Eagle Materials Inc (EXP) 2017 Q3 法說會逐字稿

Good day, everyone, and welcome to Eagle Materials' third quarter of FY17 earnings conference call.

(Operator Instructions)

As a reminder, this conference 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, Bridget.

Good morning.

Welcome to Eagle Materials' conference call for the third quarter of FY17.

We're glad that you could be with us today.

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 eaglematerials.com and click on the link to the webcast.

While you're accessing these slides, please note that the first slide covers our cautionary disclosure regarding forward-looking statements made during the call.

These statements are subject to risks and uncertainties that could cause the results to differ from those discussed during the call.

For further information, please refer to this disclosure, which also is included at the end of our press release.

This morning, I have the privilege of commenting upon Eagle's record third-quarter earnings and revenues.

These strong results, in part, reflect the fact that Eagle is well positioned to benefit from the cyclic tailwinds supporting our major construction materials businesses, specifically Cement and Gypsum Wallboard.

The demand drivers for both of these businesses continue to gain strength.

We have announced price increases across our cement markets, generally ranging from $8.00 to $10.00 per ton, and our previously announced wallboard price increase is being implemented now.

We will be commenting on the success of these announced increases in the quarters to come.

Our outlook for energy-related materials, namely Oilwell, Cement and Proppants, also continues to improve, based upon the prospects for well-count recovery and utilization intensity trends.

Our growth strategy is focused on the heavy side of our businesses, i.e., cement, aggregates, and close adjacencies.

We've been successful in substantially growing our cement capacity over the last few years and we're excited about our geographic expansion into Ohio.

We now expect to close on the acquisition of the Fairborn cement plant next month.

These strategic moves serve us well and will pay substantial dividends in the future.

US cement demand is expected to exceed US cement supply in the coming years.

This should benefit an American, heartland focused cement producer like Eagle Materials.

Our balance sheet is strong and we are poised for additional growth moves as they are feasible.

We are aggressively pursuing growth, but we are not pursuing growth for growth's sake.

We are disciplined and maintain high standards for new investment.

It is this consistent stewardship that provided us financial flexibility in the down cycle and gives us the latitude that we enjoy today.

We have built a long and strong track record of performance.

The point I want to leave you with today is that we have the bench strength, the strategic focus, and the executional capability to build upon this track record in 2017 and beyond.

With that, let me say Happy New Year to everyone.

And now I'll turn the commentary over to Craig, to talk about our quarterly financial results.

Thank you, Dave.

Eagle's third-quarter revenues were $302 million and improved 9% from the prior year.

Our third-quarter earnings per share increased 27%, to $1.17, as our Cement, Paper and Concrete and Aggregates businesses all reported record third-quarter results.

This next slide highlights the results of our Cement, Concrete and Aggregates businesses.

A 4% increase on our average net cement sales price, along with improved sales volumes in our concrete and aggregates businesses, were the primary drivers of the 7% increase in quarterly revenues.

Cement sales volumes were down 1% from the prior year, primarily associated with some early winter storms in our northern markets that impacted December business.

Operating earnings from Cement, Concrete and Aggregates improved 15%, to a record $49.9 million, reflecting improved pricing and good cost control.

Moving to our Wallboard and Paperboard business, improved sales volumes drove a 12% increase in our quarterly comparative of Wallboard and Paperboard revenues.

Operating earnings also increased 12%, to $50.5 million for the third quarter.

Eagle's Oil and Gas Proppants operating results improved significantly from the prior year, reflecting improved sales volumes and our efforts at streamlining costs in that business.

We also recognized a $4 million gain on settlement associated with the termination of one of our long-term frac sand customer contracts.

The third-quarter financial results also include $5 million of depreciation and amortization in that business.

Cash flow generation during the quarter was exceptional and increased 18%, to nearly $129 million.

Excess cash flow was used to pay dividends, make capital investments and reduce outstanding borrowings.

Second-quarter capital spending of $16 million was down from the prior year, reflecting sustaining capital levels.

