Eagle Materials Inc (EXP) 2020 Q1 法說會逐字稿

Good day, everyone, and welcome to Eagle Materials First Quarter and 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.

Thank you.

Good afternoon.

Welcome to Eagle Materials' Conference Call for our First Fiscal Quarter of 2020.

We are glad 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 www.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 and 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 addressing the news at the top of mind with many of our shareholders this quarter, namely our announced plans to separate the heavy and light side of our business into 2 independent publicly traded companies.

This separation is expected to be complete in the first half of calendar 2020.

We feel that both businesses are well positioned for future growth, are best-in-class in their respective industries, will be resilient during tough times through their low-cost producer position and have achieved sufficient size to stand on their own.

The separation of these 2 businesses will give each business the opportunity to focus on its distinct strategic priorities, priorities that best position the business for profitability and growth, implement a capital structure that is tailored to the needs of the business, allocate resources and deploy capital in a manner consistent with their strategic priorities and finally, it will allow new and existing investors to value the 2 companies based on their pure play, operational and financial results.

After the separation, the company's Heavy Materials, U.S.-only heartland cement-plant system will operate as a distinct pure play.

The business will possess excellent future prospects as the largest U.S.-owned cement producer, owning its raw material reserves that will supply its operations over the long term.

Eagle's Light Materials business, comprised of Gypsum Wallboard and Recycled Paperboard, has a long track record of superior margin performance.

These financial results are driven by sustainable low-cost producer positions in U.S. Sunbelt markets and its long-lived raw material reserves.

This business has uniquely distinguished itself financially through the industry business cycles as well as achieving industry-leading levels of customer satisfaction.

As we announced, creating 2 distinct benchmark businesses is the path we are pursuing.

I think our announcements and actions show our commitment to shareholder value creation.

On a related note, it is also worth commenting that we repurchased nearly $200 million of our shares during the quarter, illustrating our confidence in these businesses and their prospects.

We did this repurchase without jeopardizing our financial flexibility.

That is all I'm prepared to comment on today regarding the separation and share repurchases.

We will not answer further questions at the end of the call today about our separation process or progress.

Let me turn to our business results for the quarter.

It was a mixed quarter in a number of respects.

While we're approaching high levels of capacity utilization in both major businesses, this quarter only translated into modest price improvement in Cement and, in fact, some price slippage in Wallboard.

This month, we announced a price increase in Wallboard effective in early August as backlogs are good, but the marketplace will determine our level of success and we will report on that in the next earnings call.

Heavy Materials revenues were up 3% due to progression on both price and volume.

The operating earnings were up 5% due to increased freight cost and unusually wet weather, which hampered the contributions from our Concrete and Aggregates, in particular.

We have discussed on many occasions how the Cement business is indeed very regional.

This was never more clearly exemplified than this quarter.

I was quite pleased with the price increases in our Cement business attained in each of our regions except 2, and lack of progress in those 2 regions affected the overall price progression that we posted.

In both cases, it was an illustration of having to meet competitive situations.

Freight and logistics, of course, also played a role.

Light Materials revenues were up 10%, and operating earnings were down 21% on lower volumes in sales prices.

We still see low single-digit volume growth for the full fiscal year, recognizing the mixed start to this fiscal year.

I might add that we are pleased with our Wallboard volumes in July, which have remained strong.

Finally, I'd point out that although our Oil and Gas Proppants segment has been under pressure, it remained cash flow positive this quarter, a testament to the talented management team making quick decisions in response to market developments.

As part of our heavy-light business separation announcement, we have indicated that we are exploring strategic alternatives for this segment and that process is underway.

Now let me turn it over to Craig to grow through the financial specifics for the quarter.

Thank you, Michael.

First quarter revenue was $371 million, a decline of 6% from the prior year, reflecting lower Wallboard sales volume and sales prices, partially offset by improved Cement sales volume and sales prices.

First quarter earnings per share were $0.94.

As we highlighted in the press release, the first quarter included $0.19 of nonroutine expenses, primarily associated with the planned separation of our Heavy and Light Materials businesses.

Turning now to the segment performance.

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

Revenue in the sector increased 3%, driven primarily by a 3% improvement in Cement sales volume and improved pricing in both Cement and Concrete.

Operating earnings declined 5%, reflecting higher fixed and freight cost coupled with wet weather throughout the quarter, which limited our Concrete and Aggregate sales volume.

Moving to the Light Materials sector on the next slide.

