Eagle Materials Inc (EXP) 2016 Q4 法說會逐字稿

Welcome to Eagle Materials' FY16 earnings 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. Dave Powers.

Mr. Powers, please go ahead, sir.

Thank you.

Good morning to all.

Welcome to Eagle Materials conference call for the fourth quarter and our FY16.

We are glad that you could be with us today.

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

There will be a slide presentation in connection with this call.

To access it, please go to 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 the 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 release.

I'd like to begin with some perspective on our cement, proppants and our gypsum wallboard businesses and then Craig will walk us through the financial results.

First, Eagle's cement business has performed very well during the fourth quarter.

Although we benefited from relatively mild winter weather, make no mistake that strong underlying demand fundamentals are well evident, these fundamentals are the primary drivers of growth in most of our markets.

Accordingly, we implemented cement price increases in all of our markets this spring.

As a testament to the strength of our cement markets, it's worth noting that although our oil well cement sales are down roughly 80% from where they were two years ago, we've been able to fully reallocate those volumes to our construction grade customers.

Our oil & gas proppants business continues to operate at near cash breakeven levels, consistent with our strategic intentions during this phase of the energy cycle.

We remain poised for greater contribution with recovery in drilling activity.

Finally, gypsum wallboard demand continues to show strength.

In fact, when we look at the three regions of the country where we most actively participate, the Mountain, the West/South/Central, and the South Atlantic, we see that industry shipments were up 33% during the quarter.

When we then adjust for what likely constituted surge buying by our customers, we estimate that our core markets grew between 12% and 13% during the quarter.

Candidly, this volume exceeded the pace of our internal expectations.

American Gypsum did implement a wallboard price increase this spring.

We look forward to sharing the results of that increase with you during next quarter's conference call.

Now, let me turn it over to Craig to review our financial results.

Thank you, Dave.

Eagle's FY16 revenues were over $1.1 billion, an all-time record and an increase of 7% from the prior year, reflecting improved sales volumes and prices across most of our businesses and the successful integration of our new slag-smith facility near Chicago.

Our fourth-quarter revenues were also a record $252.1 million.

Eagle's fourth-quarter earnings before interest and taxes improved 26% to $56.1 million as our cement and paperboard businesses reported record fourth-quarter results.

As we mentioned in the press release, the prior-year's fourth-quarter results reflect the benefit of $16.8 million after-tax or $0.33 per diluted share associated with settling our litigation against the IRS.

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

Operating earnings from our cement, concrete and aggregates businesses improved 19% to a record $147.7 million, reflecting improved pricing, good cost control, and the acquisition of the slag-smith facility midway through the year.

Our fourth-quarter wallboard sales volumes and by extension our paperboard sales volumes benefited from customer surge buying ahead of American Gypsum's spring wallboard price increase.

The surge buying activity and strong underlying demand helped drive a 5% increase in our annual gypsum wallboard and paperboard revenues.

Operating earnings in our wallboard and paperboard businesses improved 8% to $191.5 million for the year.

Much like the cement business, the change in our quarterly average wallboard price primarily reflects regional variances.

Finally, Republic Paperboard performed exceptionally well and set quarterly and annual record for operating earnings.

Eagle's Oil & Gas proppants financial results reflect the difficult business conditions in oil & gas sector.

The annual operating loss includes a $37.8 million charge we took in the second quarter, primarily related to intangible assets and depreciation and amortization of $27.2 million.

The near-term demand and pricing outlook for proppants remains limited.

We continue to right-size our business while focusing on running the business at close to cash flow breakeven levels until conditions improve.

Operating cash flow during FY16 increased to $265.8 million, up 14% with capital spending of approximately $89.6 million.

Excess cash flow was used to repurchase shares, acquire the slag-cement grinding facility, pay dividends and reduce outstanding borrowings.

As we look at the fourth quarter, fourth-quarter capital spending of $14 million was down significantly from the prior-year's fourth quarter reflecting more of a sustaining capital environment.

Also during the fourth quarter, over $50 million of cash flow was returned to shareholders in the form of share buybacks and dividends.

This brings total share repurchases of over 2.1 million shares since the buyback authorization was increased in August of 2015.

