Eagle Materials Inc (EXP) 2017 Q4 法說會逐字稿

Good day, everyone, and welcome to Eagle Materials Fiscal Year 2017 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.

Thank you Kevin.

Good morning to all.

Welcome to Eagle Materials Conference Call for Fiscal Year 2017 and our Fourth Quarter.

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 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 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.

Before we get into the financial details of our fiscal year and fourth quarter, let me begin by offering a few comments about business conditions and the actions we are taking to capitalize on these opportunities.

One of those remarkable moments in the cyclical industry that I can say with all candor that we're benefiting from net tailwinds across all of our business lines and that we expect these tailwinds to continue this fiscal year.

We're benefiting from a U.S. economic cycle that's now in an expansionary phase as it relates to our businesses.

Trends and jobs, consumer confidence, demographics, mortgage affordability, just to name a few of the key factors that are important to the health of our markets, are all positive.

This supports our outlook for growth across construction markets in new housing, remodeling and in commercial, nonresidential and infrastructure construction.

The implication of these positive factors in our businesses is evidenced in our business results and our actions.

Let me start with Cement.

Eagle implemented price increases in many of our cement markets in January and the remainder of our cement markets in April.

In February, we were successful in acquiring the Fairborn, Ohio cement plant, which was strategically targeted in keeping with the positive long-term outlook, the plant's fit with our cement system and our criteria for new investment.

Upon the closure of this transaction, we immediately took the plant down for 22 days for an annual outage and to implement our Eagle maintenance regimes with an eye towards getting the plant to peak operating performance, which will allow us to better service our customers' needs going forward.

Turning to Wallboard and Paperboard.

We achieved partial success in implementing our announced wallboard price increase, and our average mill net improved 4%.

Moreover, we ended the quarter with higher mill nets than the quarterly average.

Our Western wallboard markets are now showing renewed strength.

In fact, we're reaching a point of not being able to fully meet our customers' needs in the West given increase in demand.

Accordingly, we're making plans to gradually open our idle line at Bernalillo, New Mexico on an incremental [add-needed] basis to take care of our customers.

We will run this line similar the way we run one of our lines at our Duke, Oklahoma plant, modulating production and demand until demand supports sustained production and staffing levels.

On the cost side.

Prices for OCC, the primary recycled raw material used in our gypsum paperboard operation, spiked during the quarter.

Fortunately, prices in May have now rolled back 20%.

We have absorbed about $3.5 million of cost during the quarter related to this spike.

The majority of OCC price increases are passed on to our customers via quarterly price adjustments the following quarter, but there are time lags on the true-up.

Some quarters benefits us.

Other times, like this quarter, it hurts our quarterly financials.

We do expect that the net OCC cost penalty for Eagle materials could be in the area of $6 million for fiscal 2018, which will be felt primarily in the first half of the year.

The third leg of our business is frac sand, and the future outlook for this business looks bright.

This is a newer business for us, and we've said we would hibernate the business at the bottom of the energy cycle, essentially running at a cash flow breakeven or better until conditions justify greater participation.

That time is getting closer.

Sales opportunities continue to improve.

We've seen price improvement from the lows last fall, and we expect these trends to continue with higher profit utilization intensity per well pressing supply.

We've also said that we would use this time to organically build out our targeted 5 million ton capacity frac sand network.

The key to this build-out is installing drying capacity at our flagship Utica mine.

We've earmarked $70 million for this project in related and efficiency investments, targeting next summer to be operational there.

Our strategy remains focused on high-quality northern white sand with low-cost reach to strategic targeted shale plays.

In sum, all 3 of our businesses are poised to post increasingly strong results.

We have ample balance sheet firepower to continue to improve our businesses, to capture growth opportunities that may emerge and to serve our shareholders.

Now let me turn it over to Craig to comment on our financials.

Thank you, Dave.

Eagle's fiscal year 2017 revenues were a record $1.2 billion, an increase of 6% from the prior year, reflecting improved sales volumes and prices across most of our businesses.

Eagle's annual earnings per share was also a record at $4.10 per share, a 34% improvement.

As we mentioned in the press release, Eagle's fourth quarter financial results included $9.4 million pretax or $0.13 per share of costs associated with the acquisition of Fairborn business.

$4.4 million of the costs were transaction-related, including legal and other similar costs, while $5 million of the cost relate to the Fairborn business completing their planned annual maintenance outage in March, just after the acquisition, and the impact of recording of the acquired inventory at fair value.

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

A 2% improvement in cement sales volumes and improved Cement, Concrete and Aggregates pricing were the primary drivers of the 10% increase in Eagle's annual comparative of revenues.

