Eagle Materials Inc (EXP) 2018 Q3 法說會逐字稿

Good day, everyone, and welcome to Eagle Materials conference call for the third quarter of fiscal 2018.

This call is being recorded.

At this time, I'd like to turn the call over to Eagle President and CEO, Mr. Dave Powers.

Mr. Powers, please go ahead.

Thank you, Skyler.

Good morning, and welcome to Eagle Materials conference call for our third fiscal quarter of 2018.

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

Joining me today are Craig Kesler, our Chief Financial Officer; 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.

Let me begin by simply saying that Eagle Materials had a strong fiscal third quarter from an operating standpoint and an exceptional quarter from an earnings standpoint.

Our operations exceeded my expectations in capturing the market opportunities available to them over the quarter.

Beyond this record operating contribution, the company is already benefiting from tax reform, and we can expect this tax reform will enable us to more fully invest in our people and our operations over the years to come.

We were also able to put the Wallboard antitrust class action lawsuits behind us, with agreements to settle all direct and indirect purchaser claims, and this did reduce the magnitude of our record earnings.

While we did nothing wrong, we made the business decision to put the litigation risk, the expense and the distraction behind us.

We believe we have better-than-average visibility on the prospects for our business over the next 2 years.

And these prospects are very good, indeed.

We feel it would take a lot to derail the train right now, with the biggest risks being more geopolitical uncertainty than economic uncertainty.

Eagle's strategy has been to remain exclusively a U.S. company, and the U.S. construction markets are a great place to be looking forward, especially for our businesses.

We more than doubled the size of our Cement system this cycle and expect to benefit greatly from favorable supply-demand dynamics here going forward.

Today, our earnings contribution from the Cement group has grown to exceed that of all other segments.

We still feel we're only approaching mid-cycle in housing construction and repair and remodel spend, and our Wallboard and Paperboard businesses are benefiting from increased demand as well as increased pricing as demand presses capacity.

We implemented a Wallboard price increase in January.

We will be commenting on the success of this announced increase in the quarters to come.

There are some cost headwinds affecting the industry.

And notably, among these, for us, is freight, which, from today's vantage point, looks like it might increase about $2 per 1,000, which would adversely affect our mill nets going forward.

I'm also pleased to report that our frac sand business is contributing meaningfully this fiscal year.

With the Utica mine project on track for completion this summer, we expect materially greater contribution from this business in the coming fiscal year.

We continue to be disciplined capital allocators.

We are proactive in identifying high-return organic growth projects that build our system benefits and improve the cost position and productivity of our plants.

We also evaluate numerous opportunities for growth that align with our strategy and investment criteria.

I want to assure you, as we move through the cycle, that we will not relax our investment disciplines.

I recognize this relaxation has been commonly evidenced in prior cycles in the construction materials industry.

Eagle did not fall into these traps then and has no intention of doing so this cycle either.

This discipline has served us well and having the balance sheet capacity to take advantage of opportunities when others could not.

And it gives us tremendous financial flexibility going forward.

We continue to generate meaningful amounts of cash, and we have a track record of managing these situations effectively to the benefit of our shareholders.

Now let me turn it over to Craig to comment on the financial results.

Thank you, Dave.

Eagle's third quarter revenues were a record $359 million and improved 19% from the prior year.

Eagle's quarterly earnings per share improved 78% to a record $2.08.

As we mentioned in the press release, Eagle's third quarter financial results include 2 nonrecurring items.

First, we recorded a $39 million pretax charge related to the settlement of our class action Wallboard antitrust litigation.

Second, we recorded a $61 million benefit related to tax reform.

This is a onetime noncash decrease to income tax expense and relates to the remeasurement of our net deferred tax liabilities to lower corporate statutory rates as a result of the recently enacted tax reform.

Going forward, we expect the new lower rates to increase both Eagle's net earnings and after-tax cash flow.

Prior to tax reform, our effective tax rate had been around 33%.

At this time, we anticipate our effective tax rate in fiscal 2019 to be in the range of 22% to 24%.

This next slide highlights the results of our Cement, Concrete and Aggregates businesses, a 12% improvement in Cement sales volumes and improved Cement, Concrete and Aggregates pricing, were the primary drivers of the 12% increase in Eagle's quarterly comparative of Cement, Concrete and Aggregates revenues.

Operating earnings from these businesses also improved 12% to a record $56 million, reflecting the addition of the Fairborn business and improved pricing.

Moving to our Wallboard and Paperboard businesses.

