Eagle Materials Inc (EXP) 2016 Q1 法說會逐字稿

Good day ladies and gentlemen.

And welcome to the quarter one, 2016 Eagle Materials Inc earnings conference call.

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

(Operator Instructions)

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

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

Please go ahead.

Thank you, and welcome to Eagle Materials conference call for the first quarter of FY16.

Joining me today are Craig Kesler, our Chief Financial Officer; and Bob Stewart, Executive Vice President of 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 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 first-quarter revenues and operating earnings were up 7% and 4% respectively.

We are very pleased with these results in light of an unprecedentedly wet spring and early summer, literally and figuratively a washout of the start of the construction season in some of our most important markets.

Most notably, Texas, Oklahoma and Colorado.

However, the underlying demand for construction materials remains strong across all of our markets and we continue to experience improved pricing in all of our construction product segments.

We've taken the opportunity to complete all of the major maintenance outages at our cement facilities during this time, and have continued to improve our cost position in our new frac sand business, while oilfield continues its rebalancing.

We believe we are exceptionally well-positioned to benefit from the recovery in both construction and oilfield services markets in the US.

As you can see by the 25% decline in Texas sales volumes, the rain had an unusually profound effect on the quarter.

These weather conditions were highly unusual.

After 24 days of rain in Texas in May, we were greeted with a tropical depression in June that dumped tremendous amounts of rainfall in a month where we are typically parched dry and construction is very busy.

The skies are now clear, foundations are being cleaned and re-inspected, and we are starting to see a growing backlog of business in Texas, Oklahoma and Colorado.

August through the rest of calendar year looks to be -- remain stronger than normal.

Average net sales prices increased 9% from the prior-year as price increases were implemented in all of our cement markets earlier this year.

Increased wallboard average net sales prices and sales volumes were offset by lower paperboard sales volumes, which effectively kept our quarterly comparative of wallboard and paperboard revenues flat.

However, the operating earnings in our wallboard and paperboard business has increased 4% to $46.9 million for the first quarter.

Eagle's oil and gas proppants annual financial results reflect the ramp-up of our greenfield frac sand business during 2015, as well as the acquisition of CRS Proppants.

As we highlighted in the press release, depreciation, depletion and amortization increased $7 million in the segment.

The reduction in oil and gas rig counts over the last six months and declining well completion activity is affecting near-term demand for profits.

We've 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 our outreach to targeted shale plays and strengthen our long-term low-cost position.

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

Thank you, Steve.

Cash flow from operations during the quarter was impacted by increased working capital, as the wet weather kept inventory levels higher than typical while payables declined.

We also invested $27 million in capital expenditures during the quarter, which included completing the buildout of our frac sand position and cost control projects in the cement business.

Interest expense during the quarter increased 11% from the prior year's quarter, reflecting increased borrowings under our bank credit facility, post the acquisition of CRS Proppants.

The effective tax rate for the quarter was approximately 32%.

As this last slide reflects, Eagle's net debt to cap ratio was 33% at June 30, 2015.

Thank you for attending today's call, we will now move to the question-and-answer session.

Carolyn?

(Operator Instructions)

Todd Vencil.

Good morning guys.

Steve, first of all, there was about a $5.50 sequential decline for the March quarter in the wallboard price.

I was wondering if you could talk about what was behind that, were you just seeing them drift lower with freight, but this seemed, the magnitude was significantly bigger here.

Is there anything going on?

We actually had some volume reduction some of which was associated with the weather that we talked about severely impacting the cement business.

So we did have some competitive pressures that reduced the January 1 price increase.

Those, however, have abated as the demand has steadily increased in July, and we have not -- and we are very, very happy with both our order backlog and current level of sales of American Gypsum.

When you talk about the competitive pressures that reduced the January price increase, is that, what form is that taking, is that outright reductions in price or is it some other sort of structure?

In some places it's one-offs and in other cases it's just a function of product mix and delivery costs.

Okay.

Turning to oil well cement some [ex] talked about some significant declines in that business, I'm guessing you guys probably saw that as well.

Can you frame up what the declines, if any, and specifically in your oil well product have looked like, what that has meant for your price and margin?

Obviously your price is up 9% so that was a very strong result but was there any headwind from the reductions in oil well and how do you see that developing?

So we really did not have any impact from that, as far as the overall business.

