Eagle Materials Inc (EXP) 2016 Q3 法說會逐字稿

Good day, everyone, and welcome to Eagle Materials' third-quarter of FY16 earnings results conference call.

This call is being recorded.

At this time, I would like to turn the call over to Eagle's President and CEO, Mr. Steve Rowley.

Mr. Rowley, please go ahead, sir.

Thank you, and welcome to Eagle Materials' conference call for the third 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.

It is also my pleasure to announce that Dave Powers is also joining us today.

Dave currently is our President of American Gypsum, and will formally succeed me as President and CEO of Eagle Materials on April 1.

My decision to retire is driven by recent elective surgery complications that restricted my mobility and my capability to fulfill what I view as the full set of CEO role dimensions.

The decision, while filled with melancholy, is appropriate.

Additionally, the Company, in all aspects, is in the best shape that it has ever been, with an incredibly strong future ahead.

It has always been a personal priority to ensure that Eagle has exceptional bench strength in every key position in the Company, up and down the line, and to maintain great options for succession, regardless of timing.

I have enormous confidence in the team at Eagle today.

We are blessed with a number of executives who would be fine choices to succeed me.

But Dave's interest, energy, experience, and capabilities make him an unbeatable choice, at this time, to take the Company to the next level.

Dave is a seasoned business leader that has built our Gypsum Wallboard business into the undisputed benchmark performer of the wallboard industry.

Dave has guided American Gypsum's path to becoming the industry's leader in highest customer satisfaction and the lowest cost production, the most important foundational elements of our broader Company strategy.

His leadership skills and experience are proven, and proven at Eagle.

Although Dave does not need my help, I look forward to being available to assist Dave in an advisory role for the next couple of years.

And now, I would like Dave to say a few words.

Thank you, Steve.

Let me start by saying it's been a pleasure working with you over the last 15 years.

You have positioned Eagle for an exciting future.

The Company is extraordinarily well positioned to capitalize on the current construction up-cycle.

I want to make a couple of comments here.

The first is to emphasize that I'm fully committed to advancing Eagle's strategy that's been developed and implemented over Steve's tenure.

My appointment should be recognized as a change in leadership only, and not a change in strategy or investment priorities.

We will remain focused on profitable growth, improvement through the cycle.

We remain equally committed not to overpaying for the privilege of achieving growth when investing.

I firmly believe the only way to be successful through the cycles is to be the lowest-cost producer of high-quality products, delivered with exceptional customer service.

Secondly, I'm fully committed to a multi-year tenure.

My ramp-up curve should be short, given my experience at Eagle Materials and in the building materials industry.

I look forward to sharing our fiscal year results with you this spring.

Until then, let me turn it back over to Steve to talk about our recent quarter.

Thanks, Dave.

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.

The decline in Eagle's third-quarter revenues and segment operating earnings was driven primarily by a shift in the timing of Wallboard sales volumes, versus prior year's third quarter, associated with the change in timing of our announced Wallboard price increase, and a dramatic slowdown in our frac sand business versus the prior year.

General construction activity continues to improve across all of our markets, with customers reporting significant backlogs of work.

In Texas, where the wettest year on record delayed many construction projects, we anticipate a strain on the supply of construction projects this spring and summer, as many of these construction projects are still trying to catch up.

A 4% increase in our average net cement sales price, and increased sales volumes, were the primary drivers of the increase in Eagle's quarterly comparative of Cement, Concrete and Aggregate revenues.

Sales volumes improved across most of our markets, with the decline in our Texas cement sales volume reflecting another round of wet weather during October and December, and reduced demand for our oil well cement products.

Cement, Concrete and Aggregate earnings improved 11% versus the prior year, reflecting improved pricing.

Eagle cement companies have announced a cement price increase from $7 to $12 per ton, across all of our markets.

A decline in our Wallboard and Paperboard sales volumes drove a 10% decrease in our quarterly comparatives of Wallboard and Paperboard revenues.

