Eagle Materials Inc (EXP) 2020 Q3 法說會逐字稿

Good day, everyone, and welcome to Eagle Materials' Third quarter of Fiscal 2020 Earnings Conference Call.

This call is being recorded.

At this time, I would like to turn the call over to Eagle's President and Chief Executive Officer; Mr. Michael Haack.

Mr. Haack, please go ahead, sir.

Good morning.

Welcome to Eagle Materials conference call for our third fiscal quarter of 2020.

We're glad you can 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 the 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 the press release.

Our results this quarter have been consistent with the outlook that we have been sharing with you, and business conditions remain favorable across our construction markets.

Moving forward, we continue to expect demand growth in the low single digits for the foreseeable future.

On both the Heavy side, notably, the Portland cement and on the Light side, specifically in Gypsum Wallboard.

We also recognize that there are risks to this outlook.

But as I have stated before, we continue to believe these risks tilt to the upside for calendar 2020.

Overall, it was a solid quarter for Eagle Materials.

Consolidated revenues were up 5%, driven by increased cement and wallboard shipments, strong operational execution and improved cement pricing.

Our Cement sales volumes were up 7% to a record 1.4 million tons.

Operating earnings from Cement were up 15% over the same quarter year ago due to higher sales volumes.

Wallboard demand remained healthy and our shipments were up 2%.

However, soft pricing in Wallboard was a headwind affecting operating earnings for the segment this quarter.

We do have price increases out across all markets in Wallboard and in Cement as well.

I'd like to take a moment to update you on major expansion developments underway at both the Heavy and Light side of our businesses.

Starting with the Light side.

We announced a significant expansion project at our Republic Paperboard operations aimed at expanding productive capacity there by roughly 20%.

The goal of this expansion is to meet market demand, lower current costs and minimize future cost exposure to white fiber.

The project entails the installation of proven technology, but it is technology that is new to Gypsum Wallboard paper manufacturing industry.

Republic is a world-class operation and the talented team there will utilize this technology to further extend our competitive advantages on paper performance.

The project is expected to be complete this spring, and we expect to begin ramping up paper production in the second calendar quarter of 2020.

Most of the equipment spend is complete for this project.

On the Heavy side, we announced during the quarter that we entered into a definitive agreement to purchase the Kosmos cement plant, 7 terminals and related assets from the CEMEX Buzzi joint venture.

We're on track to close on this transaction in the fourth fiscal quarter and begin enjoying an immediate contribution to cash flow starting next fiscal year.

The transaction has now cleared HSR review.

We're quite excited about the acquisition, as this further extends our reach in the U.S. Heartland footprint, consistent with our growth and plant network strategy.

This acquisition will also provide the Cement business with even more capacity to serve U.S. Heartland cement markets.

The timing of this transaction could not have come at a better time, given our intentions to separate the company into Heavy and Light and stand-alone entities this summer.

While we're on the topic of that separation, I want to underscore that we are still on track for a summer launch of the 2 parts of the company, as we have indicated in prior communications.

Also, as a prelude to the separation, we have been evaluating options for the noncore Heavy side assets, specifically including our frac sand, processing and distribution assets.

While we continue to work on this process, I have no announcements to make yet other than to say, this quarter, we wrote down the frac sand assets and have continued to operate this business on a near cash flow breakeven basis, while we're -- we have been evaluating the alternatives.

It is worth noting that excluding this nonroutine impairment items, our adjusted net earnings per share was up 22% over the third fiscal quarter a year ago.

That's all for me as far as introductory remarks, now let me turn it over to Craig to go through the financials for the quarter.

Thank you, Michael.

Eagle's third quarter revenue improved 5% to $350 million, reflecting increased Cement sales volume and pricing, improved Wallboard and Paperboard sales volume and the results of a small Concrete and Aggregates acquisition.

The acquired business contributed approximately $9 million of revenue during the quarter.

Third quarter EPS was a loss of $2.77, which includes the impact of several nonroutine items during the quarter, most notably an asset impairment charge of $224 million related to the Oil and Gas Proppants business.

