Eagle Materials Inc (EXP) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the FY15 Eagle Materials Inc.

earnings conference call and webcast.

My name is Mark, and I'll 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 over to Steve Rowley, President and CEO.

Please proceed, sir.

Thank you, and welcome to Eagle Materials' conference call for the fourth quarter and FY15.

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'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 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.

I am pleased to report that our fiscal-year revenues were $1.1 billion, an all-time record, and increased 19% from last year.

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

And, as we mentioned in the press release, the impact of settling our litigation with the IRS benefited the fourth-quarter and annual results by approximately $0.39 per diluted share.

We also recently reached an agreement to acquire Holcim's slag-grinding facility in south Chicago.

This facility is a great complement to our existing Midwest cement facilities, and will enhance our marketing efforts throughout the Midwest.

A 5% increase in our annual cement sales volume and a 6% increase in net cement sales prices were the primary drivers of the increase in Eagle's annual comparative of Cement, Concrete, and Aggregate results.

While weather conditions in Texas have been very soggy, our customers continue to enjoy a robust backlog of business.

Even with this slow start to the year, we expect cement demand in Texas will increase by approximately 5%, to 18 million tons.

We recently implemented cement price increases across all of our cement markets.

Increased wallboard average net sales prices and increased sales volumes drove a 13% increase in our annual comparative of Wallboard and Paperboard revenues.

Operating earnings in our Wallboard and Paperboard businesses improved 28%, to $177.4 million, for the fiscal years.

Our paper mill continues to perform exceptionally well and set an annual record for operating earnings.

Eagle's Oil and Gas Proppant annual fiscal results reflect the ramp-up of our greenfield frac sand business during FY15, as well as the acquisition of CRS Proppants on November 14, 2014.

The recent reduction in oil and gas rig counts, and decline in well completion activity, has affected near-term demand for proppants, which in turn impacted our fourth-quarter frac sand financial results.

This past quarter was difficult, as sand suppliers and sand consumers reacted to the changing environment of stacking rigs and moving rigs.

We have worked closely with our customers to navigate the cycle and strengthen our customer relationships.

From a strategic perspective, we will take advantage of this opportunity to cost effectively build out our outreach to targeted shale plays and strengthen our long-term low-cost positions.

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

Thank you, Steve.

During FY15, Eagle generated $234 million of cash flow from operations, a 37% increase from the prior year.

Cash was utilized to fund $112 million of capital expenditures, acquisition spending of $237 million, and dividends of $20 million.

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

As we mentioned in the press release, we finalized our settlement with the IRS regarding the Republic acquisition during the fourth quarter and, as a result, we recorded a tax benefit of approximately $16.6 million and an interest recovery of $4.4 million.

Excluding this one-time benefit, our effective tax rate for the year was approximately 33%.

And, 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 our low-cost competitive position.

Eagle's net debt-to-cap ratio was 33% at March 31, 2015.

Thank you for attending today's call.

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

Mark?

(Operator Instructions)

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

Please proceed.

Thanks.

Good morning.

I guess first one is a clarification.

You mentioned due diligence costs relating to, quote, construction products business.

Could you be more specific what that is?

Yes.

So we obviously continue to look for growth opportunities, and we were actively pursuing them.

And it's related to those activities.

Okay.

And then is that across all segments or concentrated in one segment?

Concentrated primarily in one segment.

Okay.

And then on the proppants side, could you give us some color on the volumes in both the greenfield and CRS?

And then my understanding is CRS is largely take-or-pay.

I know there's seasonality, or some level of seasonality.

But I'm just curious how the two businesses contributed individually to the EBIT loss in the segment.

We are continuing to work on the integration process with CRS.

We expect that process to be fully completed by calendar year end.

And in addition to that, we're just now finding -- we're nearing completion of some planned efficiency and customer convenience modifications in South Texas.

We'll start commissioning that, those modifications, here very soon.

Expect those systems to really be fully operational by mid-July.

So a lot of this is just getting our systems in place.

We really are at the early stages of the business.

And working to make sure that functions appropriately.

Long term, we're very, very excited about our long-term low cost position.

