on our quarterly results were minimal due to purchase price accounting, we are pleased to have this profitable business of contracted sold-out volumes added to our portfolio and highly value the experienced operational, logistical and sales talent that we have acquired.

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

Thank you, Steve.

During the first nine months of the year, Eagle generated $183 million of cash flow from operations, a 27% increase from the prior year.

Cash was utilized to fund $65 million of capital expenditures, acquisition spending of $237 million and dividends of $15 million.

In addition to cash flow from operations, we funded the acquisition with borrowings under our bank revolver.

Interest expense during the quarter declined 8% to $4.1 million, reflecting lower average borrowing levels and lower borrowing costs under our bank credit facility.

After considering the impact of the acquisition funding, interest expense should run approximately $5 million per quarter.

And our effective tax rate for the nine months was nearly 33%.

As this last slide reflects, Eagle continues to generate meaningful cash flow from operations as we benefit from improvement in construction activity across a larger footprint of operations, while improving on our low cost competitive position.

Our net debt to cap ratio was 34% at December 31, 2014.

Thank you for attending today's call.

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

Denise?

(Operator Instructions)

Our first question comes from Kathryn Thompson with Thompson Research Group.

First, a few questions on Cement.

Your JV ops have been sold out for the past four to five years.

Could you clarify what percentage of sales are for oil well cement roughly five years ago versus today?

And then what is demand for oil well cement now that we've seen a more meaningful drop in oil prices?

And how should we think about demand going forward specifically out of Texas?

So we have been more than sold out, we've actually been oversold.

So in addition to selling out the plant, we've been importing through our import terminals, purchasing cement from other competitors, both in the market and in neighboring markets.

And even waterfalling some cement from our operations nearby down into the marketplace.

So we are in a really an oversold position, not necessarily a sold-out position.

So a very, very strong position.

Volumes still remain very strong for Cement, and the impact as far as oil, I think we went up and down a little bit over the last five years, but -- and we've gone from roughly 40% of the business to 60%, 50% to 60% of the manufactured process going to the oil cementing businesses.

So that's been a nice improvement.

Who knows where things go from here?

Volumes are still very strong, though, for both regular cement as well as for oil well cement in Texas.

And we have a nice price increase that we've been able to implement as well just recently in the last month for oil well cement in the marketplace.

And what was that price increase?

It was very -- it was substantial.

More than -- because what had happened in the marketplace we've had a number of price increases for ordinary cement, for regular cement, type 1 cement in the marketplace.

And we were getting to the point where it's much more difficult to produce, much more costly to produce and reduces the production capacity of the plant.

So you tend to need a greater spread to make the numbers work for oil well cement, and that spread had narrowed dramatically because of all the price increases over the last couple of years.

So, anyway, it was a very high increase.

And then once again, a follow-up on the JV ops, and really this is helping us to understand how we can reasonably expect to think about how to modeling margins on going forward.

So five years ago your JV op margins were roughly 37%.

And but today performance this year will be roughly 200 basis points below, despite having a higher percentage of higher priced oil well cement sales.

How should we think about, in a market of potentially falling demand for oil well cement, how should we think about modeling those JV op margins on a go-forward basis?

We're very transparent with the JV and the financials.

We can tell that you we finished our budgeting process for the JV, and our results show substantial improvement to earnings this coming year at the JV.

That's what we've budgeted.

Yes, we're very, very comfortable with that.

Okay.

And this is more shifting gears over to frac sand.

Is CRS still on track to be up to the total 2 million tons of production by late March, early April, or that March/April time frame?

Yes, absolutely.

And how much of your Corpus Christi volumes are contracted?

A small -- a much smaller percentage.

Again, we like our position there and feel that we have a very strong position on a spot basis, because of our extreme low-cost position in the marketplace.

But closer to the 20% to 25% range in Corpus Christi.

And then finally, on Wallboard, what's the impact of lower energy costs, including natural gas or plants and diesel for transportation?

How did that impact numbers for the quarter, and how will it affect as we look forward?

It logistics continue to remain challenging for all our businesses.

Again, requiring an extreme focus from our logistics departments in each business.

We constantly focus on which markets to play in, so that we can maximize our sales and markets where we have a competitive advantage.

So you're always adjusting that, and you're adjusting where you're going to market to maximize where you are competitive.

That's our focus there.

So, yes, prices have gone up a little bit, and it's primarily the labor rates, not so much the price of the fuel.

There may be a little offset with diesel prices down.

Those things can shift, though, in the middle of a quarter, so it's hard to tell where the fuel surcharges will be from one quarter to the next.