Other nonroutine items were business development costs and the effect of an outage linked to the planned expansion of our paper mill.

Excluding the impact of these nonroutine items, adjusted EPS was $1.51.

Turning now to segment performance.

This next slide highlights the results of our Heavy materials sector, which includes our Cement and Concrete and Aggregate segments.

Revenue in this sector increased 18% driven primarily by 7% improvement in Cement sales volume, improved pricing in both Cement and Concrete and the results of the Concrete and Aggregates acquisition.

Operating earnings increased 19%, again, reflecting the improvement in sales, volume and pricing.

Moving to the Light Materials sector on the next slide.

Improved Wallboard and Paperboard sales volume was offset by an 8% decline in Wallboard prices, which led to a 4% decrease in Light Materials revenue.

Quarterly operating earnings in our Light Materials business declined 7% to $48 million, reflecting lower net sales prices, partially offset by higher sales volume.

In connection with the expansion of our paper mill, we took an extended outage during the quarter to tie in new equipment.

The impact of this average was approximately $1.5 million during the quarter.

In the Oil and Gas Proppants sector, third quarter revenue was down 48% and we had an operating loss of $7 million.

During the first 9 months of fiscal 2020, operating cash flow increased 9% to $321 million.

And capital spending was down slightly to $84 million.

We completed the acquisition of a small Concrete and Aggregates company during August, with a purchase price of approximately $30 million.

In advance of our pending acquisition of Kosmos Cement Company as well as company separation, we have paused the share repurchase program to manage our capital structure.

Finally, our debt-to-cap ratio was 51% at December 31, 2019, with $126 million of cash on hand.

Our net debt-to-EBITDA leverage ratio was approximately 1.8x at December 31.

In advance of the Kosmos Cement acquisition, we established a $665 million term loan facility in December, providing us with a low-cost financing source.

Post acquisition, pro forma leverage will be at or slightly below 3x, with good visibility to delever post acquisition.

The Kosmos Cement assets will increase our annual cement capacity by nearly 25% to more than 7.5 million tons and provide an immediate contribution to annual cash flow.

As Michael said, we expect the pending acquisition to be completed during our fiscal fourth quarter.

We are very excited about this opportunity to grow our Cement position and to welcome a talented group of new employees to Eagle.

Thank you for attending today's call.

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

Catherine?

(Operator Instructions) Our first question is coming from Trey Grooms with Stephens.

So I guess, the first one is on the Kosmos acquisition, so getting deeper into that geographic market, I guess it's also bringing more long-haul or maybe more barging into the picture with the 7 terminals.

Can you talk about kind of how that plant fits there in your network in the market that it serves?

What's the kind of demand and pricing been like in that market and kind of the outlook?

And also how this plant might compare to others in your network, just from efficiency or profitability standpoint?

Sure, Trey.

When we look at this asset, we're very excited, as Craig and I alluded to, to get this asset into our network.

When we look at this transaction and this opportunity, we're really looking at our Cement plants as a network.

We have Illinois Cement, Fairborn Cement and Sugar Creek that are all in this area.

And this further enhances it and kind of knit those together that is going to provide better service to our customers throughout this area.

As for the plant itself, it was redone in 2002.

So it's a modern plant, with a large capacity plan.

So we feel it's a perfect fit for us to expand our reach and extend our capacity in that market.

And as I said, knitting that together as one unit in that area.

Okay.

And then kind of sticking with the Cement.

There had been some more kind of competitive behavior, I guess, or maybe more competitive than we would have thought at this stage in the cycle within some of your Cement markets anyway over the last few years.

And it seems like the stage should be set for pretty good pricing realization this year, given the demand outlook.

Can you talk about any early reads that you may have around that cement price increase, specifically as we look into the spring season, given that backdrop?

And then kind of tying that in, any early comments around the Wallboard pricing for January as well.

Yes.

Terry, we would look at it, we're out in all of our markets with the cement price increase.

It's too early to really tell what the market is going to -- the market will determine that price, and it's too early to tell what that's going to be.

We're fairly -- we're out everywhere with it.

Wallboard is the same thing.