And we're going to continue to work to enhance that while -- and as you improve your position, it's not only good for yourselves, it's also good for your customers (technical difficulties) your ability to get sand to the marketplace lower and lower.

So we're very pleased with the progress we've made in this (technical difficulties).

So just -- and I'll defer to others, but just to be clear, CRS generating a profit before integration expense and before systems changes and some of the things you're talking about, and the losses are still in Texas primarily, or any kind of help along those lines?

Thank you.

We would say this quarter, obviously, you're going through a period of time where you had a major adjustment in demand for proppants associated with what's happened to the price of energy.

So you're going to kind of need to let the dust settle.

And while the dust is settling, you're going through a period where you work with your customers as they work with their customers to mix and match where the demand needs to be.

Oil rigs are not something that are put up and stay in one specific location.

They are going to move to where they have the best chance to produce oil at a profit.

So you're going to go through a transition where you need -- where your sand might have been going to one location that's going to shift to another location.

It just takes a while to work through all of that stuff.

And it takes a while to work with the customers to make sure your flow of product to them is appropriate.

And that's really what's occurring.

So whereas when things are really tight, a lot of stuff may be picked up directly at your plant.

As things shift and move around, a lot of it tends to shift back more to a delivery basis to the specific targeted shale play.

And we're just in that transition period and getting all that worked out.

At the end of the day, yes, this business is run with a lot of take-or-pay contracts.

But when the demand is dropped as dramatically it has, rig counts are nearly in half, often times, certainly until you get through the process, you're going to have a short-term period where it's hard to match supply with this changing demand.

It takes a quarter or two.

Once that's done, everybody's readjusted and everybody's refocused.

And then you move forward.

So we're not surprised by this.

And we're very happy.

We've worked very, very closely with all of the contracted customers that we enjoy as a part of the CRS acquisition.

And have come to very, very good understanding of how collectively we're going to move forward and maximize the opportunity for both companies.

So, Steve, just to be clear, the economic value, if you will, of those contracts on the take-or-pay are still largely intact, albeit with maybe a little difference in timing?

So the answer is they are intact, maybe even expanded.

Okay?

And -- but yes, certainly you're going to have some back-end loading, and it depends on how you work it.

Certainly the volumes will be back-end loaded somewhat, because you have this huge disruption for the near term.

And sometimes, again, to make sure that your customers are competitive, maybe some of the pricing gets back-end loaded.

So you work through that on a case-by-case basis with each customer to make sure your customers can be successful.

At the end of the day, we're not going to win unless our customers win.

We work very closely with them to make sure they can be successful.

Great.

Thanks for that color.

Good luck.

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

Please proceed.

Good morning.

First question is the third-party sand that you guys were selling in the past, where are we on that?

Is that behind you?

How should we be thinking about the impact there on overall frac sand profitability?

And then with the demand outlook, the systems changes you're talking about, integration, with all of these things playing a role, as well as the third-party sand and everything else.

At what point should we start thinking about this business returning to profitability -- frac sand?

So the third party sand is behind us now.

That did have some impact this quarter.

It certainly had some impact as spot market pricing went down in the quarter.

Most of that was sold on a spot basis.

But now that is all behind us, and we're looking forward to, again, a transition year this year.

But very, very comfortable that as the year progresses, the results will get better and better.

And as we get into next year, the results will be much improved.

So really, we really love this business.

We love our position and are going to continue to -- obviously, we have plenty of cash flow as a Company.

We're going to continue to enhance our position and improve our low cost position in all of the targeted major shale plays.

And with that, some of these changes that you're making, I think the system changes you talked about in the back half of this year, that was going to come through.

Is that combined with what you're seeing with the change from third party?

I'm just trying to get our hands around, at least in the ballpark of how we should be thinking about the business for this year.

You say it should be improving.

Is there any sense of the negative $6 million this quarter, could that turn to positive, you think by the end of the year?

I would anticipate by the end of this fiscal year very much improved positive results.

Okay.

Perfect.

That's what I was going after, Steve.

And I appreciate the color there.

On Texas cement, you mentioned that you're expecting it to be up 5% this year.

This would imply an improvement, obviously, from what we saw in the first quarter.

How much of the 1Q weakness do you think was weather-related?