But we put a lot of focus on that in all our businesses so that we can, in fact, maximize our margins.

Okay, great.

And then one final follow-up question, and I'll jump back in the queue, on frac sand.

And trying to understand the dynamics in Corpus Christi.

You had indicated that you want to fully sell through your third-party sand before you start selling your internally produced sand.

Well, if demand is so strong, why wouldn't you be perhaps more aggressive in selling your third-party sand so you can get to your internally produced?

And could the answer be that there's such a big pricing disparity between your third-party sand that you're selling and your internally produced?

Maybe a little bit --

No, the answer to that is anticipating that there might be another shortage of sand this winter, we built up a very large inventory, and it takes a while for that to happen, so you start planning for that early summer.

And if you recall, even early summer we still didn't have our permit to mine.

And so we started the process of contracting to buy sand, purchase sand, put it on the water to get down to Corpus so we'd have enough volume of inventory if there was another shortage of sand in the marketplace, based on a difficult winter.

So it's really just a function of inventory and chewing through that inventory first before we move into the produced sand.

So it's really just an inventory control in the way our plans are to chew that up first.

While we've run our sand, are very, very pleased with both the quality and the percentages of split of the sand that we're getting.

We're getting actually a little higher amounts of the coarser grades than originally anticipated.

So we're very happy with the way the wet plant is running, because that means we're bringing coarser sand down in higher volume to Corpus Christi.

Great.

Thank you very much.

Our next question comes from Trey Grooms with Stephens Inc.

Good morning, and congrats on a good quarter.

First question I have is on the -- a follow-up on getting some clarity on the frac sand in the quarter.

You mentioned the CRS purchase price accounting.

What was the negative impact there?

Or I guess what would the CRS impact have been on the business otherwise?

I think in the past we've talked about the amount of cash flow coming from that business on a monthly basis.

That effectively is what occurred.

So we're very, very comfortable that the cash flow through the business is anticipated when we purchased the company.

Craig, you might talk about purchase accounting.

So, Trey, like we did a few years ago in purchase price accounting, you step up the inventory to fair value.

That impacted within the oil and gas proppants business about $700,000 in the quarter.

And then as well as just the allocation of the purchase price to the various assets that we acquired.

So you had pretty significant amount of depreciation and amortization just in that 1.5 months of ownership of about $1.9 million.

So a pretty substantial depreciation, inventory step-up that gets expensed in a pretty short period of time.

As Steve said, the EBITDA and the cash flow is consistent with what we were anticipating.

Great, okay.

And if I remember that right, it was at a run rate of somewhere in the $30 million on an annual basis, is that accurate?

That's accurate.

And then you said that you sold -- was it all purchased material there on the frac sand business, everything that you sold, of course, excluding CRS in the quarter?

In Corpus, right.

In Corpus.

Okay, and then so how much of your internally produced material are you shipping now?

And if I heard your comments earlier correctly, it sounded like by the end of the winter you should have that completely exhausted, and we're beginning of February now, so just a sense for how much of the internally produced material is shipping today?

And then is it correct to think that in 1Q that it would all be internally produced?

(multiple speakers)

Yes.

So sometime by the end of this month, early next month, we should have gone through all the purchased product, okay.

And so sometime during this quarter we'll have gone through the purchased product, and then we'll be sole producing sand from our sand that we mined in Utica and brought down this fall to Corpus Christi.

So certainly the first quarter, things will start to look a lot more normal, as far as for you to get a feel for what cash flow is going to be like and earnings from northern white sand.

All right, that's helpful.

To try to get a better sense on this oil well cement, and if we were to see some pullback there, how quickly can you guys convert the oil well cement that you're selling today back over to construction-grade cement, and what are the dynamics that take place there if that were to occur?

So, really, that's in a blink of an eye.

Currently we are purchasing sand from third parties and we're importing sand, and we're also waterfalling sand from ourselves down in.

So the first thing that you do, the waterfalled sand and some of the purchased sand have very, very low margins.

Our purchased cement have very low margins.

So, therefore, certainly the waterfalling can stop tomorrow if need be.

So we have other homes for that.

It's just right now for the needs, we're finding a way to get cement into this marketplace.

So that's easy enough to happen if, for some reason, there's a dramatic reduction in the volume.

Got you, okay.

And then my last one is on the cement pricing that was announced for October and I believe there's another one here for this spring.

Can you give us a sense for or maybe a little color on how the October increases shook out and your expectations for what's out there for April?

Thanks.

So this is in Texas that was fully implemented.

And no reason not to believe -- again, cement is so tight in Texas that it will be fully implemented this spring as well.

Great, thanks a lot.