This last slide reflects the cash flow generation results of our highly competitive low cost position.

Our net debt to cap ratio was 33% at March 31, 2016.

Thank you for attending today's call.

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

Operator?

(Operator Instructions)

Trey Grooms, Stephens Inc.

First question is on the cement pricing being flat in the quarter.

I know you've been trending kind of up 7% or so, 7% or 8%.

You mentioned geographic differences, Craig, but anymore color you can give us on that?

Then also, if you could give us a sense for what pricing cement looked like in pricing there on a like-for-like basis there in your markets?

Sure.

Thanks, Trey.

As we've mentioned over the past several quarters, we have seen a significant change in the demand for oil well cement here in South and West Texas, which is obviously having an impact on the average quarterly cement price.

As Dave mentioned in his prepared remarks, that has continued to evolve here into early calendar 2016.

So that is impacting -- if you look at the joint venture results, you can see their price was down and that is primarily a product mix shift from the oil well cement into the construction grade cement, but still maximizing profitability out of that Texas cement facility.

If you then look at the wholly-owned business, you can see in the earnings release, the prices did appreciate there fairly well in year-over-year, which reflects some pricing a year ago.

Then as we mentioned last call, we did -- we put forth and implemented price increases, most of them here in early April, in all of our cement markets out -- those have gone very well.

Cement supplies continue to be tight across the country, but very happy with where pricing is and where it's headed.

Great.

Then kind of sticking to that, the JV volume being down a little bit in the quarter, I know you mentioned oil well.

Any other drivers there?

Then, if you can kind of talk about how you guys are balancing produced cement versus imported cement in that market?

Then kind of your expectations around that as we look through this year?

No, that's a good question, Trey.

Texas remains a very robust construction market.

When you look at the markets of North Texas and Central Texas, those -- cement demand in those markets continues to exceed supply, so the State of Texas continues to be over sold.

So to your point, as we said, we have had to shift away a lot of oil well cement, but we've been able to place that into the construction grade market.

That's gone very, very smoothly for us.

But it's been a big change, but the demand in the State continues to be very robust.

It's across all the different construction sectors from residential to non-residential.

Public infrastructure spending continues to be very robust across the State.

You've got to remember, you have a North Texas MSA, a Central Texas and Houston that individually are extremely large markets.

Those markets continue to grow.

So purchased product will continue to play a role in our marketing efforts as it's necessary.

Okay.

Last one for me, on wallboard volume, very strong as expected, of course with the pre-buying and everything -- I appreciate you kind of trying to dissect it down to what the end markets were or the core markets were versus any pre-buy, that was helpful.

You mentioned, I think Dave, in your prepared remarks you mentioned wallboard continues to show strength.

Are you referring to kind of what we've seen after the quarter?

I guess what I'm getting at is really trying to -- if you could give us any color on what you're seeing for wallboard demand post this big pre-buy period?

Our businesses are still strong.

Our volume continues to be strong.

When I look at March and April of this year and compare it to March and April of last year, we're up double-digits.

So customers are reporting that they're busy.

Originally to start the year, we were looking at 5% market growth.

We're thinking a little bit higher than that going forward.

Great.

Thanks for taking my questions.

Good luck, guys.

Thanks, Trey.

Adam Thalhimer, BB&T Capital Markets.

Congrats on a strong Q4.

Thank you.

Craig, this $7 to $12 cement price increase, can you help us think about how that might flow through in FY17?

Just, what you normally see with those?

Sure, so most of those increases were put forth kind of like I said April 1. So they will come into effect here pretty quick, as we get into the spring construction season.

In terms of the net realization, we'll certainly give you that update at the June quarter call, but where supplies are tight, we feel very good about those price increases.

Okay.

Then where do you think -- on the JV cement side, where is the bottom for pricing there?

One of the things you've got to remember is, as we went through calendar 2015 not only did we have to see the transition from oil well cement to construction grade cement but we were also dealing with an extremely wet weather year for the entire State of Texas, that certainly impacted sales volumes throughout the year.

So we certainly don't know what the weather pattern holds but we should not have another 100-year flood like we had the entire year last year.