And can you talk about kind of what you're seeing from underlying demand in Texas now in cement?

Sure.

The backlog, as I mentioned on the prepared comments, is exceptionally strong.

There is just a lot of construction activity in Texas.

And once the rain stops, the cement flood gates will need to open up to take care of the backlog of business that's out there.

So yes, rain was the major factor.

However, energy, we do supply well cement in Texas.

And we expect our sales this year to be off by about 35% as far as well cement is concerned.

These volumes are, obviously, as I just mentioned with the strength of the construction backlog, they will be totally replaced by manufactured construction-grade cement.

Okay.

That's very helpful.

My last question is just around the wallboard profitability.

Nice incremental margins there.

Can you talk about kind of what's behind that, and how should we kind of think about the incrementals there in that business kind of going forward as we look through this year?

Thanks a lot, and good luck.

Thank you, Trey.

The January price increases has been partially, but again, fairly successfully implemented.

Our price is up approximately $10 a 1000 Q3 to Q4.

That's -- we're very comfortable with that, and really think that, that tells the story about the construction recovery.

It is ongoing.

It's not going off on a hockey-stick type of approach, but it's steady and ongoing.

The demand for wallboard continues to improve.

To put that into perspective, our April through mid-May, we're halfway through May now, wallboard sales volumes, they've increased about 25% over the January through March over last year, over last quarter's ship rates.

So demand's up.

Pricing's up.

We are feeling very good about the wallboard business.

All right.

Thanks a lot, Steve.

Your next questioning comes from the line of Jerry Revich from Goldman Sachs.

Please proceed.

Hi, good morning.

Good morning, Jerry.

Good morning.

I'm wondering if you gentlemen can talk about the upcoming September 15 environmental regulations in cement and whether you plan to do a $5 environmental surcharge or any similar pricing mechanism like we've heard out of one of your competitors?

And then maybe separately, can you just touch on your prospects for each of your major plants to push pricing over the balance of the year?

So yes, we have implemented all the capital projects needed to be fully compliant with the new regulations that come into play.

So we're very comfortable that we're ready there.

We have just implemented price increases here early April in almost all of our markets, maybe some earlier January.

But we have implemented price increases.

So we're just now digesting that price increase.

In some markets where demand is very, very strong we may look at some potential increases in prices.

We really are at a point where volumes are so strong in some of our markets this year, we're going to run out of cement in the fall if we don't find a way to throttle them back.

So, to put that into perspective, in cement, many -- all of our markets, cement markets, are up at least mid to upper single-digit volume increases year over year.

Okay.

But in many markets, the volumes were up 20% year over year.

And a lot of that had to do with the Polar Vortex.

But some of it is even beyond the Polar Vortex, just extraordinarily strong volumes right now.

And we know the more we sell now, the bigger an issue it's going to be when the real crunch comes in, in the fall.

So very excited about all of our cement markets.

Really right now, scrambling to make sure we have all the product available.

We just completed our major maintenance at all of our cement plants.

So the plants are in tip-top shape going into this busy shipping season.

And we're going to do everything we can to make sure we don't let down any customers and have the cement they need as construction continues to pick up.

Okay.

And then from a capital deployment standpoint, Craig, your net debt-to-EBITDA is approaching, I think, 1 times or so.

Can you talk about your target levels of leverage and how you're thinking about uses of capital from here?

You've been active from a buyback standpoint in the past.

Where does that stack up in your priority list at this point?

We continue to look for growth opportunities.

As we've mentioned in the past, we have pretty high hurdle rates.

So we're particular about the growth opportunities.

And as business continues to improve like it is right now, more than likely we believe that the amount of cash generated will grossly exceed the demand for growth, whether it's greenfield or acquisitions.

So yes, we know that as we go forward we need to find a way to appropriately, for all of our shareholders, return some of the cash.

Okay.

And lastly, on the frac sand side, your competitors are posting $20 to $25 per ton EBITDA profits.

And I'm wondering, can you flesh out for us when you expect to get to those levels, I guess, in your wallboard and cement business?

We're not used to you folks trailing your competitors on a profitability standpoint.

Maybe you could just flesh out for us when you expect your business to get to those levels.