Lower Wallboard sales volume and prices drove a 10% decline in Light Materials revenue.

The operating earnings in our Wallboard, Paperboard business declined 21% to $48 million, reflecting lower Wallboard sales volume and net sales prices, partially offset by lower recycled fiber costs.

In the Oil and Gas Proppants sector, revenue was down 45%, and we had an operating loss of $4 million.

So our sales volume improved 11%, reflecting the results of our new facility in Illinois.

During the quarter, operating cash flow declined to $51 million consistent with the net earnings decline and capital spending declined to $22 million.

As Michael mentioned, we returned over $200 million to shareholders through a combination of share repurchases and dividends during the quarter.

And finally, at June 30, 2019, our debt-to-cap ratio was 46%.

Thank you for attending today's call.

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

Andrew?

(Operator Instructions) And our first question comes from the line of Trey Grooms with Stephens Inc.

I guess first one is on Wallboard.

So the pricing down -- it's on there, 6% year-over-year, and I know last quarter, you guys mentioned that you had ended the quarter at a lower level than kind of the average on the Wallboard pricing for the last quarter you just reported.

And if you look at this most recent quarter, how did that trend, as we were kind of going through the quarter?

And maybe how did Wallboard pricing end this June quarter versus the average?

Yes.

So I get your question, Trey.

So yes, we averaged a little -- almost $151.

We were a couple of dollars below that in the month of June, but in reality, we have not seen a whole lot of price movement in the last month or 2. It seems to have stabilized here.

Okay.

Good to hear.

And then secondly, kind of along those lines, with the price increase that you guys have announced for early August, are you guys seeing any prebuy activity at all as you kind of moved in through the July time frame or maybe even late June?

No.

Trey, we haven't seen much of a tick up that we contribute to prebuy activity.

Generally, we're seeing the market is getting back to normal, and the volumes are moving -- we're happy with our July volumes, but we don't think it's tied to the prebuy.

Okay.

Fair enough.

And I'm guessing with the tougher comps from the year ago period, the prebuy timing last year and just the weather starting to maybe cooperate a little bit better.

Is it fair to say that we're kind of tracking a little bit closer to maybe the -- those low-single digits you guys had pointed to for the full year?

Yes.

Trey, as we factor out the prebuy from the prior year, keep in mind, the prior year volumes were up 8% or 9%.

And so that was the unusual period.

But when you factor that out, volumes, as we kind of said, kind of grow in this low- to mid-single digit type of improvement and we seem to be on that trend.

Okay.

And then lastly for me is, you mentioned a competitive situation in Cement.

It sounds like that's kind of continued -- I think you mentioned that last year as well.

You guys put up 1%, ex the freight, I guess it was may be closer to 2%.

Can you give us anymore color?

I mean what -- I understand weather and things like that can happen, but the underlying demand, seems like it's strong enough to support some pretty healthy price actions here with things tightening up.

Can you give us an idea of what -- maybe your opinion of what's going on with that competitive situation?

And is that something that weather may have played a role in?

And maybe we could see some -- a little bit better behavior maybe a little later on?

Yes.

Trey, how I look at this in the comments, I was happy overall with where our pricing has been going in most of our regions.

This quarter, like I said, was really specific to a couple different locations.

The one I'll kind of just give you as a highlight because I'm not going to go into the specific competitive situation.

But one of the areas that we tend to struggle a little bit more in, as you know, the Illinois market and we see that as weaker.

However, we also some positives coming with that, that they implemented the gas tax.

We see them starting to do some more investment in their infrastructure, and so we do think that this -- that market is a struggling market but there is some light at the end of the tunnel on that market too that there will be some more increased demand.

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

Great.

Could you guys clarify the price increase for Wallboard that you announced for August?

Yes.

So our price increase was effective August 3, and we did not give a specific amount.

Those were going to be communicated directly to customers.

Okay.

And then Craig, the overhang of the higher freight cost into the second fiscal quarter, could we see that as significant as what you saw on the first quarter?

Should we see that alleviate, maybe just some feel there?

Brent, it's a good question, and we're not the only ones dealing with this.

The flooding that happened in the Midwest, right, it started to impact multiple modes of transportation.

You had barges unable to move because of higher river levels.

You had bridges washed out.

The railroads have gotten backed up.

So we were -- which then you end up going through alternative modes of transportation that are more expensive to get to some of the markets.

So we like to believe that those will start to improve as we head into the summer and the flooding subsides, but we haven't seen that yet.

And so we're -- the flooding is down, the rivers are open more.