Operating earnings from our Cement, Concrete and Aggregates businesses improved 16% to a record $172 million, reflecting improved sales volumes and pricing.

Moving to our Wallboard and Paperboard business.

Improved sales volumes drove a 5% improvement in our annual comparative of Wallboard and Paperboard revenues.

Annual operating earnings in that segment improved 3% to $197 million.

As we mentioned in the press release, the fourth quarter's Wallboard sales volumes were impacted by a shift in the timing of our Wallboard price increase this quarter versus the timing last year.

In essence, the pre-buy occurred at different times, affecting the comparability.

When we adjust for the timing change, we estimate that Wallboard demand grew similar between 6% to 8%.

Eagle's Oil and Gas Proppants operating earnings improved significantly from the prior year, and the near-term prospects for our frac sand business have improved significantly from this time last year, which was reflected in a 144% increase in our fourth quarter frac sand sales volumes.

We expect the positive momentum we experienced during our fourth quarter to continue into calendar 2017 as completion activity and the intensity of proppant usage continues to strengthen in North America.

Operating cash flow during fiscal 2017 increased 25% to nearly $332 million.

Excess cash flow was used to fund capital investments, acquire the Fairborn business, repurchase shares and pay dividends during fiscal 2017.

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

Our net debt-to-cap ratio was 36% at March 31, 2017.

Thank you for attending today's call.

Kevin, we'll now move to the question-and-answer session.

(Operator Instructions) Our first question comes from Blake Hirschman with Stephens Inc.

Concerning season inflation, it's been a big topic of conversation, specifically papers and jet, labor, freight.

You kind of touched on the paper costs in your prepared remarks.

But kind of looking at the other cost buckets as well, can you talk about what you're seeing here?

And kind of given that backdrop, how are you thinking about profitability within the Wallboard business?

In terms of outbound freight, we're expecting between 2% and 3% increase in outbound freight.

The -- we have no concerns regarding synthetic gypsum cost.

We have one plant.

We have a very great partner in Santee Cooper, and our prices are pretty well locked in.

We're based -- the majority of our plants, 5 of our 6 lines are natural gypsum, so we're not affected by the increase in synthetic cost.

In terms of natural gas, we were buying at extremely low numbers last year with a couple of hedging programs.

We're up a little bit this year.

I probably expect in the area of $3 to $4 cost increase this year in the drywall business.

Got it.

That's helpful.

And then on the Wallboard volumes.

You said excluding the differences and the timing of the pre-buy, you thought the volume growth would have been like 6% to 8%.

Is that a demand trend that you think is sustainable going into your fiscal '18 with the recent trends we've seen in housing starts and kind of the non-res end market as well?

We do believe that.

We're halfway through this fiscal -- this quarter, and we're very pleased with the volumes and the prices this quarter.

Got it.

And then just one more for me.

Some volumes in the frac sand business, they were up nicely as you guys had alluded to on the last call.

Can you talk about how the volume trended throughout the quarter?

And if that's persisted into the fiscal 1Q?

A little stronger than the first quarter of this year, the first calendar quarter.

Our next question comes from Jerry Revich with Goldman Sachs.

I'm wondering if you could talk about for the Cement business, how do you expect pricing actions for you folks across your markets this year to compare to the cadence of price increases you folks put through last year?

And are there any markets that are incrementally tightening where you might be able to get 2 price increases over the next calendar year?

There are different markets, and they are different, as you noted.

We got higher amounts in some than we did in the others.

I will tell you 2/3 of the price increase we got in January, about 1/3 of it, we've got in April.

We've made no announcements for a second increase this year.

Yes.

And can you comment are there any markets that are incrementally tighter where additional pricing actions are possible this year?

Jerry, at this point, we won't speculate about forward-looking pricing.

But as we've said many times, utilization rates continue to be very high in the Cement business across the country, frankly.

Okay.

And then in your prepared remarks, you gentlemen spoke about leading-edge wallboard pricing being above the full quarter average.

Can you just help us with the order of magnitude and just comment on what drove improving pricing over the course of the quarter?

Was that just a response to the OCC cost increase?

Or was it specific market-driven?

The markets vary across the country, and it was more market-driven than anything.

And Jerry, all I can really say is our number is higher than the first quarter, and we're pleased with where it's at.

The next question comes from Scott Schrier with Citi.

I wanted to ask about some of your comments on the Western markets, specifically are there opportunities for further pricing there?

And how should we think about bringing that plant back online as far as incremental costs or margin pressures as we look at the Wallboard business?

We're going to bring it on very slowly, and we're only going to -- we're going to operate it like a peaker plant.

And when we have the orders, we're going to run it.