You're talking -- you mentioned the cement and the wallboard and the frac sands?

Yes.

So the better way to ask that question is, in frac sand, your competitors are putting up $20 to $25 per ton EBITDA contributions in their sand businesses at this point.

And obviously we're seeing losses in your business this past quarter.

When do you expect that gap to close?

On an EBITDA basis, we're at that same level.

All right.

We'll follow up offline.

Thank you.

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

Please proceed.

Thanks for taking my questions today.

The first is on cement.

Could you give some clarification on how readily did the market accept the $13 per ton well-grade cement price increase in January?

And then, we would assume that based on reported results, it was decent acceptance, but more clarity there.

And then a follow-up on pricing, again for the $10 per ton increase in January.

Could you clarify, is this for all markets?

Thank you.

So some of the pricing in January occurred, and it was not in all markets.

And then some of the pricing has been implemented early April.

I don't know that it's the full $10, but in some cases we're getting near that, at least we look year over year some of our individual businesses.

With respecting to getting very specific about pricing to specific customers or specific segment of our customers, we're not going to answer that question, Kathryn.

Okay.

For frac sands, switching to that business.

Specific to Q4, what was the purchase accounting impact to EBIT?

You gave the annual number, but want to just make sure that we get -- or clear on the Q4 impact.

And then if you could give some guidance on how we should think about modeling DD&A expenses on a go-forward basis as we look to model through FY16.

Sure, Kathryn.

This is Craig.

So the sand business, when we -- you step up inventory, that happened November 14.

So the $1.5 million, not quite $1million, but a $1 million in this quarter came from the -- was expensed during this quarter from the step-up in inventory.

And then in terms of depreciation and amortization for the entire business.

So for the fourth quarter, and this is the total company of Eagle, about $21.7 million of depreciation, depletion, and amortization.

The most significant change there coming through the frac sand business, as you would expect.

So cement was about $7.9 million in DD&A.

Wallboard is about $5 million.

Paper, $2.1 million.

Concrete and aggregates was a $1.5 million.

And then the step-up here for the oil and gas proppants business was about $4.9 million.

And that was $0.5 million a year ago in the fourth quarter.

And then about $400,000 in kind of corporate and other.

So the total of $21.7 million.

And I would say it should range in that for the remainder of FY16, depending upon activity levels.

But that would be a pretty good run rate to use for the year.

Okay.

Thank you.

And then final follow-up on frac sands.

So CRS is shut down for a portion of the quarter due to cold weather, just purely from a seasonal standpoint.

How long are these shutdowns typically in your fiscal Q4?

And what were the fixed costs recognized in the quarter specifically related to CRS?

The wet operation shuts down in the winter, but the dry plant stays fully operational.

And in fact, we completed construction of the second dry plant this quarter, and it's up fully -- fully up and operational.

So doubling the capacity of that plant has been completed, and they are both fully functional.

So you really don't have a shutdown of the dry plant.

It's a shutdown of the mine and the inventory that you build up to be able to have enough sand to run through the winter that occurs.

What were the fixed costs recognized in the quarter?

We would assume that you're not -- maybe another way to ask this, if when you look at the volumes that were generated in the quarter for frac sand, what rough portion came out of your -- was actually from CRS?

Because I'm just trying to get a sense of, from a seasonal standpoint we would assume this would be a very low quarter, but we just need some clarification and hand-holding on that.

Kathryn, as Steve mentioned, the wet plant and mine are down during the winter months, given the seasonality up that north.

So you, for accounting purposes, expense fixed costs through that time period.

You're talking roughly $1 million, maybe a little bit more than that.

Given that we're starting up another plant, as Steve alluded to, it's difficult to look at that as perfectly.

But that would have been the impact during the quarter.

Okay, great.

Thanks very much for taking my questions.

Your next question comes from the line of Adam Thalhimer from BB&T Capital Markets.

Please proceed.

Good morning, guys.

Good morning.

On the -- I wanted to ask about the pricing in JV cement.

I think you said that you'll switch by year end from oil well to construction.

What's the impact there on pricing?

So we really look at it on a margin basis.

And we're going to switch some of it, not all.

We're going to say our well cements are going to be up about 35% this year.