Improved sales volumes drove an 11% improvement in our quarterly comparative of Wallboard and Paperboard revenues.

Quarterly operating earnings of these businesses improved 1% to $51 million.

Eagle's Oil and Gas Proppants operating earnings improved from the prior year, and then the near-term prospects for our frac sand business have continued to improve from this time last year, which is reflected in the 230% increase in our third quarter frac sand sales volumes.

This improvement in sales volumes helped generate EBITDA of nearly $5 million for the third quarter.

Operating cash flow during the first 9 months of the year was down 5%, reflecting the timing of certain working capital items, while capital investments increased to $84 million, which includes investments in our Nevada Cement facility, the Bernalillo wallboard plant start-up and construction of our new frac sand drawing plant in Illinois.

We also completed the Wildcat acquisition earlier in the fiscal year.

Excess cash flow was used to pay dividends, repurchase shares and reduce outstanding borrowings.

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

Our net debt-to-cap ratio was 28% at December 31, 2017.

Thank you for attending today's call.

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

(Operator Instructions) And our first question comes from Trey Grooms with Stephens.

First question is on Cement.

Can you talk a little bit about the, I guess, some of the factors that are behind the lower like-for-like Cement volume in the quarter, both with the JV and the wholly owned?

And kind of from where we sit today, what you're expecting for end-market demand in the markets that you operate in, looking into calendar '18 or maybe fiscal '19?

Well, Trey, first of all, our Cement volume is down about 2%, and a lot of that has to do with some jobs that were delayed and some weather.

Going forward, we're not really economists, but when I read all the folks that are making projections, we're looking at about 2.5% growth going forward for next year.

And the years beyond that, a little bit more.

Okay.

And that's a -- with the JV, I mean, obviously, I would have expected some impact from weather there.

If you look forward with kind of what's going on in what you're seeing in backlog and so forth with the JV, is the weather issues kind of behind us there?

Are there any lingering impacts from that, that we should expect?

Or just any color there.

We think the weather impacts are behind us.

Okay.

And I guess, kind of moving on to Wallboard.

Looking at the quarter, obviously, volumes were good, very strong in the quarter.

But when we're kind of looking into calendar '18, past the December quarter, kind of along the same lines of the Cement question, what are you guys thinking or seeing as far as expectations into end-market demand for Wallboard?

And then as a follow-up to that, specifically in the December quarter, do you feel like there was any pre-buying or inventory building going into the new year in December?

Or just how to think about your thoughts around that.

Sure, Trey.

This is Craig.

I'll address your first part.

On the Wallboard demand side, if you think about what drives Wallboard demand, it's 85-plus percent related to residential construction, both new construction and repair and remodel construction, and at least forecasts for those 2 demand drivers continue to improve, and the underlying fundamentals for that business continue to look very strong as we head into this calendar year.

On the pre-buying and the demand in the -- at our third quarter, you do have very strong underlying fundamentals as we talked about.

But in addition, you had some of the activity post the hurricanes that would have picked up a little bit in the quarter, not to mention some of the pre-buying.

It's hard to distinguish when you have improving economic activity underlying that.

It's hard to distinguish between which of those is impacting or how it impacted the volumes exactly, but it could have been 30 million square feet or so in the quarter that was kind of associated with pre-buying and that type of activity.

All right.

That's super helpful, Craig.

And still with Wallboard.

On OCC, prices being back down.

Paperboard looks like it's benefiting pretty quickly from that.

How do we think about the timing and how that impacts the Wallboard business and starts to roll through there?

Yes.

So Trey, the pricing mechanism in the Wallboard business is on the quarterly lags we've talked about.

And so in this case, the benefit -- the Wallboard business is still experiencing a little higher paper prices, but that should start to abate in the next couple of months as those contracts start to roll or the pricing rolls into how they pass it through.

Got it.

Last one for me, and I'll pass it on, is the tax reform.

You talked on tax expectation for effective tax rate, but you also touched a little bit on how this will allow you to invest in people, in operations, organic, internal-type growth.

How do -- any color you can give us on that?

Any specifics on maybe how to think about CapEx and then resulting D&A as a result of that?

Sure, Trey.

As it relates to tax reform and the increased cash flow that we'll see from tax reform, it doesn't really change our capital allocation strategy or priorities.

Yes, we'll continue to invest in the business to strengthen our low-cost producer position.

We'll continue to opportunistically grow the company, where the return criterias are met.

And as we've always done, we balance that with returning cash to shareholders.