So again, you look at the State of Texas being over-sold as it has been for the last several years and continues to be, supplies are very tight in the State and construction activity remains robust.

Okay.

Then on frac sand, if I'm reading you right, it sounds like you kind of stay at minus $9 million of op income per quarter until the demand improves?

As we said in the last few quarters and I think Dave said again today, the goal there is to keep that as close to cash breakeven levels as we can.

This past quarter, we took some -- with the customer base struggling a little bit, we continue to look at those receivables and adjust for those.

But, yes, it's going to remain on an operating income level kind of like this and keeping it at a cash flow breakeven level.

Okay.

Thanks for the color.

Scott Schrier, Citi.

First, I want to say nice progress in the quarter.

I wanted to say, I guess considering where your stock price is now relative to the last call, has your view on buybacks and capital allocation changed at all?

No, just as we continue with the share repurchase program that we started beginning to implement last August, we continue to implement that program.

We continue to see value in the shares.

Got it.

Then similarly, the aggregates business is doing well with strong volumes in pricing.

Was there anything that you can note that helped drive that?

Also on that note, in the capital allocation, is that an area where you would consider deploying more capital?

Look, we are very fortunate that we sit with a balance sheet that is structured very well, low leverage, enabling us to put capital to work where appropriate.

Certainly, the focus has always been and will continue to be the return on those investments.

If we can get that in the heavy side, whether that's the aggregates or the cement side, we're going to remain very focused on creating shareholder value through those, getting those returns.

That's something that's always been a top priority, but we're not going to overpay for that privilege.

So but in terms of the aggregates -- the concrete and aggregates performance, I think it just reflects what we've said here today that we continue to see these businesses improving.

We've got a couple of concrete aggregate business across the country.

They are in markets that are just continuing to improve.

Great, thanks.

I appreciate you taking my questions.

Good luck this quarter.

Thanks.

Todd Vencil, Sterne.

Thinking about the wallboard price in the quarter, it's down sequentially, a little over $5 from the December quarter.

With 36% volume growth, I'm guessing that wasn't the result of competitive pressure around volumes.

Can we write that all off to regional mix or product mix?

Or how do I think about that?

I would write most of it off to regional mix.

We had a little bit of product mix, so more 1/2 inch than 5/8 cost us a little on the mill net side, but it helped us a whole heck of a lot on the cost side.

As far as regional mix, our lowest price in the country is the Southeast.

Our customers there have a great capacity to warehouse product.

Most of the surge buying, prior to the price increase, happened to be in the Southeast.

The majority of it had to do with market mix and second product mix.

Got it.

Just to be clear, in the Southeast, where I think as you're saying, your pricing is sort of structurally lower, is your percentage margin there any different?

Or is your margin any different on the 1/4 inch versus the 5/8?

The margin is no different at that plant than other plants just because that's my lowest cost plant.

The margin in terms of percent is about the same 1/2 inch to 5/8.

Gross profit per machine hours about the same.

Perfect, thanks for that.

Then turning to cement for me.

You mentioned that, Craig, the demand still exceeds supply in Texas.

Can you give us a sense of magnitude on that?

I know you guys in the past have talked about X million tons of demand, X million tons of capacity.

Can you update us on that?

Yes.

I think demand is still in that 16.5 to 17 million ton range and capacity right around 13 million tons.

So, it hasn't really changed despite the drop in oil well cement demand?

That's a great point, Todd, that we've seen a substantial, as we said, drop in oil well cement demand.

That has been absorbed and then even more than -- in the construction grade cement that's more than made up for that.

Got it.

Can you -- on that point, can you give us any sense of where the gap stands today between the differential in pricing and profitability between oil well and construction cement there in Texas?

As we've said, the pricing differential is a little bit lower on the construction grade cement, which is why you're seeing this product mix shift impacting the mill net, but in terms of overall margin, there's not a lot of margin differential in the products, because it's a little lower cost production cost when you produce construction grade cement.

So we're very happy.

You see that in our earnings, proppant per ton remains very robust.

So we're happy to be selling either product.

Good.

Then final question for me, on the concrete, a little surprised that the price on ready mix is up just about 1 point year-over-year I think.