That's our estimate.

Then when that happens, you switch and you produce construction-grade.

What occurs then is that the plant's able to operate more efficiently and produce more volume.

So you get some incremental sales, manufacture sales associated with it.

So it's more costly and the plant operates at a much lower rate when you produce the oil well cement.

You really get a double impact there that's good.

Pricing has come up dramatically in the last year, 1.5 years in Texas.

And it really starts bumping into the pricing of the well-grade cement.

And so then what happens, when you look at what's the best thing to do as business, as the pricing of construction-grade cement starts approaching the pricing of well cement, and now you're losing, let's say, roughly 15% plant capacity, you start to ask yourself, is it better to produce well cement or construction-grade cement?

Well, we've said we know that these business is cyclical, both of them.

What we've done, is said that over the long term, we would like to be in both businesses.

So we're going to supply to the energy services as much well cement as we can possibly supply, irrespective of what's happening in the construction-grade market.

But you do need to have pricing appropriate, or it makes that even a more difficult decision.

For many, many years we've said, we're not going to turn away a well customer just because we can make more money in the construction grade.

That's still the case.

But if it gets really crazy, and if the price of well cement goes down dramatically, then that decision gets tougher and tougher.

We'll have long discussions with our customers and say look, you're putting us in a very, very difficult position.

Those are part of the discussions.

I didn't really want to get into a lot of details about that earlier.

But we look for long-term partnerships and how we're all going to win over the long term.

We can help you out now.

You can help us out later, and how do you best balance all of that between the broad base of customers and the product mixes that you have?

And this isn't just in cement.

It's in wallboard and paper and everything we do in the frac sands.

You look for long-term solutions and way to, yes, with all your customers that allows everybody to enjoy good results and be successful over a much longer-term basis than what happened last quarter.

Okay.

Thanks for that color.

On the wallboard volume, did you say earlier in the call that quarter to date you're up 25% year over year?

25% sequentially versus the January quarter -- or March quarter.

So January through March sales volumes, April to mid-May we're up 25% versus our fourth quarter in wallboard volumes.

Okay.

And the last thing I wanted to ask about was the slag acquisition.

How should we think about that in terms of contributions?

So obviously this is -- we're going to take ownership of the business about halfway into a shipping season.

So for us, our success is what's been currently put in place by the existing owner.

And we have everything set up to have a smooth handoff and to be able to make sure any commitments that they have made, that we'll be able to keep up and deliver the slag to the customers.

For us, and maybe just a little understanding of what slag cement's all about, it is primarily used and needed for alkali silica reactivity mitigation.

That's more than a mouthful, but so is the problem.

What slag cement provides is an additive that allows the production of durable concrete when using suspect sand and aggregates that are often the only reasonably costs source of sand and aggregates in a local concrete market.

So if you have some difficult construction, the aggregates for the ready-mix customer, they won't be able to produce a quality concrete without the addition of slag.

So excited to have that added to our products and to be able to service a much broader base of customers by being able to, where they have an issue with aggregates, supply something that will help them produce a high quality concrete.

Got it.

Okay.

Thanks, guys.

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

Please proceed, sir.

Hi, good morning.

As far as cement goes, recognizing the market's tightening, but with pricing up and the dollar high, are you starting to see more imported cement coming into the markets you serve?

Not necessarily.

We're still importing a lot, as there's a huge shortage here in Texas.

So those imports are coming in.

Even though we talked about the little bit in the well cement, but that gets shifted over to manufactured.

We still have a -- there's still a huge shortage in the Texas market.

I can't speak -- that's the only market that we currently are importing cement into.

We're waterfalling some around from some of our other plants, as we explained with the Sunshine acquisition.

It allows us to move cement in between companies where some markets are stronger and other plants may have some seasonality factors impacting them.

But that's currently the only place that we are importing cement, is into Texas.

And we are going to import as much as we can this year.

Okay.

And then on the proppants side, you talked about what you're trying to do with CRS and the integration process, and kind of improving the cost position there.

Do you still see a lot of low-hanging fruit in your greenfield operation, and where might the bulk of that opportunity be there as well?