Oil well sales for the quarter were down about 25% to 35% in both markets.

However, manufactured cement product was readily absorbed in both the Texas and mountain construction markets.

So we did because of the weather have to back off on purchase sales, but manufactured product that we don't have any problem at all selling out both of those plants in the construction market, as the demand for oil well cement is down in both of those markets.

Is that a little bit of a headwind on your average price, or does it not really show up?

It didn't show up, it would be small at best.

Got it.

And in the frac sand, Craig mentioned the CapEx, it sounded if you completed the buildout, can you just update us on is that correct or are we done with the process that we're putting in place in Illinois and the buildout at CRS?

We are near finished up at CRS, just a small amount really should be finished this month up there.

However, we're still working on our delivery system from Utica down to Corpus Christi.

I think it will take about a year and about $15 million more to finish that out which finally gets the material from the mine to the dock and into the plant without having to touch it twice or put it in a truck and run it to a third-party barge loadout facility.

It'll take about another year to complete.

And then in addition to that we continue to work on permitting another drying plant to complement the wash plant up in Utica, Illinois.

So [in terms] (inaudible) focus.

And is that, final question for me, thanks for taking all these, is that, are you going to be basically gone ahead with your original plans on the expansions, they haven't been trimmed back at all?

Not at all.

Thanks a lot.

Trey Grooms, Stephens

Good morning, quick question on the cement Steve, you said you are seeing better than average demand now since the weather had started cooperating.

Can you give us a little bit more color about what that means and specifically by geography what you're seeing?

We will go market by market.

The upper Midwest has been very strong, really was not impacted by any weather, so if you get up into the Illinois, Michigan and Wisconsin markets, a very, very strong market this year.

And did not have a weather impact and remains strong.

In the lower Midwest, we did have rain in Kansas and Oklahoma, that has settled down and so demand is picking up as far as the market out of the newly acquired plants.

And then mountain also had a lot of impact by rain.

However, that has picked back up and our sales are very, very strong in the mountain region.

And in the Nevada market that still remains weak.

Northern Nevada, Sacramento markets, that doesn't have anything to do with weather, it's just structurally pretty weak in both of those markets.

And then Texas with rain, rain and more rain, we are starting to see business pickup certainly in Austin with our Ready-Mix business and it just takes a while to clean out and re-inspect all the foundations before we start pouring concrete again.

It takes a while to try it and clean out et cetera, et cetera.

We are slowly starting to see the demand pickup across Texas, so the demand pickup has been a little slow, however, it wasn't just rain, it was a flooding event that occurred which really created a lot of issues to the earthwork that had previously been put in place.

So A, it's too wet to re-dig anything new, and then on top of that you have to go back and fix what the water had damaged before you can actually start pouring concrete.

That's behind us now and you're starting to see the uplift in the marketplace.

All right, great.

And some of the, I guess a few of your competitors have been, on the cement side, have been talking about the potential for October pricing increases in cement can you give us a sense of what your thoughts are as we look into the fall in your different geographies and different markets?

And any thoughts you could give us around maybe magnitude or what you're seeing or thinking around that.

So that will definitely vary market by market and some markets are going to be tighter than others.

And then you get into an issue, as we'll have in Texas, where all of a sudden because it's rained there's a lot of cement available, but once the demand picks up, you just can't logistically produce it.

And your silos are full and get your mills can produce it fast enough when the market recovers.

So then you end up with another shortage, a near-term shortage, as you're trying to catch up with the work that was previously missed.

And then, as I mentioned before, demand has been very, very strong in the upper Midwest, so I would not be surprised to see some price increasing in that area, as well as a starting to see improvement in the lower Midwest as well and the potential for another price increase there.

Great.

My last one and then I'll just jump back in queue, is going back to wallboard pricing.

Off of Todd's question, so it is down sequentially, you mentioned that there was some mix there, there was some actual price movement there.

So my understanding, and I believe was the case for the last couple of years, you guys had pretty much eliminated individual job quotes.

Has that practice changed at all, or was this a just a short term anomaly, given some very short-term demand trends that you are seeing?

This didn't have anything to do with job quotes, it was just meeting some specific requirements and maybe a few customers.

While we said we didn't really eliminate job quotes, we were only given one quote and that's good for 12 months.

And we have received a lot of pressure when the May and June timeframe and finally last month put out a price increase letter, just to make sure that all of the work that's being bid in 2016 that there is -- people understand what the pricing structure is going to be like next year.