We're out with the Wallboard price increase.

And we just don't have enough time yet to see where that's going to settle out.

We'll have more information here over the coming months to see what the market determines that price to be.

And our next question comes from Brent Thielman with D.A. Davidson.

Could you guys clarify the price increases you're out within the market on Light and Heavy?

Sure.

Brent, this is Craig.

The -- on the Cement side, we are out generally around $8 a ton in every one of our markets.

And generally, those are for the spring time close to April 1. There's a couple of markets that we were up in January, but it's truly $8 in April and then the January -- the Wallboard price was a January price that we're communicating to customers.

Got it.

Okay.

And then on Wallboard.

Maybe if you could just talk about the demand environment.

It seems like some of the early signs are looking healthier.

You guys seem to sort of outperform before we see in the broader market.

You talk about what you're seeing in some of your regions just from a demand perspective on the Wallboard side.

Yes.

With the -- underlying fundamentals look good.

We've consistently said, we see low single-digit growth in the foreseeable future.

And that's kind of what we're planning around.

And there's nothing to deter us from planning around those numbers, low single-digit growth.

And our next question comes from Anthony Pettinari with Citigroup.

I was wondering if you could touch a little bit on the demand you're seeing in some of your regional Cement markets.

I think you talked about strength in Texas and Colorado and some weakness in Illinois.

Just wondering if you had any kind of additional color on regional market strength.

Yes.

Anthony, I think as we've said in the past, we are seeing improvement in all of our markets.

And the rate of -- the pace of increase might be slightly different.

But I mean, to put it into perspective, the state of Texas in calendar '19 was pushing 18 million, 19 million tons of demand.

We continue to see good growth here in the state of Texas.

That is an enormous number.

But even across our other states, we're seeing it.

You're also seeing states becoming more creative or more aggressive in the way they finance their infrastructure spending.

You mentioned Illinois, Illinois is a good example where they put some spending budgets in place in order to improve their infrastructure.

And that doesn't happen overnight.

It happens over a period of time.

But we are seeing improvement across all of our markets.

Okay.

That's helpful.

And then just on the Paperboard side, as you think about costs for 2020.

Last year, we saw this collapse in OCC prices.

I guess, they exited the year $20, $25 a ton, kind of historic lows.

As you think about Paperboard costs for the next 12 months, specifically on OCC, are you expecting prices to remain near these levels and any other kind of cost items that you call out?

Yes.

Really, with regards to the OCC pricing, we're projecting that it's a very cyclical market, but it's been fairly flat over the last -- with a slightly declining trend over the last 12 months, and we think that's kind of stabilized, and we're projecting a stabilization of that price through.

There will be minor variances on a month-to-month basis.

But overall, we're expecting a fairly flat to slightly rising trend there.

And our next question comes from Jerry Revich with Goldman Sachs.

I'm wondering if you could talk about how you're thinking about your Heavy side network.

Assuming these -- the transaction that you've highlighted earlier closes.

How do you view other white spaces within the U.S. geography, just qualitatively?

What markets would you view as attractive?

Any parameters would be helpful.

Yes.

So I'm not going to speculate on what becomes available or what markets come open.

But if you see our historical performance of where we've invested our money.

You can see this one does fill a white space in our network.

And that's kind of how we look at our network as a whole, how we bring those plants together, and that's what we use as our strategy, filling those white spaces.

So...

Okay.

And in the past, you folks have spoken about really focusing on land lock parts of the network.

Obviously, we've got some barge exposure on the proposed assets.

Can you just talk about how your thought process there has evolved and the opportunity in terms of why this particular partly served asset is interesting to you folks?

Yes.

It really is a result of, again, around the location in the -- how it fits with our other facilities.

So when you look at that asset and how it ties together, like I said a little bit earlier was we have Illinois and then we have Fairborn.

We have Sugar Creek.

This completes a nice base area and the extended reach, while we haven't been participating in that market in the past.

This does have the extended reach that it fills all those markets with it.

So it's -- how we determined it is barge is one mode of transportation where we've done rail and truck in the past with it.

And this just completes that network in that area and ties everything together.