So again, we continue to modify that to improve our cost position and, of course, a big part of that was being able to produce our own sand.

Our own mine just started up last July, and then we had to work through the inventory of the purchase product.

That's all up and running, all very effective, all very low cost.

We continue to look at opportunities to take $0.50 out here, $1 or $5 out here by utilizing our balance sheet and putting in appropriate capital projects.

We also, as I mentioned, in South Texas wanted to make sure that we are the most convenient supplier of high quality cement to the Eagle Ford.

And that, all of that process will be complete kind of by mid-July.

So really positioning ourselves going forward as the lowest cost, most convenient supplier of high quality Northern White Sand to the Eagle Ford.

That was our first goal from a greenfield basis.

Now we are looking at doing the same in other targeted shale plays.

Okay.

And then in the lines of putting that cash and maybe that balance sheet to work in the proppants business, are you more focused right now on the distribution side or is adding additional production capacity still potentially of interest?

So we're doing both.

It depends on the size of the target shale play.

So if a targeted shale play is not quite as massive, that would be a distribution play.

If a targeted shale play is long term, it's big and it's massive, we're going to do the right thing and put production capacity in place.

Okay.

And then maybe just last one for Craig.

Any estimate on CapEx for FY16?

Yes.

Obviously, with Skyway, that's going to be about $30 million that we expect to spend in our fiscal second quarter, pending the outcome of the Global, the LafargeHolcim merger.

Above and beyond that, we're going to be in the $60 million to $70 million range, depending upon timing of projects.

There's some in the cement business, continued cost reduction projects, as we've done over the many years.

And then as Steve alluded to, the further build-out of the sand business.

But that's a good place to start with for the year.

Okay.

Thank you.

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

Please proceed.

Good morning, everyone.

Good morning.

Steve, the wholly owned plants appear to have an outstanding quarter.

Was that, especially considering the weather, was the March quarter, is that the new normal in terms of operating profitability, or was it a light quarter year over year in terms of maintenance?

Sometimes you have you maintenance that hits a little bit in the fourth quarter.

But mostly we have generally shifted most of our major maintenance to the first quarter.

I think that's what happened last year.

But we did last year, if you remember, had a brutal winter.

And that really had an impact, probably a larger impact per share, than any maintenance costs in the quarter.

This year, we didn't have just a normal shipping in the winter.

We had a very robust shipping season for our businesses in the quarter.

And as we've gone into April and May, the demand continues to increase.

So the construction business is improving.

Whereas before we would be talking about it improving in Texas and in the mountain regions, now it's improving in all of our markets.

Okay.

Sounds good.

And then on the slag business, can you tell us what the incremental profitability you expect from that business going forward?

Let's, let's get the keys first before we get into that.

All right.

Okay.

Well, thank you.

Mark?

Operator?

Garik Shmois from Longbow Research, please proceed.

Hi.

Thank you.

Question on oil and gas proppants.

Now that you -- sounds like you finished the expansion of the CRS plant.

Recognizing that it's a very challenging environment, I was wondering if you, though, could help us understand a little bit how that added volume is going to feather in through FY16?

So that added volume will start to feather in, really primarily in the last quarter of this year.

So we can say that these next couple of quarters, as again we mentioned earlier, you're kind of letting the dust settle in the energy market and everybody figure out where sand needs to go and who needs it and which market, which shale play the sand needs to go to.

So we anticipate really seeing the need for that in our fourth quarter of this coming year.

Okay.

Thanks for that.

Switching to wallboard and paperboard, is it possible to quantify how much, if any, was there a benefit of lower energy costs?

Very little.

Very little to speak of.

Okay.

So the profit improvement was primarily a function of revenue growth?

That's correct.

Okay.

And then on Texas JV cement volume, you've indicated an outlook of 5% volume growth in Texas for the year.

Just wondering how we should think about your volumes out of the JV, given the context of your broader Texas market outlook.

Do you think you can grow in line with the market?

Or will the 35% anticipated decline in oil well volume be a more significant headwind that you can't overcome?

So the well cement, that's just not an issue.

It just shifts right over and it's manufactured sales, and it's easy and the customers are there and we don't have a problem moving that around.