Good luck.

Our next question comes from Garik Shmois with Longbow Research.

First question is on the CRS capacity.

I think the majority of your 2 million tons was contracted.

And wondering if your customers have started to come back to try to renegotiate the terms?

And if so, maybe a little bit of color on how those discussions are progressing.

So while it's still very early to understand frac sand volume requirements by basin, we do remain very flexible and receptive to working with contracted customers with respect to the timing of their volume requirements.

So if a basin has an issue, and a customer has an issue in a basin, and that impacts their quarterly volumes, we'll work with them to [extend] and modify the volumes, but commercially, it's a contract.

So as far as the spot market is concerned, that's a different matter.

And the nice thing for us is we're very confident that because of our very low delivery cost position, it is going to serve us very well in the spot market going forward as volumes become available.

That's where you want to be in more difficult markets, is the lowest cost provider of sand.

That's helpful.

And as a follow-up, as you mentioned, the spot market, can you provide maybe a little bit of color on what you've seen in the spot market over the last three months or so?

Little or no movement, we'll be honest.

While people ask and there have been people asking about the changes, we're very, very comfortable.

As we enter into agreements and contracts, both ourselves on some of the raw material purchases that we need for our businesses, we do it with people that we trust and we do it in a principled manner.

And we always live up to those commitments.

And vice versa, when we go on the selling side, we're honorable people and we do business with people with high standards and high principles, and they also live up to their commitment once you've finalized a deal.

Okay, thanks.

And then I was wondering if you could provide maybe a little bit of context on where you stand with respect to the plant expansion at the Illinois mine.

You were in the process of trying to secure additional permits.

Is that still moving forward as previously anticipated, or are you starting to rethink how aggressively you're going to look to add capacity?

Absolutely, that continues to move forward.

Very important to us.

It's strategically long term to have that additional capacity up and running to be able to serve the market.

Okay, thanks.

And then switching gears to Cement, could you -- wondering what you're seeing.

You had good volume growth in the wholly-owned region.

Any specific markets that stood out in the quarter that you'd like to call out?

So, in fact, nearly all of our markets had double-digit percentage volume increases this past year with the exception of a couple.

So really, really strong demand for cement in all of our markets.

Okay.

And then lastly on Wallboard, you had a price increase that was announced for January.

If you could help us understand maybe a little bit how that price increase is gaining traction in the market.

Certainly.

So as we've stated before, price remains more important than volume for Eagle Materials.

And while it's a little early in the process, initial indications are that we are realizing another substantial price increase in Wallboard.

Okay.

Thanks so much.

Our next question comes from Jerry Revich with Goldman Sachs.

I wonder if you generally can talk about the cadence of planned cement price increases based on notifications you sent to your customers across your footprint for 2015?

And do you think there will be an opportunity to push pricing twice in some of those regions this year?

Can you just give us an update there, please?

Yes.

Some of our markets have multiple price increases announced for maybe early this year and then later this year.

And early this year meaning January to April.

And in some cases, where there's seasonality, you may push the price increase to where the shipping season begins.

So roughly half and half.

About half of our markets are realizing price increase in January.

The other half, probably the beginning of shipping season, which is the April time frame.

But that's all going very well.

And any thoughts on potential for another increase this summer or fall?

There are increase announcements already out for some of our markets for this summer or early fall, but not all.

Okay.

And then in Wallboard, it looks like, based on at least current diesel prices, it looks like total trucking rate increases, including fuel that you folks might see in 2015 versus 2014 could be flattish.

And I know that was a headwind for you folks last year.

So could we see better net price realization in Wallboard this calendar year just as a function of the delivery cost being flat as opposed to a headwind that you saw last year?

Yes, so we have had a lot of pushback from our contracted commercial carriers.

Flatbed trucks are 100% utilized, so they have pushed back very, very hard on pricing.

So we are going to take some more price increases as far as delivery.

Okay.

And then in frac sand, obviously you folks have the low cost position.

Your competitors are talking about their contracts really protecting to get the business even if volumes decline.

Can you just talk about, what have conversation been like for long-term discussions for you to supply out of Corpus considering the focus across the E&P customer base to bring down costs broadly but specifically same costs as well?

Do you think we'll see a willingness from some of the E&Ps to walk away from their contractual agreements?

How do you see that situation playing out if sand volumes are going to be weaker like the E&P suggests?

I think that really varies by the customer.

Some customers have a lot of sand already committed contractually.

Others have very little sand contracted.

And, of course, that's for us to, as far as the spot market is concerned is we are going to work closely with the ones that have less committed or have hardly any contracted sand committed, because that's where we feel we have our strongest position and the ability to sell sand.