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

Eagle's net-debt-to-cap ratio was 20% at December 31, 2016.

Thank you for attending today's call.

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

Bridget?

(Operator Instructions)

Trey Grooms, Stephens Incorporated.

Good morning, gentlemen.

And I've dropped off the call for just a second, so if I ask something that you addressed, just let me know.

My first question is on the frac-sand business.

We've seen rig counts increase in the Permian, obviously, which I think should help your CRS business.

And then recently, we've been seeing some activity pick up in the Eagleford, which as you guys have noted in the past, that's the basin that can really drive your sand business, given that plant in Corpus.

We've been getting a lot of questions on this business, and it's obviously getting a lot of attention now with the uptick in drilling activity we've seen.

We didn't really see any huge change in the December quarter.

But could you guys give us any update or has there been any change in how we should be thinking about this business as we look out at both the near term and longer term, given the bump in drilling activity we've seen, particularly in the Eagleford?

Trey, I would tell you, the last four to six weeks, we've experienced a pretty good uptick in our orders, a substantial uptick in our orders.

We've also received a little bit of price improvement on the spot market with a couple of products in a couple of markets.

So we feel pretty strong about going forward.

We are seeing a little bit of uptick in the Eagleford and we're just taking a look at that right now.

Okay.

That's super helpful.

And with this uptick, do you feel like, as we're looking forward, that that's going to get us -- I know in past calls, you guys have said, near term, don't really get too excited about, but the longer term, you still feel really good about your position and everything.

So is it fair to say that this uptick that you're seeing is maybe changing your view on the near term that you're actually, it sounds like there's a little more optimism in your voice than normal.

We do like our position, and there will be a time where we pick up the pace in the Eagleford.

Okay.

Thanks for that.

And on wallboard volume, very strong, obviously, in the quarter.

Good job there.

Do you guys have any sense for how much of that, if any, was pre-buying activity, of course, ahead of any price movement there, or price increases in early 2017?

Really just trying to get my hands around underlying demand versus channel filling in the quarter.

It's always tough to measure that, Trey.

But I don't believe there was very much pre-buying in the quarter.

There were a few customers that ordered some rails.

But most of the pre-buying, I think, occurred in the first three weeks of January.

Got it.

Okay.

Then the last one for me, and I'll pass it along, looking at the wholly-owned Cement volume, it was a little tougher than what we were looking for.

You called out early winter weather.

But can you talk any more specifically about what you're seeing in various markets from a demand standpoint, maybe where you're seeing relative strengths and weaknesses?

And any color on your demand outlook for these markets would be helpful, as well.

Thanks, Trey.

The December weather really was impactful more in the Chicago, Kansas City markets, where a few winter storms early in December and through December, frankly, impacted the sales volumes there.

But underlying demand continues to be strong.

And I think we would look at the PCA-type forecast for demand growth in our relevant markets, and we're seeing pretty consistent activity with that.

All right.

Thanks, gentlemen, and good luck.

Thank you.

Brent Thielman, D.A. Davidson.

Thanks.

Good morning.

Just back on wallboard, pretty solid finish to the December quarter for single-family starts.

Obviously, your volumes look good.

Any sense for customer inventory levels headed into the January price increase, maybe in context to prior years, where the industry's tried to push these price increases through?

We're not seeing as much customer buildup of inventory.

Customers in the southeast have larger warehouses and take rail.

And that's normally where it occurs.

So I haven't seen a lot of folks try to load up prior to December.

And customers are also telling me that it's going out the door about as fast as they can order it.

So I don't believe inventories of our customer base is near as high as it's been the last several years.

Okay.

That's helpful color.

Thank you.

And then, as we started to see oil prices stabilize, rig counts improve, how can we think about timing and Eagle starting the process of reramping production of oil-well cement again?

Yes, Brent, it typically, it's the same equipment, so as the need arises for oil-well cement and the demand arises from customer orders, there's a shift at the facility that will occur.

It's almost as simple as that.

Okay.