However, when you've had three or four or five months of really wet weather, sometimes when the spigot opens, the spigot opens faster than you have pressure to put the cement out.

So depending on how fast that comes, what usually happens is there will be a shortage of cement in the market.

You won't be able to produce it quick enough.

Your competitors won't be able to produce it quick enough.

The customers are sitting there just chomping at the bit waiting for the cement to come.

And it just takes a while, then, to work that through.

So you will -- I do anticipate there will be some movement, at least quarter to quarter, in how cement is sold in Texas.

But typically then you'll look to bring other sources in.

Whether we're bringing it from some of our sister plants or whether we're trying to find a way to, in addition to bringing imports in, buying cement from some of our other competitors in nearby markets to help the shortfall that clearly we're going to see in Texas.

But the demand's there for that kind of rate of cement.

The problem is sometimes the mills don't quite have the instantaneous ability to meet that.

So we're going to have a very busy and a very complex summer trying to make sure that all of the customers have all of the cement they need for their backlog of business.

Okay.

So it's fair to assume that the gap that we saw between your volume performance in the JV and the broader Texas market in the March quarter, that gap is not sustainable.

It's going to narrow and going to look probably more similar to what the Texas market is going to look like over the next several quarters?

Absolutely.

Okay.

Thanks.

Last question, just curious on the slag cement plant that you bought.

Is there any possibility that you can convert that plant to a clinker plant over time, or is it just something that doesn't happen within your capabilities?

You make clinker in a kiln.

To put a kiln and be able to make clinker there, you would have to go through a massive permitting.

You generally need a limestone source, and it takes a long time to get a permit to build a kiln to produce clinker.

So that probably -- producing clinker at that site is probably not -- it was designed to take a by-product of a steel mill and produce a cementitous product that has all these properties that we talked about earlier.

Okay.

Thanks for the help.

Good luck.

Your next question comes from the line of Rob Hansen from Deutsche Bank.

Please proceed.

Thanks.

I just wanted to revisit the cement slag operation that you're purchasing.

How does that impact the price of ready-mix concrete when you add slag, and kind of what's the kind of typical replacement rate that you see there?

And will this be used kind of externally, you'll still be selling this externally?

Or will you eventually kind of integrate this into your own cement operations?

So the answer is, we will do both.

We will sell it directly.

We'll also take it to some of our cement facilities and sell a 1-SM, and then maybe a couple or grades to where we blend the slag with our cement so it doesn't have to be blended at the job site.

So we'll be doing both.

A lot will be selling slag straight, direct as slag and the customer can blend it at whatever percentages he chooses.

And we'll also be making these other products at our plants.

Typically, the substitution rate is 20% to 25%, can be as high as 40%.

Got it, okay.

And then I just wanted to clarify, in your cement business as the volumes kind of dry up in the oil well cement, does that mean we should be looking at kind of an upward drift in cement margins as you're doing more regular cement?

We'll see at, least as far as manufactured sales, we'll have an upward drift in manufacture sales as the kiln production is higher producing manufactured clinker, or construction-grade clinker, versus well-grade clinker.

But the margins are different in both of them.

It's a combination of more volume, maybe still a little lower margin, but more volume and incremental sales.

So it's not a simple calculus.

Okay.

Thank you.

And then one last one is just you mentioned the wallboard demand up 25% quarter over quarter.

How does this compare to normal seasonality?

Is this a little better than historical trends?

This is a little better.

And again, with a price increase happening early January, a lot of our customers will build up some inventory in December and then not buy wallboard, buy a little bit less in the first quarter.

But it's also a good trend is as we look total wallboard sales kind of for the first quarter this last year or this last quarter, we're up about 10%, we were only up about 5%.

So we didn't sell as much as some of our competitors, but we are now.

Got it.

Thank you very much, guys.

Your next question comes from the line of Scott Blumenthal from Emerald Advisors.

Please proceed, sir.

Good morning, gentlemen.

Good morning.

Steve, can you talk a little bit about cement imports, particularly as it relates to South Texas?

Is the bottleneck still as bad as it was in the past?

Is it still logistics-driven?

Have there been any recent changes in the ship channel to improve the situation there or your ability to store?

So we're part of a large JV that has a very efficient large import terminal in Houston.