Operating earnings in our Wallboard and Paperboard business declined 8%, to $45.2 million, for the third quarter.

Our Gypsum customers are reporting an approximate 5% to 7% increase in their volume needs for calendar year 2016.

Eagle's Oil and Gas Proppants third-quarter financial results reflect the difficult business conditions in the oil and gas sector.

The near-term demand and pricing outlook for proppants remains limited, and we continue to rightsize our business appropriately.

We also continue to work closely with our customers to navigate the cycle and strengthen our customer relationships.

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

Craig?

Thank you, Steve.

Eagle continued to generate significant cash flow during the third quarter.

Operating cash flow increased 66%, to $108.7 million, and our financial flexibility has allowed us to wisely invest back into our businesses small-scale capital that further reduces costs and increases Eagle's low-cost advantage.

Nearly 80% of our free cash flow this quarter was returned to shareholders, in the form of share buybacks and dividends, while, at the same time, we reduced our net debt position by nearly $20 million.

This last slide reflects the cash flow generation results, or highly competitive low-cost position.

Our net debt-to-cap ratio was 32% at December 31, 2015.

We thank you for attending today's call.

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

Liz?

(Operator Instructions)

Trey Grooms, Stephens.

Hey, good morning, guys.

First off, Steve, I want to say it's been great working with you for the last 10 years or so, and we wish you a full recovery, and wish you the best in your retirement, for sure.

Thank you.

And also, Dave, look forward to getting to know you, as well, and working with you in the years to come, too.

Great.

Steve, the Wallboard volume was obviously -- it was down in the quarter.

Understand there was some negative impact from the lack of pre-buy that you mentioned in the December quarter.

How are you seeing volumes progress here through the first quarter?

And are you expecting volumes to rebound here, as we progress through -- when I say 1Q, I mean the -- obviously, the first calendar quarter here?

Dave, why don't you answer that question?

Thanks, Steve.

Yes, I do, Trey.

I estimate, over the last several years, has been 30 million to 40 million foot of pre-buy, from year to year.

I expect to get that in the January/February timeframe.

So yes, our January volumes are up substantially.

Great.

Good to hear.

Sticking with Wallboard, pricing flat sequentially.

You've got your price increase that's been -- I think was pushed back to the end of March.

First off, I guess, has there been any change to pricing, year to date?

And how should we be thinking about pricing in Wallboard, as we look through calendar 2016 here?

We have delayed our price increase to the end of March, and our plans are still to implement that, as our letter had stated.

Regarding month-to-month and day-to-day pricing, it's not -- I'm not going to really comment on those.

Our last quarter was basically the same as the prior quarter.

Yes.

Okay.

And then lastly, before I jump back into queue, obviously, you guys, very strong free cash flow in the quarter.

You did return a lot to shareholders with the buyback, and then you also reduced some debt.

So kudos to you guys on that.

But with the stock at these levels, the valuation hasn't been this attractive, in my opinion, in a while.

This may be question for you, Dave.

As you take the reins in the next few months, how are you thinking about allocation, or capital allocation, and kind of balancing M&A versus buybacks, et cetera?

Craig, why don't you answer that question?

Sure, thanks, Trey.

So yes, as you saw during the quarter, we repurchased 870,000 shares at -- and frankly, at prices higher than where we're trading at today, and so we saw a good value during the quarter.

We continue to see a very good value at these trading levels in the shares.

All right.

Thanks a lot, guys.

Good luck.

I'll jump back into queue.

Todd Vencil, Sterne Agee.

Thanks.

Good morning, guys.

Good morning, Todd.

Steve and Dave, I'll just echo what Trey said.

Steve, I'm sorry to see you go, and hope everything goes the way you want it to.

And Dave, we'll have a longer conversation later, but welcome aboard at least this part of the process.

Thinking about cement, and focus in on Texas, there are a lot of questions out there that investors have had, and been talking about.