And we've historically done that primarily through our share repurchase program.

So while the tax reform is certainly a good thing for Eagle, it isn't -- doesn't change the way we allocate capital.

The priorities have remained the same, and we'll continue to invest in good return projects.

(Operator Instructions) Our next question comes from Billy Newby with D.A. Davidson.

Bill on for Brent Thielman today.

So I guess, with the -- I should think -- go over to the frac sand business to start.

With the recovering oil prices that we've seen kind of develop through the end of this year, are you guys -- can you just talk about any changes in the conversations you're having with customers and any changes to the outlook in that business as we move into this calendar year?

I would tell you that we are sold out in the frac sand business, and many of our agreements with customers are tied to oil prices, WTI.

And yes, we are having conversations with our customers as the oil prices go up.

Okay.

And is that -- I assume that's kind of leaving you guys to become a little bit more optimistic in regards to the oil well cement business as well?

Actually, it is.

Yes.

Works -- go ahead.

No, sorry.

Go ahead.

We're expecting to supply more product to the oil well cement area.

Right.

And I guess, is it -- with the way that frac sand business is developing in this kind of new, I guess, oil environment, is there a runway for that business to reach a breakeven point by the end of this year?

Or is that getting a little ahead of ourselves?

Yes.

So that business continues to generate pretty meaningful cash flow, as you could see over the past -- this whole year, on an EBITDA basis.

And then as we've talked about the last couple of quarters, we're investing in building out the drying facility up in our Illinois plant, and that should be ready this summer, in July of 2018.

That will add another 1.5 million tons to our total capacity, as Dave mentioned.

The one facility that we're running today in Wisconsin is sold out, and we're looking forward to bringing on the incremental capacity in Illinois and even further improve the cash flows that are generated from this business.

Our next question comes from Scott Schrier with Citi.

First question on the Wallboard and the Wallboard margin, and I appreciate the commentary on the increased freight costs that you have.

I'm curious, in this quarter, aside from the freight and the OCC, is there any other buckets?

And specifically, have you been shipping more from Duke into Houston?

Does that add a level of freight also just because of the distance?

And is that something that we should continue to see going forward?

First of all, on the Wallboard business, we had quite a bit of legal expenses during the quarter that adversely affected our margins.

We did ship some product to Duke during the quarter, and we paid quite a bit higher freight as a result of it.

There was a shortage of trucks.

And in some situations, we paid 50% more freight just to get product down there to take care of our customers' needs.

So those were 2 things that impacted us during the quarter.

Got it.

And then on Wallboard in New Mexico, can you just talk about the ramp-up of the plant?

I know you had some costs last quarter with restarting it.

I think that's all behind us.

Are you seeing good margins out of that plant and good demand into the Phoenix area?

We actually are making a little bit of money out of the plant during the quarter, and we're running it as a peaker plant.

If I've got 2 days' worth of orders, I'll run it 2 days.

If we've got 4, we'll run it 4 days.

So it's -- we're pleased with where it's at right now after just starting it up in September.

Got it.

And then on the cement margins compressing, if I'm thinking about the input costs there and how to think about it going forward.

Is the compression year-on-year, is that just due to fixed cost absorption from the like-for-like volume decline?

Or are you seeing other areas of cost inflation, too, that we should think about?

Scott, you got to think about it in a couple of different ways.

With the addition of the Fairborn facility, again, added quite a bit of depreciation on an operating earnings level.

EBITDA margins continue to perform pretty well in that business as we look at it that way.

We did see some cost pressures on the fuel side, but backing up the impact of Fairborn depreciation, which would still be a year-over-year unique comparison.

That would be the majority of it.

Got it.

That's helpful.

One last one.

Can you just give us some more color into Wildcat?

What kind of progress you're seeing there, the types of materials that you're shipping, whether it's locations and how now you're thinking about that impacting the business going forward?

Yes.

We acquired that business late during the summer, and that business continues to do well.

Volumes continue to grow there and really starting to see the benefits of that within our whole system.

It's predominantly still moving frac sand, but with some good opportunities for us going forward.

It's not a huge mover in terms of the earnings today, but we think that business long term will just continue to strengthen our low-cost position in the oil and gas business.

(Operator Instructions) Our next question comes from Jerry Revich with Goldman Sachs.

Dave, earlier in the call, you mentioned Cement.

You're expecting a little volume growth this year before an acceleration, hopefully, in '19.

Can you just flesh that out in terms of what's driving the view of more unit growth this year?