And can you give us the color on what that increase is calling for?

Yes that's 15%.

January 1?

January 1.

Thanks a lot for the color Steve, I always appreciate it, good luck.

Jerry Revich, Goldman Sachs

Good morning.

Good morning.

I'm wondering if you gentlemen can talk about the drivers of the sequential improvement in EBITDA in the oil and gas business.

Shipments were down for everyone, it looks like your cost did better, can you just flesh us through the drivers of the EBITDA improvement and if you're willing to share, what was the mix between shipments to the Eagle Ford versus the Permian this quarter?

Thanks Jerry.

I think there's a couple of different things and we walked through a few of them on the call last time in terms of, we were still very much into purchase accounting adjustments in the fourth quarter.

We had continued to sell purchase sand in the fourth quarter, so as we've now moved into, especially down in the Eagle Ford where we're now just selling internally produced sand, that's certainly a benefit to the bottom line.

Getting through some of the purchase price adjustments and so obviously still in a difficult environment for profit [and] demand given the rig count and completion activity declines.

But -- and Steve alluded to, there are some opportunities to continue to invest in the business and lower our cost structure.

But the business is starting to look like and the cost structure starting to improve.

And mix between Eagle Ford versus Permian in the quarter?

Sure we've got terminals across all of those different from both of those different shale plays in Texas.

It gets a little difficult to start to parse out which is Eagle Ford and which is the Permian.

You have customer pickup especially at the mine in Wisconsin and where they're taking it specifically.

But certainly those volumes are still decent here in Texas, given the total change that we've seen in the energy business in the last six months or so.

Okay.

And then for your cement and wallboard business, as everyone knows weather was an issue in the quarter.

Can you talk about what volume growth was like in June and July just to help us get a sense of the run rate for cement, where you've got the capacity issues.

I'm assuming you're getting up close to the double-digit range, is that right?

The volume growth was good in both markets, Craig might have the percentages, which is typical.

You start the construction season and the further north you are the later it starts, so it's typical that you would see kind of a big increase June to July.

July, August, September, October usually being our strongest sales for the cement business.

Okay, is it possible to frame those on a year-over-year basis Steve?

You know, Jerry, I think as Steve was saying earlier in his comments, you know as you -- not only were you dealing with rain in Texas and in some of these other markets, Colorado, Oklahoma, you're dealing with flooding events and it takes a little bit of time to get back into those individual projects and assess what needs to be either cleaned or in fact re-done in some of these cases.

And so to look at an individual month year over year, I think it might be a little too into the weeds.

But I think more generally we've seen good improvement, especially the second half of July, across many of these markets as you are starting to get into this process now where work can actually recommence if you will.

Wallboard, the same way.

We've seen a good strong month here in July and the orders here in the last, again, month or so have been very, very good as you're coming out of this.

I guess the one point I'd also make Jerry, as you look to the state of our Texas volumes for the month of June and if you compare it sequentially, it's actually down 2%.

I think that maybe reemphasizes a little bit of what the weather impact was.

I can't tell you the last time I've seen our Texas volumes down sequentially June to March.

So it's just it an unusual environment to be coming out of.

And the other issue is, once you've burned through the inventory that you have as sales pick up this time of year, you just don't have the production capability and logistics to meet that demand, so it's not as big a surge as you would anticipate.

Thank you.

Brent Thielman, DA Davidson

Hi, good morning.

I would be interested in any other color on successes you are having in developing your customer base in the proppants business.

And then, kind of what you're seeing from a competitive landscape in that business, are you starting to see some consolidation develop to a broader degree?

Really have not seen any consolidation and that is a very, very difficult business right now.

So there's very little spot available, however we do have an number of contracts and we do work those contracts and we are working as best we can with all of those customers to help them work through a very difficult environment.

As the energy companies continue to really get a lot of pressure or put a lot of pressure on the oil services companies.

One of the things that happens of course when that occurs is that they becomes a lot of consolidation in the oil service business, resulting at the end of the day in just a few very large oil services companies.

So when the uptick turns back around, there'll be in a very, very good position, whereas the energy companies will not be in a very good position.

As we've seen the cycle many times before, we're heading back into that same situation where the pressure from the energy companies, while short term it works, long term it's a benefit to the oil service companies.