And a lot of things have gone on in Texas, in this business, this year.

I think some capacity has come on.

There have been declines in oil well demand, and lots of rain, which is shaking things up.

Can you talk a little bit about how that has developed?

How maybe the market share and the customer relationships have shaken out so far?

And then how you see that developing over the next few months?

Yes.

So while demand is off, the biggest drop in demand in Texas has primarily been the demand for oil well cement, both in West Texas, as well as South Texas.

What's interesting to note is, demand for construction grade cement is very, very strong in both North Texas and central Texas, and primarily driven by corporate relocations.

Houston's a little bit more complicated.

Supply/demand, the little dynamics, are a little different there, starting with, certainly, a bigger impact from the energy sector impacting the demand in Houston.

And also a little more complicated, with the number of importers, and the ability to import cement into the Houston market.

So it's really more of a more complicated, more difficult market down in Houston, as opposed to the two other very large population centers in the state.

So that's what we see going on.

Very comfortable with our position, very comfortable with the fact that we also purchased cement, and purchased it both imported, as well as from other suppliers in the state.

To not only meet our broad-based customer demand, but our internal consumption.

So we feel that we still have plenty of levers to do what's right, and maximize the profitability of Texas Lehigh.

That's great.

Within the state, just can you size up for me where you think -- total cement demand in Texas is right now, in terms of annual tons?

And where capacity stands?

Yes.

So there still is a shortage of cement in Texas.

Capacity has increased a little bit, with LafargeHolcim starting up a second kiln in Midlothian earlier this year.

I think they're still working on some -- and I think they have a little bit of time to implement some environmental technology that's required for it to continue to operate, going forward.

I think that equipment, at least, is on order and on its way, as I understand.

But we are still in a under-supplied market in the state of Texas.

That's fantastic.

And then, you mentioned the price increases.

Can you talk about the specific, I guess, timing for your various markets, of when those cement price increases kick in?

So the timing of cement price increases, in our markets, it varies from January 1 to April 1. And while it is even a little too early to tell how effective the January 1 price increases will be, in many of our markets, the supply is very tight.

And where supply is tight, we feel very strongly that there will be a substantial price increase.

Perfect.

Thank you so much, Steve.

Jerry Revich, Goldman Sachs.

Good morning.

This is Brandon Jaffe on behalf of Jerry.

First, going back to the Wallboard pricing cycle last year, pricing slipped on the spring and summer.

What's your level of confidence on holding some level of your announced price increases this year?

Hey, Jerry, I'm not really going to speculate on that.

But we are going to attempt to implement our increase as announced.

Okay.

Thank you.

And on the frac sand business, how have your plans for CapEx in that business changed since the last quarter, just given the further decline in the market?

Yes.

So the answer is, last quarter, I was asked that question, and it was really answered on a longer-term perspective.

What was required to build out the facilities?

Which included some CapEx, the majority of the CapEx, really, which was for increased production capacity, which is obviously not needed right now.

But as far as cost reduction projects, to further reduce our costs, we have about $15 million scheduled to be spent this year, all with high returns, to position ourselves better in the marketplace.

Great.

Thank you.

John Baugh, Stifel.

Thank you.

And best of luck, Steve, I'm sorry to see you go.

I guess my question is on proppants, the fairly impressive narrow loss, considering how low the volumes are.

Could you give us the fixed cost number, either currently or where it will be for 2016?

So that, if you, for example sold -- I don't know -- $5 million of revenue a quarter in that segment, or $20 million for the year, what kind of maximum loss we're looking at?

Yes.

So I think the easiest way for me to answer that is, we had very, very weak December sales.

And that's what really negatively impacted our third-quarter results.

Sales have rebounded quite nicely in January, to anticipated volumes.

That should get us back to where -- what I said a quarter ago, or at least for the last couple of quarters that we should be in that cash flow breakeven neighborhood, give or take.