Can you talk about what's going on with concrete pricing?

If there's any mix or other factors in there?

Concrete is a pretty small part of our entire whole Company.

I'd suggest to you, it's more regional mix than anything.

We just have the three businesses in Kansas City, Austin and kind of North of Sacramento.

So I think those markets individually are seeing good prices, just a regional mix there.

Got it.

Thanks so much.

Brent Thielman, D.A. Davidson.

Back on the wallboard average price, absent any impact of the price increase in Q1, should we still see a rebound in that ASP as kind of the regional drivers in volumes even out?

Yes, Brent.

I think we're trying to -- we'll talk about pricing in the next -- in June quarter rather than trying to pro forma out what pricing might look like excluding certain things.

We'll give you a pretty good idea next quarter of the net realization of the price increase.

Okay, fair enough.

Then Craig, could you give us a sense of the timing and magnitude for cement maintenance CapEx for this fiscal year?

Then also what you might be thinking for total CapEx for the Company in 2017?

Sure.

No, the cement maintenance program will run very consistent with where we were a year ago.

So typically here in this June quarter that we've begun, that's when we take down the majority of the kilns for their annual outage, their planned annual outages.

Most of those, if they haven't been complete, they are pretty close to already being complete, so that will be consistent.

As we've always talked about for capital needs for the Company, sustaining capital in the $25 million range on an annual basis.

Then we do have some cost reduction project opportunities, some equipment replacement opportunities that need to be taken care of.

So I would suggest to you that total capital spending somewhere in the $50 million range, which includes us sustaining capital plus some other opportunities to further reduce cost and some other, just necessary, equipment replacements.

The bulk of that spending, above your sustaining CapEx, is that spread across all the businesses or in some particular areas?

It will be across the two major business lines, the cement and the wallboard.

There's not a lot of spending in the Paperboard business or the concrete and aggregates right now.

Then notwithstanding, obviously as we said, the frac sand business is down to a very small amount of additional capital needs but very, very small.

Got it.

Okay, thank you.

John Baugh, Stifel.

Could you just help us -- you mentioned you're down 80%, I think, in well head cement over a two-year period.

But as we sort of model out the next few quarters, I don't know how we step down in the prior year and if there's going to be even anymore step down in your view on total from the 80% drop we've already had?

John, at some point, you get to a basic level, not too different than frankly, what we saw a few years ago in housing starts.

You get down to a necessity level for that, but we're down pretty low.

Look we -- kind of the first half of calendar 2015, I'd say demand as we had spoke was down 50%.

We've seen another leg down, which gets you down to that down 80% in total.

So that it's happened pretty swift.

We'll see what happens in drilling activity from here.

But we're at pretty low levels at this point.

Sure.

We continued to step down at the December and March quarters, so we still have comparatives there.

Switching out to construction, we'll still have that comparative for most of the remaining or the new fiscal year?

Most of that has been done, right, on the oil well cement.

But that's happened.

Again, you've got the weather comparison from the prior year, so we'll see how weather goes through the rest of the year.

But the oil well shift has happened.

Okay.

Then on frac sand, I hear your comments that demand is very low and there's not much visibility there.

Is that a conservative statement?

We know oil has popped back up a little bit?

Or no, you just don't see any lift in demand for FY17 at this point?

What we do know is the rig counts are down.

The oil service companies continue to struggle financially.

The E&P's continue to reduce capital.

There's little pressure on price.

We think we're approaching the bottom.

We also think the second half of our fiscal year will be a little bit better than the first half of our fiscal year.

Right.

That's helpful.

Then I think if I read right in the press release, the share repurchase was a comment since the year-end calendar, so I guess it incorporates May or April and May to date?

Is that correct?

Could you parse out how much happened in the March quarter versus since the March quarter?

Thank you.

That was really through -- mostly through the end of the March quarter, the 1 million shares that we commented there.

There's some shares that settle post the quarter, just the way the shares are settled through the financial institutions.

Once you enter a blackout period or an earnings period, there's is some limitations on the stock repurchases.

So the vast majority of that 1 million shares was in the March quarter and the first few days of April.

Terrific.

Thanks for the color.

Good luck.

Jerry Revich, Goldman Sachs.