Is there a natural lag to think about there, Craig, in terms of when you start to see macro point data --?

No, it can happen pretty quick.

Okay.

And just one more, on Texas Lehigh, any context you can give us around how much oil-well cement you were producing fiscal Q3 last year versus this year?

With volume up 8%, but revenue flat, there, I guess I'm just curious, is that entirely explained by a shift in mix?

Yes, just almost entirely explained by the mix shift.

And really, that's what we've seen for the last year or more.

Oil-well cement is a very small percentage of that business today relative to where it was three years ago.

Okay.

Thanks, guys.

Scott Schrier, Citigroup.

Hi.

Good morning and thanks for taking my questions.

To follow up on that last question, obviously the 8% growth in Texas Lehigh is pretty strong.

As you come closer to selling out of that plant and you have all cycles firing on all cylinders, whether it's residential construction, the infrastructure piece, and then if the oil-well cement comes back, how do you think about balancing your production between oil-well cement and construction grade when capacity tightens there?

Yes, Scott, just to be clear, that plant continues to remain sold out.

So it's been sold out for the last several years.

And we do our best to meet customer needs, both on the oil-well cement side and the construction grade.

And that's why the import terminal is important as a part of that business, that allows us to meet demand needs as it exceeds the capacity of the facility.

This is something that facility has been able to manage very well for many, many years.

And well continue to do that, based on the needs of our customers.

Great.

And can you talk a bit about paperboard?

It looks like the volumes declined sequentially and then you had a nice jump up in price.

Just want to see how we should think about your product mix and volumes going forward.

Yes.

That facility also remains in a sold-out position, as we've come out from back through the cycle and it's moved to more gypsum facing paper, that's almost predominantly what we're selling today.

And so the price changes is more contractual changes, as that business is primarily based on the price of OCC and natural gas.

So that's not an unusual change in the price there and we're selling all that we can make, at this point.

Got it.

And then last one, on the Fairborn plant acquisition, can you talk a little bit about some of the trends you're seeing in the Ohio region?

And also, from an EBITDA margin perspective, do you expect to see margin expansion from that plant on day one or should we think about a ramp up in integration?

Yes, Scott, I'll hesitate a little bit, because we don't quite own it yet.

So we haven't had a chance to run it.

So let us get in there.

But in terms of, again, I'll point back to the PCA projections for the Ohio market and that general area, and we look at those type of forecasts for demand in that area.

It's a well-run facility.

It's a very low cost facility, modern pre-heater.

But let us run it and then we'll see what we can do.

Great.

Thanks for taking my questions.

Jerry Revich, Goldman Sachs.

Hi.

Good morning, everyone.

Good morning.

I'm wondering if you folks can talk about the performance at Texas Lehigh, just a really strong margin performance despite the mix headwind moving through the construction grade cement.

Operationally, are you folks running anything differently?

Are there any opportunities that we should be thinking about in terms of incremental improvements in other plants because of performance of the past couple of quarters really stands out for that plant?

You know, Jerry, that plant has a history of outstanding performance, and through all parts of the cycle.

So it's not unusual to see that from that facility.

But in terms of the mix shift, just as we've talked for a while now that based on the construction market in Texas, we're a little indifferent, quite frankly, whether you're selling a ton of oil-well cement or a ton of construction-grade cement, the margins are almost on top of each other.

So that's the beauty of where that plant sits in a strong construction market.

So that wasn't unusual to see that and, frankly, what we expected to see.

And then for the Proppant business, can you just say more about the settlement this quarter?

We've seen other folks in the industry, and I think you folks, as well, have opted to renegotiate contracts for longer term in the past.

Can you just talk about, is there a change in philosophy or is this a one-off situation that drove the settlement?

I'd say it's more one-off in nature than anything.

It was a customer that had not been performing to the standard of the contract and we pursued that nonperformance, and this is where we ended up.

And lastly, in proppants, we're seeing a range of volume ramp from the industry players, so anywhere from 10% to 60% year-over-year growth this past quarter.