And so, for us, it was just really, really slow sales in December.

But we have seen those ramp back up here in January, so we're feeling a little bit better than we were in December about the frac sand business.

Just to be clear, the D&A annually at that business is running around $25 million, $30 million a year?

That's right.

This pace for this past quarter would be a good pace to use, John.

Okay.

Super.

And then just quickly, on the Wallboard side, any input cost comments?

I guess I'm thinking about natural gas, among other things.

But if we saw up volumes, if we saw flat pricing, if we just assumed that, will we get leverage on volume?

Will we get any input cost help?

We've had some pretty good savings on natural gas.

Some efficiencies, and yes, increased volume will help drive our cost down a little bit.

We are controlling our costs, and we are running well.

Great.

Thank you for that color.

Good luck.

Brent Thielman, D.A. Davidson.

Yes.

Thanks, and Steve, all the best ahead.

On the cement side, Steve, I think you talked about, on the prior call, in terms of price increases, in the $10 to $15 a ton range.

And I think you said $7 to $12 today.

Just was curious what's changed in the marketplace?

Or what's caused that range to change?

I think we might have had another market, where a price increase was announced at a little lower level.

I think that's really what changed there.

And then maybe, in one of the other markets, maybe somebody came out a little bit lower than a higher price.

But that would be it.

But the really good news is -- and especially for this time of year -- demand remains strong in all of our markets.

And our customers are broadly expressing that they will require at least 5%, and in many cases 10% increase in their purchases this calendar year.

So there is a lot of positive momentum for construction cement demand in our markets, this coming year.

Okay.

That's great.

And then on the cement JV, as we move into the current quarter, you should have some easier volume comparisons, as I know oil well started to come off this time last year.

Weather aside, can we start to think about volumes getting back into positive territory this quarter?

Or is it still going to be a process, as you ratchet down that oil well cement?

Certainly, this quarter, [one nor] you'll have ratcheted out all of the downplay in the oil well cement, and then it's really just a function of the weather and El Nino.

So we'll see.

Typically, when we get into these patterns, you get very, very strong rains in the fall, as well as in the spring.

So I'm not sure that we don't have another round of rain coming our way, we'll see.

But when we've been in these patterns in the past, it's really been twice a year that the rains hit.

Got you.

And then, this last one, the aggregates business had some nice volume this quarter.

I know you operate in a few different territories, including Texas.

Did you essentially not see a weather impact in that business?

Or was demand just --

No, we definitely saw the same impact in Texas, associated with the weather.

And in fact, it shut our quarry down, flooded our quarry out, washed away a conveyor belt.

So we had some extra maintenance costs associated with repairing some damage from the storms.

I see.

And sorry, one last one.

I just thought of it.

Are you having difficulty moving product along the river, due to some of the flooding?

Something we should consider here, in the first part of the year?

Currently, not at all.

Okay.

Great.

Thank you.

Garik Shmois, Longbow Research.

Hi, thank you, and just wanted to echo best wishes, Steve, on your retirement.

Just wanted a question on Wallboard, first.

You took share in the second quarter, gave back maybe a little bit here in Q3.

I think some of the negative volume declines is regional, but maybe the question for Dave.

Are you happy with your Wallboard share position right now, as you head into calendar 2016?

And is there any difference in how you are viewing volume versus price?

It fluctuates from quarter to quarter, and over the last seven years, it's been flat.

Okay.

And any change to the volume versus pricing strategy?

I think in the past, you have prioritized prices.

Is that still very much the case?

No, I'm not going to comment on that.

Okay.

I guess switching to cement now.

In Texas, our math shows about a 3% sequential decline in cement prices, quarter to quarter.

Which, given the volume declines because of oil well, is fairly impressive nonetheless.

But I'm just wondering if you could maybe, Steve, talk about if there's been any change to the mix that's impacting price in Texas?

Or if there's any incremental competitive pressures, because of some of the rains?