And we are taking full advantage of our part of that JV.

And I know there are a couple other terminals in Houston that have not been fully functional, but one has been partially functional.

One had been shut down for four or five years, needed a lot of dredging to get it going.

I believe that dredging has taken place, but it's an area that typically, when you have weather over time, you're always going to have to come back and dredge it.

That gets costly and you have to add that into the price of the imported cement that you bring in.

I know that's some of that's happening, but hey, it's needed.

We are woefully short of cement in Texas.

Our customers need all the help they can get.

Okay.

I know that historically wallboard is not the favorite business in your portfolio, but can you talk a little bit about capacity especially -- or utilization, I mean, especially in kind of the New Mexico, Texas, Arizona area?

And if you're seeing things in Phoenix tightening to the extent that you may consider maybe taking your other plant in New Mexico out of moth balls?

First off, we love all of our businesses.

We don't really play favorites.

We find ways to make these businesses extraordinarily successful, and we work -- and all the people working in these businesses have done an extraordinary job.

From (multiple speakers) to wallboard to cement, concrete and aggregates, while we sometimes we have some pretty small positions, but all of them are exceptionally well run and we're proud of every one of them.

As far demand, demand is starting to pick up in Southern California.

As demand picks up in Southern California, sooner or later that demand ends up rolling over into the Arizona market.

We anticipate that happening in the next year to 1.5 years; we don't know, right?

When that occurs, and as housing, like I said, we don't see it, housing, going up in a hockey stick but we see it going up very steadily and very stable.

What we're looking at is a very long-term steady increase in demand for housing for a much longer period than a normal cycle.

So we actually see this as adding stability, both in the home building, as well as in the building materials that are supplied to the home building, as actually stability to the whole business and the whole -- the business of both manufacturing and selling the homes into the marketplace.

We actually see this as something that is going to provide better stability for the companies that are in these businesses and will reduce some of the volatility of the earnings.

Okay.

Thank you.

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

Please proceed.

Thanks for sneaking me in for one last question, guys.

Being I live here in the south as well, and it's been very wet here obviously into the spring, but even into April and May.

Just wondering if you guys could comment a little bit on if there's been some weather impact on your cement business there in Texas again this quarter?

I understand the underlying demand trends are definitely favorable, but I guess weather is what it is.

And just trying to figure out if we need to make some adjustments for weather impact as we look into the 2Q as well, or1Q for you.

If I want to get into a little more in-depth into the Texas rainy season.

To put it into perspective, kind of in the January time frame, many Texans were being warned that there would not be enough water this summer for their swimming pools.

And you may not be able to enjoy the use of those.

Right now, all -- or at least all of the reservoirs, or the majority of the reservoirs are full and the flood gates are wide open.

So yes, we've had an enormous amount of rain.

Some impact, certainly both to our own concrete and ready -- our concrete business in Central Texas.

Again, obviously some impact of the sales, but still sales are still even with this weather, and that's when you know construction is good when people are, in between these massive rain storms, pouring a lot of concrete just because they have that much work and that big of a backlog.

While there has been some impact, it's not a total washout, and it doesn't rain all day long.

If business was difficult in this type of weather, you would almost see construction come to a complete stop.

You'd say hey, my backlog's not there.

I'm going to wait until it's easy to get the job done.

With backlogs like this, any break in the weather, they're jumping on the job to get the work done.

That's real helpful, Steve.

Thanks a lot.

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

Please proceed.

Thanks.

One quick follow-up question on frac sand.

In the prior quarter you had indicated around 200,000 was about right in terms of the volumes that were sold in Q3.

Were you at a roughly similar run rate for your Q4?

Kathryn, certainly as Steve, and we've talked about here, the market for frac sand and our markets in South Texas in particular, were slow in the quarter.

We haven't yet really published specific volumes.

But you're in the -- roughly in the same range.

Thank you very much.

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

Please proceed, sir.

Thank you, everyone.

And again, we're excited about all of our businesses, and even our new business.

And looking forward to another record year in FY16.

Thank you.

Ladies and gentlemen, that concludes today's call.

Thank you for your participation.

You may now disconnect.

Have a great day.