The way I look at it and how we're going to run it, will probably add $5 of cost to that operation when we do it, but it's minimal.

And really, it's really the Phoenix market that's driving this.

Got it.

And then looking at your Paperboard business.

I just wanted to ask a little bit about the decline in the external.

I was curious if these cost increases are an opportunity for margin expansion on the -- to push some of those prices through on the external volumes.

Yes.

So Scott, that -- the prices in the Paperboard business are really contractually set.

The majority of that external volume is sold underneath a couple of long-term supply agreements that have inflators and deflators based on the cost of certain inputs, OCC pricing being one of them.

And as Dave mentioned in his prepared comments, those are implemented on a quarterly lag.

Really, the change in volumes at this point, the facility is sold out.

It's going to be a little bit of inventory change and maximizing what we can sell out of that facility.

Got it.

And lastly, I wanted to touch on your aggregates in concrete.

Obviously, you continue to have tremendous pricing in there.

You had some acceleration in concrete.

I just wanted to see if you can talk about any of the drivers there.

And alternatively, while concrete volumes were impressive, it looks like your aggregates volumes declined a little bit.

Just curious if that's weather in California or if you can kind of talk through the different nuances there, please.

Yes, Scott.

I think, on the latter part of that, you're right.

Some of the wet weather in Northern California where our operation sits, was impactful there on the sales volume.

On the concrete side, it's going to have a similar trajectory to the cement business with the price increases there.

We also -- in some -- in a limited sense, we also had our Northern California concrete operation benefited a little bit from some of the flooding issues in Northern California as we tried to help out there with some of their issues.

That would have...

And if I could just slip one more in on California, with your cement plant in Nevada and your operations there.

Is -- how do you look at the opportunity from the transportation bill?

California is a small part of certainly of Eagle but certainly even of that cement plant in particular.

It sits in the Reno market and really services the Reno market.

We're a pretty small player in Northern California.

So in general, that transportation bill should be helpful to the California infrastructure program and infrastructure spending, but not a major play for us.

Our next question comes from Adam Thalhimer with Thompson, Davis.

The corporate cost came in a little lower in the quarter.

I was just curious if there was anything in there that brought that down.

No, nothing unusual.

Just kind of a typical quarter once you exclude the legal and other closing costs.

Okay.

And then on the Cement JV, the pricing is -- was up nicely.

And I'm just curious, are you seeing higher oil well cement demand?

Maybe you can just update us on the mix of that plant now.

We are seeing higher oil well cement demand at all 3 of the locations that we do produce oil well cement.

I will tell you, this quarter, this past quarter versus the one in prior year, our volumes are up 42% on oil well cement.

Across the company.

Yes.

Okay.

And then lastly, the -- so you're EBITDA positive in oil and gas still.

I'm just curious, would it surprise you if in a given quarter in fiscal '18 if you turned operating income positive in that business?

Based on the current trajectories with the sales opportunities that are out there, that business has a real chance to start to become a meaningful contributor to the company.

This fiscal year, do you think?

Correct.

Our next question comes from Jim Barrett with CL King.

Dave, in terms of your pricing in Wallboard, if the Western U.S. is getting very tight, sold-out conditions, you're adding shifts or lines.

Would it be fair for us to conclude that pricing for your Wallboard product's going to vary fairly dramatically between, let's say, the Southeast and the Western U.S.?

I mean, shouldn't you be getting full pricing in the Western U.S. as we move into the heart of the season?

We're not going to comment on future pricing, but prices do vary from market to market.

And the stronger the market gets, one would think you'd have a little bit more pricing power, the more demand is there.

Right.

And in terms of Nevada cement, given the robust construction activity being experienced in the Reno area, is that plant sold out currently?

Jim, as we've said, utilization rates across the country are starting to be very high.

As you're alluding, in Northern Nevada in particular, they've had some good investments from companies like Tesla and others and those vendors that follow there.

So that market, frankly, has been one of the slower to recover, and it's starting to pick up some steam.

Our next question is a follow-up question from Scott Schrier with Citi.

I just wanted to ask again on the frac sand and the investments.

Can you talk about possibly how long you think the project would take?

And I know in the last call you talked about the process to bring back on some of your idled assets.

If you could just remind us about that process?

And how we think about the timing of these moving pieces?

We're planning on bringing our Utica mine up early next summer, and we look at our plant in Corpus Christi.

When the demand is there, it will probably take us 60 days to bring that online.

Okay.

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

I'd like to turn the call back over to our host.

I want to thank all of you for participating in the call.

We look forward to seeing you in the next quarter.

Thank you much.

Ladies and gentlemen, this does conclude today's presentation.

You may now disconnect, and have a wonderful day.