So we feel comfortable that there is enough contracted sand just under normal sequences where it's rolling off to where there's plenty of volume available for us to move the Corpus Christi sand into the marketplace on a spot basis, sand that's not previously committed.

Okay.

Thank you.

Our next question comes from Stephen Kim with Barclays.

Wanted to ask two questions, if I could.

One on well cement, the other one on Wallboard.

First in regards to well cement, you've historically said that -- you mentioned that it's easy to switch between construction and well cement.

And I know historically you've indicated that the pricing tends to move similarly between the two.

I just wanted to understand that a little bit better.

In terms of looking forward if we can continue to expect well cement to move similarly with construction?

I was curious, is the link, in your view, because of the fact that there is relative ease in switching production back and forth, or is there some other reason why it's historically been linked and should hopefully remain so?

And then part of that question is you've talked about the fact that it's easy to switch.

I was curious, are there maybe some inefficiencies though that you would incur as a result of switching to construction from well cement?

Yes, what we're talking about is not necessarily switching the manufacturing process as much as we were talking about switching the other sand, because in Texas -- or excuse me, Cement.

In Texas, we have more than sold out the plant.

The plant is 1.4 million, 1.5 million capacity, and we're selling 2.4 to 2.5 million tons of cement.

So it's easy for us to go ahead and turn the spigot off the purchased product, as you might have some contraction in one segment of the market, per se, let's say the oil well cement.

For us, you just actually produce a little oil well cement.

In fact, during the course of the year, we're constantly switching from producing regular cement to oil well cement on the process.

It's not an easy conversion, it creates a few difficulties.

But that's how we've been operating for the last 20 or 25 years.

The other issue that you get into with oil well cement is it's more expensive to produce, and it reduces the production throughput of the kiln system when you produce it.

So you naturally are going to want to have a higher margin when you produce the oil well cement than when you produce regular cement, because why would you reduce the capacity of the plant at higher cost if there wasn't higher margin?

So that's the analysis that you go through.

Got it, that's very helpful.

Thanks for that.

The second question related to Wallboard.

I know last year you had talked at this time about the fact that there was relatively strong pre-buy activity.

And we've heard that for a lot of guys who did that, engaged in that, elevated that, that didn't work out so well for them necessarily.

So was curious if you could talk about whether you saw any contrast between the level of prebuy this year versus last year?

And I may have a follow-up on that.

Sure.

So what we saw last year was prebuy started very, very early in late summer, we started seeing prebuy.

This year we didn't see prebuy early, that early.

But then what happened is when we got into November, December, it started to pick up.

So where we thought there might not be as much prebuy, there ended up being a much more significant amount of prebuy than we anticipated, but it was later, later in the year.

Interesting.

Okay, that's very helpful.

Thanks very much, guys.

Our next question comes from John Baugh with Stifel.

Congratulations on a great quarter.

As a follow-up on that, I understand the prebuy is different, but how does that maybe influence the March quarter as Wallboard is concerned year over year in terms of pre-buy activity?

So for us, our volume this January versus last January was at about the same pace.

So for us, the volume ended up year over year about the same pace in January of 2015 as January of 2014.

Thank you.

And then on the Corpus Christi frac sand, should we be thinking -- I believe the plant has 1.5 million annual capacity, and you've got the facility running.

Should we be thinking that in the June quarter or maybe at the latest by the September quarter, we're running at that annual capacity?

Or does that decision hinge on pricing that you're getting for the spot market?

Thank you.

Our plans are to steadily ramp that plant up as makes sense into the marketplace.

So we're going to continue to ramp that plant up.

We had some additional construction down at Corpus Christi that won't be complete until the March time frame, end of March.

So really to be able to fully utilize that whole capacity, we have to finish the final phase of construction.

And after that there's a little shakeout period.

So you're going to see it start to occur in the first quarter, but we should ramp up for sure by the second quarter of next year.

Okay.

So by the September quarter, if selling prices are reasonable, you could run at full volume there?

Yes.

It's really depends on the market and the opportunity, but no reason why we couldn't.

Great.

Thank you for that color.

Our next question comes from Todd Vencil with Sterne, Agee.

On the frac sand business, couple of questions.

Craig, you talked about the accounting drag there from the purchase accounting on CRS.

How should we think about that persisting?

How quick is that going to roll off?

There will be a little bit of that left in the fourth quarter, but I'd anticipate the majority of that.

But the number will be about the same in terms of the impact on our fourth quarter, but it should be virtually gone by then.

So about three months worth of impact, half of which you took in the December quarter?

That's right.