So that's why this was a very attractive opportunity for us to participate in.

And our next question is from Adam Thalhimer with Thompson Davis.

First question on Kosmos.

Is the pricing similar in that region to the rest of your wholly owned regions?

Yes.

It will be pretty close to the average, Adam.

And then how much volume should we bake in, Craig?

Should we use that $1.7 million figure?

Similar to a lot of the U.S. industry, utilization rates are pretty high.

We don't own it today.

But certainly, utilization rates are pretty high in that marketplace.

Okay.

Just getting ready for when it closes?

Yes...

And then on the Paperboard side, pricing down 11%.

So there were some pricing provisions in our long-term sales agreements that brought that down.

What's going on there?

How does that play out?

So like we've said in the past, our -- most of our volume is contractually sold.

Those contracts have inflators and deflators based on the price of inputs.

And so that's the price and the major one being OCC or recycled fibers.

And as that prices come down, the price we charge to customers comes down with it.

So it's been pretty consistent.

Okay.

And then Paperboard volumes, would you bake in the full 20% increase in Q2 of '20?

Or does it just kind of layer in over the...

Yes.

No, I think as Michael alluded to the outset.

This will be a ramp over a period of time.

And it will come up in the March, April time frame.

It takes a little while to line out the machine.

And then over the next several months, we'll begin to move it into the market.

But yes, it will be -- it will ramp over a broader period of time than that.

And our next question comes from Philip Ng with Jefferies.

In your Cement business, assuming demand holds up, okay, in the fourth quarter, it looks like you're running north of your reported clinker capacity this year.

So is there more you can do to unlock more supply?

And does this Kosmos acquisition free up some of that capacity as well for you?

Yes.

So if you look at it, we always look at it as a 12-month rolling, too.

So we do have some less busy times a year that we are able to produce more clinker and store that clinker, we also, on the last call, talked about some the additional brand capacity we had matched into some of our facilities where we're able to take that clinker out of storage and grind it and sell it in the market.

So we still feel comfortable with that side of running these plants full year and storing that clinker for the busier times of the year to meet some of that increased demand.

Got it.

When we think about calendar 2020, using your outlook of low single-digit growth.

Does it feel like you have no supply to meet that demand?

And are you kind of running the situation you run full out, I imagine you're pretty close.

So with that backdrop, what kind of conversations are you having with your customers on pricing?

And are they approaching those conversations only differently.

Just wanted to make sure they have supply secure?

Yes.

So we've been able to satisfy our customers' needs.

We think we're going to be able to satisfy those needs through this next calendar year also.

We -- as Craig stated, we were out with the $8 number across that market.

And we're having those conversations currently with the customers to see where that settles out.

So.

Yes.

Got it.

And I guess switching gears to Wallboard.

When we look at your volumes, pretty solid in a choppy housing environment.

But it lagged the region broadly.

Curious what's driving that?

And if you saw any increased competition in the quarter with your ASP slipping a little bit?

Yes.

I would tell you, we're very happy with where our markets are performing, our regions as they have done recently about before the national average.

And we're excited and what the latest prints on homebuilding was pretty positive.

And we think calendar 2020 will be another good year for volumes.

Okay.

And just one last one for me on Wallboard.

Did you see any prebuy in the quarter?

I know it gets kind of noisy?

And how should we think about that in the upcoming quarter, normalizing all that stuff out.

Yes.

Phil, I don't think there was any significant prebuy activity.

And as you said, it's a little noisier as demand is improving, prebuy was easier spot 4, 5 years ago, it's a little less meaningful today than what it was.

We just see the homebuilding starting to improve.

And our next question comes from Josh Wilson with Raymond James.

First off, just a housekeeping question.

Can you give us a sense of where your Wallboard price was exiting the quarter, so we know where to start with January?

It was pretty consistent with the quarterly average.

Okay.

And what was the revenue impact of the outage in the Paperboard plant?

It isn't as much of a revenue impact as it is a cost efficiency impact.

So then in terms of the margin benefit year-on-year, adjusting that out, what were the drivers there?