As we think about Eagle's volumes relative to the industry over the next couple of quarters, where do you expect to shake out?

Should we be thinking of you folks being at the lower end of the spectrum until pricing improves, or how should we think about your approach to the market as it stands today?

Jerry, I think we'll wade in as our customer orders dictate what the needs are.

And we started this business only a little while ago, during the downturn.

And so as we come out of it, with the oil rig count, yes, we've seen the movement, but it's still at very low levels, and we'd expect to continue to see growth, but we'll see how we go from here.

Thank you.

Jim Barrett, CL King & Associates.

Good morning, everyone.

Good morning.

Dave, the sand mine idled in Utica, the drying facility idled in Corpus Christi, have they been reopened?

And if not, how long would it take to reopen them and at what cost?

They have not been reopened.

Corpus Christi could be opened very, very quickly, within 30 to 60 days.

Up at Utica, we're probably looking 15 to 18 months to get that done.

I see.

And could you comment generally, your cement pricing was obviously up 4%, how much is, can you tell us in your markets, how much cement pricing is up in the spot market and what the magnitude of your price hikes are for early 2017?

Yes, Jim, as we said, the price increases that we have out in the marketplace range generally from $8.00 to $12.00 per ton.

A little bit of them are here in January and some are also in April.

About one-third of them are in January, with the remainder being April 1.

Thanks, Craig.

And last, could you comment, Craig, on your capital spending requirements going forward?

I know what they are for FY17.

Sure.

And it's consistent, assuming once we get the Fairborn acquisition closed, what I'll call sustaining capital needs are in the $35-million range.

And then opportunities for cost reduction projects, things like that, could be in the range of that again, so another $35 million.

So as we're looking forward, $75 million, something like that, in that range.

And hopefully, we continue to find good return projects and we can improve or increase that number.

Thank you both.

Thank you.

Adam Thalhimer, Thompson Davis.

Good morning, guys.

Good morning.

Can you give a little more color on Texas, on the demand you're seeing in Texas ex- energy?

You had very strong volume growth at the JV this quarter.

Yes, Adam.

Again, when we talk about Texas, just remember Texas is a very large state.

We have three, what I'll call MSAs, that North Texas, the DFW metroplex, Central Texas, and then Houston, as the major three areas.

North Texas and Central Texas continue to see very robust construction activity, a lot of it associated with the corporate relocations that began a few years ago and just continue across all types of construction.

And Houston, quite frankly, continues to remain a pretty good market, as well, with road construction activity and other general construction.

Those markets continue to do very well.

Got it.

Thanks.

And then very strong cement margin this quarter.

Can you give us any sense for the cadence of maintenance?

Yes.

That maintenance cadence should look very similar to what we've had the past few years, so there's not any unusual timing differences here.

Okay.

And then the Concrete and Aggregates business has had a few great quarters, actually.

What would be the sustainability of strength there?

Yes, Adam, you're definitely right.

That business has performed very well.

A lot of that is happening in Austin, as we just talked about.

Central Texas remains a good, robust construction market.

But I'll tell you the other, and it's a relatively small business as a part of Eagle, but we have a position in Northern California that's starting to see a real rebound in activity, as well, both on the aggregates and concrete side.

And Kansas City, that business is doing well, too.

So you're starting to see all three of our markets in a good recovery mode.

Great.

And then just lastly, you guys said you're well poised for additional growth moves.

What would be your priority for that capital allocation?

Yes, Adam, we've been very explicit about that for the last several years.

The heavy side of the company, cement, aggregates and the related businesses to that, for example, obviously adding the Fairborn cement plant here early this year.

But the slag facility that we acquired a year and half ago or so.

But that's the focus for us on the growth side.

Okay.

Great.

Thanks.

Thank you.

And I'm not showing any further questions, so I'll now turn the call back over to Mr. Powers for closing remarks.

First of all, I want to thank you all for your participation.

And we look forward to giving you an update later this spring.

Ladies and gentlemen, this does conclude the program and you may now disconnect.

Everyone have a great day.