Is it public?

Is it private non-res?

Any additional context you can give us for your footprint?

We think all of them are going to be up a little bit.

When I look at residential, the people that do the forecasting and housing starts are right, growing from 1.2 million to 1.3 million.

That's some additional tonnage.

But we'd agree with all the folks that are projecting in the area of 2.5% going forward in the markets that we play in.

Okay.

And then in terms of the ramp-up in Utica for the sand business, can you just help us understand how much contract coverage you have or the pace of production ramp we should be looking for?

And in terms of as you're ramping up the business, what's your view on the competitive shipment position that you folks will have compared to others coming out of a general area?

Yes, Jerry.

That project will finish up here this summer, as I mentioned.

And we feel very good about our ability to move that incremental 1.5 million tons pretty quickly.

Okay.

And then on transportation cost, can you talk about the cadence of how you expect -- where the $2 per 1,000 play out?

I guess, what's the timing of the increase?

And can you just remind us what's your mix of spot versus contract rate exposure?

Because spot rates look to be in the teens inflation rate, so I just want to make sure we're properly calibrated.

Jerry, we're looking at about 6% in outbound Wallboard shipments.

That's what we're looking about.

And most of those are going to take effect in the first quarter and maybe some into April, but that's what we're projecting right now.

Okay.

And then for context, when we've seen shipping pricing will be higher than prior cycles, that's tended to reinforce local competitive nature of your Wallboard business.

Do you expect that to play out similarly this time?

Or anything when you take -- keep in mind as transportation costs rise here compared to what we've seen in prior cycles?

Yes.

I think maybe more importantly, Jerry, is on the demand side, as we continue to see whole building and single-family construction activity improve, repair and remodel activity improve.

The opportunities to sell our Wallboard continue to expand.

Freight costs are certainly a part of going to market, but with good underlying fundamentals and looking to continue to improve, that's more important to us.

And our next question comes from Adam Thalhimer with Thompson, Davis.

I want to start with organic cement volumes.

You said that the weather headwind was behind you.

You also said there were some job delays you experienced maybe last 1 quarter or 2 quarters.

Are the job delays behind us?

Brent (sic) [Adam], as we talked about last quarter, I don't think we're the only one to be frustrated by cement volumes here this second half of the year.

Whether it's delays at the state level for any variety of reasons, it is -- it's just been frustrating with the way the public construction activity has picked up because the demand or the need is there, right?

There's no doubt the need to continue to improve the infrastructure within the U.S. is there.

It's just a little slow going on the spending side.

But we expect that to eventually catch up with it and meet the need there.

So if I parse through that comment, I mean, as you're looking at 2.5% growth for the full year, not you, the industry forecasters, for you guys, does that play out as like a plus 0, plus 0, plus 5, plus 5 type of year?

Yes, I don't know that we'd get into the granularity by quarter.

Again, things could change.

We try to look at things on a trailing 12-month basis at the very least.

But we continue to see the underlying business improve, and we'll use PCA projections.

But over the long run, we think we'll continue to see demand improvement across all of our markets.

Okay.

And on the Wallboard side, you referenced higher -- what were the legal costs in the quarter?

Sure.

Just associated with finalizing and settling the antitrust lawsuit, but it was a pretty meaningful number, over a couple of million dollars.

Over a couple of million.

And then I just wanted to get your sense in general on the frac sand business and regional sand.

How do you look at the emergence of kind of in-basin sand?

And do you think you need to add some of that to round out your portfolio?

We don't think we need to add any.

There is a place for brown sand, 100% brown sand in the Permian.

We're -- we make very little, 100 mesh.

We're 100% sold out.

Our new plants, 80% is already spoken for.

It's great to have options in other markets, and we have those.

And we have a follow-up question from Scott Schrier with Citi.

Scott, are you there?

Sorry about that.

Just wanted to follow up on the concrete and ags pricing.

Obviously, it looks like you had a lot of strength there.

So I just wanted to see if there's anything specific to call out, whether it's regional mix.

I know you had some weather issues in Austin there.

Just anything on that pricing would be helpful.

No, nothing unusual, Scott.

We're just really concentrated in 3 markets and very separated from each other.

But those businesses have continued to improve here, but nothing unusual in there.

At this time, I'm showing no further questions.

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

I want to thank all of you for your participation in the call, and we look forward to talking with you in the spring.

Thank you.

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

This does conclude the program.

You may now disconnect.

Everyone, have a great day.