But some of the rail congestion has continued and we have yet to see that improve.

Okay.

Okay.

And I guess just back on Wallboard, you guys obviously aren't across the country, but I'm curious if you could just talk about what you're seeing from demand perspective.

I'm a little surprised to see that price slippage just given it sounds like things are pretty healthier in your end markets.

Could you just talk about what you're seeing in those regions?

Yes, no problem.

So whenever we have this kind of environment with the choppy housing starts, we tend to get pressure on pricing.

We do see interest rates being low, and we're hoping to see an improvement in that area with the housing starts where they are and being stagnant to slightly improving with it, that's when we get pricing pressure.

And that's what we're seeing today across each of our areas with it.

The demand side has been flat to slightly improving, as we talk, low single digits.

Just because housing starts more is what we attribute the pricing pressure to.

Okay.

Last one, probably for Craig.

Can we still think about kind of a corporate G&A number in that $10 million range, I guess without these nonroutine items going forward?

Yes.

That will be the range.

And our next question comes from the line of Scott Schrier with Citi.

First, real quick on Wallboard.

The pricing, is there any regional or product mix or anything we should be considering in that number?

No.

That didn't have a significant impact on those numbers.

Got it.

Okay.

So if I look at the Wallboard margins, it looks like they might have dipped just below 30%.

We've only seen that I think one other time in the last 5 years or so, obviously losing $10 of pricing is tough to offset.

But if I look at the production cost, with or without shipping, it looks like they're roughly up 4% year-on-year on a unit basis.

I suspect a lot of that would be due to decrementals on fixed cost absorption.

But I'm wondering if you can help me with the year-on-year bridge if -- what other buckets are there for thinking about energy cost, OCC or anything else that could be kind of in that margin.

Yes.

Absolutely, Scott.

And you hit the nail on the head.

If you think what are the major variable cost components of our Wallboard business, it is things like natural gas, which remains very low, recycled fiber costs remain low and are going lower.

We're fortunate that we own all of our -- vast majority of our gypsum comes from our own reserves.

So the -- in terms of any cost inflation, that was associated with the negative absorption of fixed cost on lower volumes.

Other than that, cost would have been very, very strong.

Got it.

And I appreciate the comments on the Cement network and understand it's a regional business and of course, pricing is different in some of those markets.

Are there any of these markets where you notice strength where you're getting closer to a level where whether it's customers get put on allocation, capacity utilization tightens, where you're able to have a little bit more selectiveness in servicing closer customers by truck rather than having to eat some price in rail shipping and just a general ability to get more pricing as a tighter environment?

Yes.

Scott, I think it's -- you certainly feel that in some of these regions, and whenever you have logistics constraints like we saw this past quarter, that's going to put even more stress on the system.

So yes, many of these markets, as we've said for a while now, we are at nearly full utilization, and that gives you some opportunities as you move product around to make sure you're making the right volume and price decisions.

Got it.

And understand on cement, obviously, there were a lot of issues with the weather.

I'm curious if you're seeing any opportunities for emergency repairs, we heard a little bit of that from an aggregate producer today.

Either going forward or if any of that solid 3% growth that you had also had a little bit of repair-type work from flood damage?

In some of the markets we serve, there was that flood damage, and those projects will -- there are projects for bridges that were washed out and road repairs and other things and we will be seeing those in the coming quarters.

We did help with some of that just it was minor though.

I don't think it was a major impact to our volume in this quarter.

Great.

And if I could ask one more.

Just on Wallboard and demand and if I think about it more holistically, is -- are open floor plans or -- has affordability driven, all the homebuilders looking to make more affordable products, smaller floor plans in addition to the open floor plans.

Does that have an impact of whether it's less Wallboard needed per start?

Are you seeing any kind of whether a cyclical or structural considerations from that metric?

No, we have not seen anything like that.

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

In terms of the discussion around the transportation with trains.

In prior cycles, I think this was the point when we really got strong Cement price increases, especially given the transportation advantage that you folks have for a lot of your insulated plants.

And I'm wondering what's your sense on why the customer conversations are not easier considering the transportation cost for alternatives are now higher.

What do you think has changed cycle-over-cycle?

Yes.

I think Jerry, as Michael pointed out, the conversation is different in each region, right?

In some regions, we are very pleased with the price improvement that we achieved and those markets are doing very strong.

[I think he] highlighted, one of the markets in the upper Midwest, where we all know, Illinois has been a slower-to-recover marketplace and dealing with state issues for the last several years.