I'm wondering if you could talk about for the oil & gas business in the Eagle Ford, as we think about the eventual recovery?

What are you folks doing to build the customer base and get them comfortable with the delivery mechanism, on time supply?

Should you look forward to you folks signing any contracts?

Can you just step through it because your strategy in the past was based on selling on a spot basis.

I'm wondering how that's evolved as you think about the next recovery?

As we speak, we are working with our customers to renegotiate supply agreements.

We're looking a little bit different customer base than we originally sold.

We're also working with customers to reduce costs delivered to their well, so we are actively working that at this point, yes.

Okay.

Then in terms of your ability to gain market share in the Eagle Ford, in the next cycle, can you talk about we should be thinking about your market share in the next cycle?

Obviously, you didn't get the benefit of participating in that market in a big way in the last cycle.

I'm wondering if you could just step us through the mechanism to gain share when the rig count does eventually recover?

Our focus now is to breakeven in the short term and position ourself to make some good money in the long term.

If we do those things right we will pick up a little bit of share.

Okay.

Lastly, if I remember right, I think you had some railcars that were on leases that might provide a tailwind to your earnings as the leases roll off.

Can you just remind me, Craig, what the magnitude of the improvement could be?

What's the timing?

Yes, Jerry, in the frac sand business, there's a number of railcars that are underutilized, as you would expect.

We are going through the process currently of trying to improve those lease rates as best we can or utilize those cars in other parts of our business.

So, that is well under way.

Is there a timing when a meaningful part of the leases roll off that we should think about?

That's part of the negotiation process that we're in right now, to make sure those lease times -- those cars as necessary are used and to the extent not necessary, renegotiate the timing of those leases and the underlying cost of those leases.

Okay, thank you.

(Operator Instructions)

Jim Barrett, C.L. King & Associates.

Dave, a couple of questions for you.

Your commentary on the market for wallboard, ex the surge growth of 12% to 13% -- back of the envelope, do we attribute half of that to the warm weather?

Do you think the underlying market is growing half that?

Is that sort of a rough guess as to how that business -- or that industry is performing?

I wouldn't put much -- attribute much to the weather at all.

I think a lot of it is the market growth.

We're very fortunate the markets that we play in grew faster than a lot of the other markets.

We took full advantage of that.

But I think very little had to do with weather to be honest with you.

So it sounds like, although we're still early in the year that growth could be up more than a little bit if those trends continue, it sounds like?

That's my read, yes.

Okay.

Then on your South Carolina plant, some of your competitors mentioned modest issues accessing synthetic gypsum.

What is your near-term and longer term outlook for synthetic gypsum supply for that plant?

First of all, four of our five gypsum plants are on natural gypsum --

Correct.

So we feel very good.

We have decades of supply.

In South Carolina, our plant does run on synthetic gypsum.

We have the ability to run on actual gypsum and more importantly, we're teamed up with a terrific partner in Santee Cooper.

We built our plant on their property.

We have a 52-year lease on that property and a 52-year agreement for supply.

We fully expect Santee Cooper to continue to live up to their agreement.

But I will tell you that there are trends for fewer coal-fired power plants ahead.

Those that have invested in scrubbers have a greater likelihood to keep running.

It's really a situation that's plant and market specific.

This also applies to fly ash as well as synthetic gypsum.

Right.

Yes.

Then finally, the Skyway slag acquisition, assuming you're still happy with that deal, is there a list of companies like that across the country, which might be available for sale?

If they were, obviously at the right price strategically, is that any area that you would look to expand in?

Jim, obviously, we wouldn't talk about any specific opportunities.

But needless to say, look, we continue to look for growth in the heavy side and adjacent businesses in slag and fly ash would certainly meet that right criteria.

It will come down to valuation.

I'm not going to overpay for the privilege and generating higher than industry average returns.

That's something that we've always been focused on.

Okay.

Well, thank you both.

I'm showing no further questions in the queue at this time.

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

We would like to thank all of you for joining us today.

We look forward to sharing next quarter's results with you at the end of next quarter.

Have a great day.

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

This does conclude the conference.

You may now disconnect.

Everyone, have a wonderful day.