And inventories have been built up, that's driving some of the changes in sequential pricing?

So clearly, the shift in mix with the oil well has some impact.

But as I mentioned, things are a little more complicated in Houston.

So there has been a little bit more competitiveness in the Houston market.

Okay.

And I guess just lastly, looking at wholly-owned cement margins, was there any impact in the quarter?

I guess maybe if you could talk about any benefit from lower energy, as opposed to any maintenance that might have occurred in the December quarter?

And usually, I believe you do maintenance in the March quarter.

Is that still the expectation?

So the answer is no, we had a very clean quarter, when it comes to the cement business.

And very happy with the cost in that quarter.

And Garik, I might add, you mentioned the March quarter for maintenance.

That will be more like the June quarter for us, with the cement maintenance cost.

Okay.

Thank you.

On the cusp, because sometimes you might get some a little early, but in that timeframe.

Okay.

Great.

Adam Thalhimer, BB&T Capital Markets.

Good morning, guys.

Good morning.

Hey, Dave, can you give us any sense of why the cement -- or why the Wallboard prices didn't hold in 2015?

I just think we had a lot more competitive pressures in the marketplace, and that's my basic answer to that.

Okay.

And then, what is your -- Steve, what is your mix in Texas?

You talked about the three different regions.

But what is your percentage mix exposure to those?

It's very -- we have exposure in all three markets, with the Houston market primarily supplied through our import position in Houston.

But there's also a fair amount of -- our partner has a fair amount of downstream integration in that market, where we had downstream integration in the Central Texas market.

We've stayed focused, as close as we can, to the plant, because that's your highest margin.

And then, we reach out, certainly, to North Texas and South Texas, as well, from that plant, as required, to fill out the capacity of the plant.

Okay.

Thanks for that.

And then on the volumes from the cement JV, down 20%, year over year, on average, over the last year.

What kind of growth should we expect going forward?

How much of that decrease was the oil well cement, and how much of it was weather?

Yes.

So our oil well cement business is off 50%, and maybe that's 5% of that.

The rest is just heavy rain in October and heavy rain in December.

So tough rain weather for us this time.

Great.

Thank you.

Jim Barrett, CL King & Associates.

Good morning, everyone.

Good morning.

Steve, congratulations on your accomplishments and your career, and good luck in your retirement.

Most of my questions are for Craig.

Craig, could you annualize the $15 million in cost savings in the proppant business?

What the savings are likely to be?

What the -- in terms of the incremental -- the capital that Steve referenced, in the near-term, for some cost reduction projects.

And there's a lot of them that go into that.

At these volume levels, the impact is important to keep those businesses at, we said, this cash breakeven level, this EBITDA breakeven level.

So hard to quantify, but very good, high return projects, with a pretty quick payback period for us.

Okay.

And Craig, more broadly, could you talk about your -- the Company's major capital projects, as we look into calendar 2016?

Sure.

So -- and one of the things to start with is, as we've said in the past, our what I'll call sustaining capital needs are in this $25 million range.

And if we were to parse through the numbers year to date, we are on that pace.

So as we look forward, sustaining capital needs should remain in the $45 million range.

Each year, there's opportunities for expansion of markets through terminals, opportunities like that, the small cost reduction projects.

We referenced the cost reduction project in the frac sand business.

So -- but none of those our major dollar items.

You'll see, in this past nine months, we've spent $38 million in the frac sand business.

The vast majority of that was spent in the first half of the year, to finish up the projects in that business.

And now that those are nearly complete or are complete, the frac sand capital needs will decline significantly.

Okay.

Yes.

Obviously, we had the Skyway acquisition during the summertime.

So from a sustaining capital needs of the business, we're going to be back well below where we were this past year, this coming year.

Okay.

Thanks, Craig.

And Dave, one question for you, and congratulations on your new position.

And I did hear your comments about the expected rebound in Wallboard volumes.