And -- so that's going to be a very different conversation than you have in a Southern market, for example.

So not all the regions are acting in the -- are at the same point at this time, but we do look at a state like Illinois that for the first time in 30 years is increasing their state gasoline tax to try to rebuild their infrastructure.

So they'll get there, they are just a little bit behind where some of these other markets are.

And to get to Cement pricing at 1%, it sounds like you have a number of states that are up.

Can you just help us understand the spread in terms of pricing action, so Illinois sounds like it's probably down mid-single digits?

Based on the qualitative comments, can you talk about which states are at the higher end of that price increase?

And what's the spread in terms of pricing performance on states where -- that are tight versus ones that aren't?

Yes.

Look, we won't give pricing region-to-region, but suffice it to say, we're seeing good pricing and you can guess some of these markets, Texas and Colorado.

Some of the markets that have been very strong markets from a demand perspective, tight utilization rates and they'll be -- we're very happy with their pricing.

And so overall the Cement pricing environment, would you characterize it as a mid-cycle pause in the pricing environment?

Or are we at such points where the variable contribution margins are so attractive in the business that it becomes harder to push pricing kind of like what we're talking about in Wallboard?

Yes.

I think it's very different situation, Jerry.

I think it's -- in the regions where you have high utilization rates, we are able to achieve very good pricing improvement.

You just have other regions that are a little behind.

And eventually, they'll be in the similar situation where utilization rates grow, and that will give you the opportunity for making incremental pricing.

But I don't see it as a -- as necessarily a mid-cycle pause, I think each region's acting as you would expect.

Okay.

And lastly on Wallboard.

Earlier in the cycle, you folks had the annual price increases, and we've been away from that market structure.

How are you thinking about strategically 2020 and beyond?

Are you thinking about going back to the January 1 price increases that just seem to be more effective for you folks earlier on in the cycle?

Yes.

Jerry, we haven't even started to look at that right now at this time.

We announced a pricing increase for August 3, and we'll see what the market response to that and then we'll address that situation after that time frame.

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

I wanted to start on the Cement volumes, plus 3% is probably the best organic you've had in a couple of years.

And it was pretty wet in the quarter, can you guys just expand on how you kind of overcame the weather?

Yes.

Adam, I think, look, we're not the first ones that have talked about weather for many, many quarters in a row.

And so there's no doubt that May and the first part of June were extremely wet.

But I think it's kind of a testament a little bit to the underlying demand fundamentals that we see in that business and that our regions are a little unique.

But we just saw good improvement, and when the sun did shine, that has continued into July.

And I think it just points more to the underlying demand environment than anything.

I think mostly we can move past some of these weather concerns and issues.

But our businesses are doing well.

So I'm just curious, the 3% growth you saw in the quarter, is there any reason that couldn't accelerate in the back half of the year?

Yes.

We'll try not to speculate too much.

But look, the environment for our businesses are good right now.

And right now, it's been shining, the sun has been shining in a lot of July and business is strong.

And then lastly, how much debt are you willing to take on for share repurchases?

I saw the leverage tick up to a little over 2x, which is unusual for you guys.

Yes.

Look, I think we continue to see value in the shares.

We're fortunate, we do sit in a situation where we have very low leverage, 2x for a company like this is not unusual.

And look, it's always a balance between opportunities to continue to grow the company and when the market presents value opportunities to return that cash to shareholders.

I think our history has been to be pretty financially conservative when it comes to managing the balance sheet.

We understand that we operate in a cyclical business and -- but we also understand there are opportunities in front of us.

And we want to make sure that we have the balance sheet to continue to grow and manage cycles.

So there is no bright line that we put in place, but just managing it appropriately, given opportunities and given where we are in the cycle.

And our next question comes from the line of Phil Ng with Jefferies.

The 2 markets you called out from increased competition in Cement, have pricing in those markets stabilized?

And I thought your commentary on Cement pricing sounded pretty constructive in the last call.

My question is, did the wet spring and maybe some of the flooding lead to a more challenging pricing conversations late in the quarter?

Yes.

So I think you would be right on the assumption that, that stabilized in those 2 markets with this.

And the second part of your question was, say that again.

Your commentary on Cement pricing sounded pretty constructive on the last call, so did the conversations get a little more challenging late in the quarter due to wet spring and potentially from that flooding impact as well?

Weather had some impact on that.

And frankly, that was a driver for some of the conversation we have.