Another way to think about it.

Okay, good.

On the frac sand business, thinking big picture, and I appreciate the comments you guys just made about volumes.

But given what you're seeing in terms of spot and contract market pricing, and I'm thinking now about the Corpus volumes, given what you're seeing on the pricing there between the spot and the contracts you've been signing up and then now that you're running the plant up in Illinois, and you've got the logistics figured out, can you give us any thoughts on what you think profitability per ton is going to be on those volumes you sell through there?

Let us integrate the new business.

The start-up business with the new business that we acquired and get our feet under ourselves before we go ahead and give you any more details.

Fair enough.

I'll ask every week, Steve.

That's fair, I appreciate that.

Switching to Cement.

You mentioned, Steve, that you're purchasing cement from third parties.

Is that in the context of ocean-going imports, or are you doing some land-based stuff, buying from some other US producers?

All of the above.

Are the other US producers in Texas or outside Texas, if I can ask?

All of the above.

Okay.

Great, interesting.

Are those guys becoming less willing to sell to you, given that everything is pretty tight?

We keep working on that, and I'll also mention that we started waterfalling some of our own product down.

And that's because, yes, things are starting to get tight and harder to get cement from a third-party competitor.

Got it.

And on that point that you just made, I remember the waterfalling from most of last year was difficult.

Has that eased up in terms of the rail congestion?

We have found a way to make that happen, that's correct.

Okay, good.

Related question but bigger picture, more industry.

Thinking about Texas, can you give us a picture of the market balance?

I mean, it seems to me like everybody is sold out in Texas, more or less.

Am I right about that?

How much is coming into the ports and how much is coming in on the rails from other states?

Yes, clearly demand in Texas exceeds supply by quite a large margin right now in Texas.

Okay, fair enough.

Can you give us a view on maintenance that you can see in the near term?

Was there any significant maintenance in the quarter?

Doesn't look like there was to me from the numbers, but you tell me.

No.

So we will have some maintenance coming up, and it might split some in this quarter, some in the next.

Typically in the winter quarter we'll do some finished grinding maintenance, certainly in the seasonal markets.

But as far as kiln maintenance, sometimes they may hit at the very end of this quarter, but almost always we have a lot of major maintenance in our first quarter.

So you can anticipate generally a fair amount of major maintenance in our first fiscal quarter, that's just generally the timing of when our maintenance occurs.

Similar to last year in terms of magnitude from what you can tell right now?

Exactly.

Okay, good.

Final question, I think I know the answer but I'll ask it anyway.

You've talked about significant price increases in Cement.

It's fair to assume that you're seeing similar trajectories and trends in the Concrete business and in Aggregates?

In markets that are strong, that's absolutely true.

So we don't play in a lot of Aggregate markets, but certainly in Texas that's very true.

Northern California is still weak, okay.

So that's the lay of the land there.

Okay.

And I lied, this will be my final question.

In the market in general, it feels like last year there was a deceleration in the resi business and even in the level of some land development activities maybe.

And a few people we're talking to are talking about some reacceleration into this year.

Can you talk about what you guys may be seeing specifically in your residential end market?

We are hearing the same things, and in the markets where cement demand is strong and the economies are a little more vibrant, residential is strong in those markets.

But we've also -- we're currently hearing a lot of renewed optimism about single-family housing recovery, that it's just around the corner.

And we're very well-positioned, and we are absolutely looking forward to that eventuality.

That's perfect.

Thank you.

Our next question comes from Jim Barrett with C.L.King & Associates.

Steve, do you view the current decline in oil prices and the uncertainty it creates as a good time to be shopping for more frac sand assets?

How do you view that from a timing perspective?

We're always open to look for opportunities that have a good return on investment.

And typically those will occur in times of recession of one business or the other.

So if it makes sense and it fits in with our strategy of being the lowest delivered cost provider of frac sand, it makes sense.

If it's a weak position because there's a lot of sand that's out there that is weak, it's not easy to get to the rail, if it does get to the rail it's to the wrong rail.

So you have to be very, very careful as you look at those opportunities.

But if there's an opportunity to acquire a well-positioned frac sand business, certainly we'll take a look at it.

And of the better quality frac sand assets, is there a reasonable pipeline of assets that are being shopped currently?

I wouldn't speculate on that.

Okay.

Well, thank you very much.

We have no further questions.

I will now turn the call back over to Management for any closing remarks.

Please proceed.

Thank you, and we're looking forward to our year-end call which is going to be a very, very strong year for Eagle Materials, in three months.

Thank you very much.

This concludes today's conference; you may now disconnect.

Have a great day, everyone.