But in those markets where you sell Wallboard with heavy energy exposure -- whether it's Texas, Oklahoma, Colorado -- have you noticed any muting of demand, due to the fact the energy space is in tough shape?

Not really.

My Texas volume total is up.

I expect Houston to be flat this year.

So, no, I really haven't.

There's a lot of apartment projects on the books, ready to be built, a lot of high rises still being built.

And my customers tell me that it is still going to be strong.

Interesting.

Okay.

(multiple speakers) Thank you both very much.

Scott Schrier, Citi.

Hi.

Good morning.

Thanks for take my questions.

I wanted to talk about the comments you made on this spring and the summer, how you expect to have a significant increase in demand.

And because of that increase, do you expect to see the amount of purchased cement needed to fill that demand trending upward?

And if so, what kind of headwinds on margins might we see?

So the answer is, the majority of our imports or our purchased product is in Texas.

And we're balancing that out with what's happening in Houston, and so we are comfortable with that.

Comfortable with the -- we're doing much better now in the Midwest.

And whereas we had been sold out primarily in Texas and mountain for many years now, two or three years, anyway, in those markets, we're rapidly getting to that point, certainly, in the Chicago area.

So now you're starting to see everything starts to get stronger, and get tighter, in those markets.

And we're also starting to see an increase in the southern Midwest region, with the two new acquisitions.

So that all looks strong, and even the Reno market's improving.

So I think, still, the part of Northern California that we play in is still a little weak.

But the other markets are very, very strong for us, as far as cement volume demand.

Great.

Thank you.

And just on Wallboard, could you talk about any trends that you're seeing, as far as nonresident demand versus your residential demand?

We expect both to be up this year.

Okay.

Thank you for taking my questions.

Chris White, Thompson Research Group.

Good morning.

Just one question today.

Our Texas Department of Transportation contact shared that the new Prop 1 funding is helping drive additional highway construction, and that Prop 1 should even provide a greater boost in 2017.

I was wondering if Eagle was able to take advantage of the new increased funding in TxDOT?

And if so, how?

So the answer, we always watch that, and this is really more for our customers.

And we will work with our customers, as they decide to chase that.

So we work very, very closely, to assist our customers to participate in those projects, when they go to bid.

Are you able to engage in any type of increased demand from Prop 1 at this time?

It's a little early there.

It's been announced, and -- but it just goes hand-in-hand with what I talked about before.

You've got a lot of congested roads, okay, associated with this corporate relocation.

So we've had a lot of people move into Texas this past year, and it's crowded.

So there is need for improvement in the infrastructure in the state.

Great.

Thanks for taking my question.

Davis Paddock, Invesco.

Yes.

Thanks.

Steve, good luck to you in your retirement.

A quick question on, just want to clarify, on the proppant side, you mentioned returning to a cash flow breakeven.

Which I guess on the EBIT line would mean that -- basically, a loss in line with the depreciation of $25 million to $30 million.

What level of sales does that -- do you need to be at that cash flow breakeven level?

We just have not been discussing that in this environment.

I guess, Davis, what I would add is, we also continue to right size the business.

So those fixed costs that we can have some control over, we'll continue to work on, to manage that business to that breakeven level, almost, however sales dictate that.

Okay.

And so how much was the December weakness -- how much did that impact sales in the December quarter?

If it had been normal, how much different would it have been?

So they are off like 75%, okay?

Okay.

Got it.

Great.

I think that's all my questions.

Thank you.

Thanks, Davis.

And at this time, I'm not showing any further phone questions.

I'd like to turn the call back to Mr. Steve Rowley for closing remarks.

Again, thanks, everybody, for many great years, and many enjoyable calls.

I'd like now to turn it over to Dave for a final comment.

Steve, I want to thank you for being such a terrific leader over the years.

You have been a great mentor to me, and we wish you the best.

And we look forward to talking to you in the spring.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the program, and you may now disconnect.

Everyone have a great day.