However, as Craig stated, and as I continued to state, the demand seems to be out there over this last part of the quarter.

We are very happy with our 3% up on the volume side, and we -- dependent on weather and other factors, we see it as being a -- getting back to a good volume of shipments over these next couple of months as long as the weather stays good.

Got it.

And then on your Wallboard business, there is a price increase in the marketplace, and you commented a driver for an increase you have out there is due to improved backlog and it's been pretty good.

Can you provide any color how extended your backlogs are for Wallboard and help compare it to where it was this time last year or perhaps to start of the year?

Yes.

Phil, our backlog is going to be a bit of function of single-family construction activity and as interest rates -- we don't necessarily keep a backlog like you would think traditionally, but as we look at where interest rates have dropped to in the last couple of months and look at our order levels, we feel good as we're heading into exiting July and into the rest of the summer.

Got it.

And with rates coming in, I mean, I appreciate there's always a lag before it has an impact on consumers.

Have you seen that trickle down to some of your demand that's exposed to new construction?

Phil, obviously, we sell through distributors into the homebuilders.

So we don't necessarily sell direct.

We sell across whether it's repair, remodel, non-res construction or residential.

So we can look at our order patterns and they've been good.

And our next question comes from the line of Stanley Elliott with Stifel.

A quick question.

How much is left on the current share repurchase authorization?

Yes.

We've got 8 million plus shares, if you recall at the -- in the late May, sometime in May, we made an announcement that we increased the share buyback to -- by 10 million shares, which took it to 10.7 million shares.

And we bought back 2.2 million shares, so we got a fairly large remaining authorization.

And in some of the markets, I guess we're talking about the Illinois market being a little challenged in terms of Cement.

It sounds like that the flooding environment certainly picked up there.

Is it possible to see a Cement price increase later in the year?

I know that's not historically or typically what you would think to happen?

Or should we put more faith in something like that on the pricing side improving more into next year?

Yes.

Stanley -- won't try to speculate on future price increases and our customers will certainly be the first to know about that.

But in terms of seasonally, we should still think of it as kind of more of an April 1 market or early spring market in terms of the price even if -- it looks like that the funding environment is ticking up.

Yes.

I think it's a little too early to call any definitive date.

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

I have a couple housekeeping items on line.

First, could you update us on the CapEx guidance and discuss whether the plans to separate the business has any impact on the timing of the investments and the benefits resulting from that?

Yes.

Josh, good question.

No updates on the CapEx guidance.

And in terms of the planned separation, we are continuing to operate business as usual and making investments as appropriate to maintain the assets and grow to the extent the opportunity presents itself.

So no change to the Paperboard expansion plans?

Correct.

No, they are on -- if you look at the quarter CapEx, it was almost $22 million.

I'd say about half of that was related to the paper mill expansion that is on-time, underbudget and should be ready at the end of the spring.

Very good.

And your inventory days jumped during the quarter, was that driven by weather or something else?

A little bit of weather, also our paper inventory, we have kept at a higher level because you'll go through some outages as you go through that paper mill expansion, and you want to enter those outages with ample enough finished paper product.

But that was the biggest component there.

And our next question comes from the line of Keith Hughes with SunTrust.

This is Josh Large on for Keith.

So you've touched on the price increase in Wallboard that's out there.

What about on the cost side?

I know OCC has trended down, nat gas definitely hasn't gone up.

I know that's has hedged for a bit of time.

How should we think about the variable cost side there trending through the rest of the year?

Yes.

Look, I think you pointed them out though.

And as I mentioned earlier, the other component.

So those are the 2 major components, gas and paper, those are all trending very good for us, nice tailwinds.

Again, our gypsum source is virtually locked in.

So from a cost headwind -- and labor is not a big component of the overall cost structure.

So we're in pretty good shape.

Okay.

And unusually Paperboard, I think you've historically said has a, what, 1, 2 quarter lag kind of where the contract structure is for when OCC kind of flows through to your Paperboard pricing?

That's right.

That's right.

Okay.

And then only last question.

I know you guys don't have kind of decision yet, but is there any time frame you guys have had out there on like the split structure, like when you guys -- you kind of come to that decision?

No.

No, we don't have any time line on that right now.

And that concludes today's question-and-answer session.

So with that, I'll turn the call back over to President and CEO, Michael Haack for closing remarks.

Just want to say thank you for participating in the call, and we look forward to seeing you at our next earnings call in the fall.

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

This does conclude the program, and you may all disconnect.

Everyone, have a wonderful day.