Okay that's helpful.

And then I guess on paperboard, profit and margins came in a bit from last year, can you just fill us in on the moving parts there?

Sure, Brent.

So we go through a maintenance period at the paper mill from time to time and that was a pretty significant impact to this quarter's financial results.

A little over $1 million impact from the maintenance year over year and just timing of when that occurs during the year.

And however, fiber costs and gas costs were down about $15 a ton, and American Gypsum actually costs were down a fair amount, so we actually had margin improvement in the wallboard business.

Got you.

Great thank you.

Kathryn Thompson, Thompson Research Group

Thanks for taking my questions today.

The first is on frac sand.

Looking at your Illinois and Wisconsin volumes, how much are currently sold at spot price?

It would be helpful if you could separate by facility, because Wisconsin had a smaller percentage ever so by spot versus Illinois.

And then a follow-up to that, if you could just discuss around how Eagle competes in an environment of falling prices for frac sand and could you actually be a beneficiary in this environment?

Thank you.

So there really is very little spot price [at] market out there, so it's a very small percentage that we're selling spot, and not that we aren't getting some, we are getting some but that would be a small percentage of our sales.

And over time, if the market adjusts and as some of the contractual business either gets delayed or the contracts expire, you would anticipate the spot market to grow.

And certainly that would be a huge advantage to us to where we have a very, very strong low-cost position in South Texas.

Just once again following up separating, could you remind us what percentage of your business for Wisconsin are contract versus spot and just the same for your Illinois facility?

So in both cases it's almost all contract.

It might be a little bit more spot with, out of Corpus Christi, but almost all of it is contractual business.

Okay.

Helpful.

I'll follow-up a post call on that.

Second is to your JV cement sales.

What percentage of your JV sales were to the energy end market today and how is that compare versus last year at the same time?

So I can tell though in the JV business, it was down about 25% year over year, the energy sales.

Not sure what the balance is between the two, but it was down, the oil-well sales of themselves were down about 25%.

And follow up on that.

Did you see any change in pricing with that decline in volumes, just specifically for --

We did not.

And then finally just going to overall net-cement pricing, it was helpful color about upcoming price increases, but should we see improving momentum as the year progresses, as you continue to roll off lower price projects, if you could just help in confirming that, it would be helpful?

On the cement side we do very little direct work.

So most of our cement is really a spot basis.

So we do not have a lot of projects that we bid out, we have a small amount but not a lot, so any impact that we would see going forward would be from price increases that occur in the marketplace.

And then finally, just do you have any thoughts on capital allocation uses of cash, kind of midway through the calendar year and as you look forward in terms of capital projects that are -- look to be mostly wrapping up for your frac-sand facility build out, how else do you think about uses of cash?

We have more than enough cash to fund our cost-reduction projects as we look forward.

So then we remain opportunistic to look at other ways to grow our businesses and then remain -- if that is not the case, we always have the ability return some cash to the shareholders.

We can't find projects that meet our hurdle rates.

In the absence of finding projects that meet your hurdle rate, would you be more inclined over the next six months to buy back your own stock?

Potentially, yes.

Thank you very much.

Garik Shmois, Longbow Research

My first question on frac sand.

I was wondering if you could talk a little bit about how demand progressed through the quarter?

Heard from some of your competitors that demand actually accelerated, June and July.

I know you're still wrapping up that business, but just wondering if you were seeing a similar type of organic acceleration for the frac sand?

I really think that becomes basin specific, so I think demand remains fairly strong in West Texas.

It may have actually improved a little bit out in West Texas.

If it dropped off substantially in most of the other markets, although there's still a fair amount of cement going east.

As well as to South Texas and Oklahoma.

So those were the markets that we're familiar with, that we don't -- if there's any frac sand that goes up into the Bakken area, that would be customer pickup and we wouldn't really know much about that.

And then on the DD&A expense in the frac-sand business, just wondering if you could provide maybe a little bit visibility on how we should be thinking about DD&A moving forward, just given the step up in some of the projects that you're still wrapping up?

Sure, thanks Gary.

I would put this at a pretty good run rate where we were for this past quarter, both for the remainder of the year that will roughly put you at $98 million to $100 million in total DD&A for all of the Eagle.

There's a few of these minor projects that will wrap up here this month or so, but many of them -- the project -- those are smaller dollars and the depreciation has already started on the larger projects that they've been placed in service.