Look, OCC prices, as we've been saying, are very -- pretty low, even -- and energy prices have remained low, but OCC is the major driver there on the margin improvement.

Got it.

And just to reask the prior question then you feel like your market share is okay in Wallboard and that there was nothing timing related or something like that?

Our market share hasn't changed more than 40 basis points in 5 years.

Okay.

And then last one for me.

Your inventory days and payable days were down a fair amount year-on-year.

Was that timing as well?

Or is there a shift or some activity there?

Yes, I think as Michael said, on the Cement side, we've made some investments on grinding that's allowed us to eat through some of the clinker inventory, and we're always managing working capital to the best of our abilities and to maximize cash flow.

But -- and a lot of it is a seasonal timing as well.

And our next question comes from Paul Roger with BNP Paribas.

This is Robert Whitworth on for Paul Roger.

I wanted to start by asking, can you comment on the outlook for cost inflation and sort of remind us of your hedging policy, especially for natural gas.

We sit here with the majority of our cost inputs, no significant inflation.

You think about things like OCC, natural gas, now it's more on the Light side.

On the Heavy side, it is energy-oriented with electricity and fuels.

And you're seeing some inflationary pressures, but nothing unusual there across the business platform.

In terms of hedging, with gas well below $2 now.

We're making -- we are putting some hedges in place for certainly the next 12 months.

And looking out to fix those costs and at these very low levels.

Great.

And just one follow-up.

Obviously, you'll be closing the Kosmos still shortly.

Are you -- would you look at making more investments into Cement, obviously, despite the upcoming separation?

Is that something that you would look at doing?

Right now, Paul, is that we always look at any opportunities that come available.

I don't want to early discuss on if we'd be open to investing more into the thing.

What we're concentrating on right now is the separation of these 2 companies that will happen in the summer months.

So that's where the management team is focused right now.

Our next question comes from Adrian Huerta with JP Morgan.

Two very specific questions.

One on Cement freight cost.

You said in the prior quarter that costs were stabilizing.

Can you tell us how the cost was this quarter?

And the second question is on the separation cost, that it was a little less than $3 million in the previous quarter.

What was the amount in this quarter?

Yes, I'll answer your first question -- or your last question first.

So we were $3.4 million, as we highlighted in the press release for kind of what I'll call business development costs.

That certainly included the separation.

It also included fees around and costs associated with the Kosmos acquisition that we incurred just prior to the announcement.

And then in terms of Cement freight, and I'd say freight in general.

We're not seeing major changes there.

The trend has been pretty flat, benign for the last 12 months.

And again, there's always a little bit of cost pressure there, but nothing like what we saw 2 years ago.

And we have a follow-up from Brent Thielman with D.A. Davidson.

Just one quick one on the Kosmos transaction, in the original release, you guys talked about this $120 million in tax benefits.

Any more color to that?

And kind of how you would -- if we could think about you recognizing that once this is done?

Yes.

Brent, that's a great question.

It's a very important part of the investment.

So with tax reform, we are able to immediately expense or deduct a significant amount of the purchase price.

We're going through that process right now.

But using the Fairborn allocation as a barometer, there will be a pretty significant depreciation deduction here in year 1 as right upon closing of the transaction that will very likely move us into an NOL position from a tax perspective, and that we'll be able to be carried forward with both of the companies even post separation.

So we'll be in the enviable position of minimal taxes being paid.

So again, all that free cash flow inevitably improved as a result of this.

But that's where that $120 million comes from is that immediate deduction for a big chunk of the purchase price.

Okay.

That's great.

Actually, one more quick one on the paper mill.

Do you expect any more outages or downtime here as this expansion gets wrapped up, that might have some impact on the cost basis?

Yes, that will -- we -- as Michael said, we'll wrap that up here this spring.

So very likely in March will be a pretty extended outage even more so than this past quarter.

And we'll certainly quantify that for everybody on the call, but that will impact our March quarter to tie in to the new total equipment package.

Thank you.

And I'm showing no further questions at this time.

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

Thank you, everybody, for attending the call today and we'll look forward to speaking with you again in the summer.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.

Everyone, have a great day.