So I think this is a pretty good run rate from where we are.

Thanks.

Switching to cement, had good margins despite challenging volumes obviously a very strong price increases, but I was wondering if you could maybe speak to any sort of raw material deflation that might have benefited you in the quarter?

Yes, so Gary that's right.

We saw a good improvement in the profitability of the wholly-owned businesses, and we were able to achieve some lower energy costs, some raw material, just again, as you've heard us talk for many years, cost reduction projects and improvements are a constant focus.

And we're able to achieve some of those and our costs reflect that.

And the other portion of that, I think Steve mentioned it earlier, is as you switch between purchased-product to manufactured-product sales, you'll have a benefit from a higher margin on the manufactured sales as well, and all those things kind of going to this quarter.

And then the negative piece is all the maintenance.

This year we had maintenance in all of our plants.

And then lastly just on paperboard and volumes, is it fair to assume, you touched upon this briefly, is it fair to assume that the volume decline in the quarter was driven by weather, is there something else that might have?

You I think with paper it was really an extended maintenance outage, so we had a longer maintenance outage this year, year over year than a year ago.

Is it fair to assume that volumes will improve now that the maintenance is out of the way?

That is a good assumption.

Thanks so much.

Adam Thalhimer, BB&T Capital Markets

Hi, good morning guys.

In terms of the operating profit, within oil and gas, do still expect that to improve sequentially as the year goes on?

What we mentioned before is we think the improvement's going to occur really in the last quarter of our FY or the first quarter of next year.

So we've kind of made our modifications early, and those are good to the end of the year.

So we're really seeing the improvement in our last fiscal quarter, which will be first quarter next year.

Okay, I'm not sure were talking apples, is it improvement equal profitability or improvement versus Q1?

Profitability.

Okay, and then can you give a little bit of color -- and you talked about graphically what you're seeing in terms of demand, but what are you seeing in terms of public-sector spending?

So that really is going to vary state by state.

So the answer is, though we are seeing very, very strong demand in what had been a weak market at the upper Midwest, so, and that is really public spending that's occurring in that market.

I think I mentioned now for two or three years the Texas and mountain region has had strong demand, mostly again it has to do with the public infrastructure.

However, in both of those states, you had growth in population, a lot of people are still moving to Texas and a lot of people still moving to the Denver market.

So that's a combination of single family and multi family as well as just public infrastructure, so those markets remain strong and you still see a tremendous amount of population growth in both of these markets.

Okay.

And then lastly, the $3 million of maintenance costs [to] cement, does that reduce some of the maintenance spending in the rest of this year and how should we think about -- is there anything we should be aware of in terms of additional maintenance costs?

So our maintenance budget this year, year over year versus last year's about the same, it gets kind of bunched into one quarter.

We do have some occasional maintenance that usually occurs when shipments are down in the middle of winter, so that was still continue to occur.

But usually the finished grinding and circuit maintenance is much less than the clinker producing part of the maintenance.

Okay thank you.

Jim Barris, CL King & Associates

Good morning, everyone.

Steve could you talk about, and it was touched upon, capital allocation.

At this point in time, do you have a preference for cement versus frac-sand assets in terms of when you look longer term in terms of how you're going to grow this Company?

So we like both of those businesses, they're core businesses for Eagle, and we also like to have great returns for our shareholders.

So it will come down to what's the better return.

Okay.

A competitor did announce today that it had purchased a -- I'm sorry it sold a cement plant in California.

Was that a property that was of strategic interest to Eagle?

So that is a -- I think it's probably really good for both parties, and it's a property, it would be complicated for Eagle because we do not have any other business in Southern California, and that would have been a complicated move for Eagle to get into that Southern California marketplace.

Understood.

And although it's very early in the cycle and who knows how long oil prices will stay depressed, but are you starting to see any indication of frac-sand assets being made available at lower prices?

Rumors only.

Okay.

Okay well that's good to know and thank you very much.

You're welcome.

Thank you.

And if there are no further questions at this time, ladies and gentlemen, now I would like to turn the call back over to Steve for closing remarks.

Thank you Carolyn.

We appreciate all of the questions, and looking forward to our next call in three months.

Thank you very much.

Thank you Steve.

Thank you for your participation in today's conference, that concludes the presentation.

You may now disconnect.

Have a good day.