Eagle Materials (EXP) Dave Powers on Q1 2017 Results - Earnings Call Transcript

| About: Eagle Materials (EXP)

Eagle Materials, Inc. (NYSE:EXP)

Q1 2017 Earnings Call

July 25, 2016 8:30 am ET

Executives

Dave Powers - President and Chief Executive Officer

Craig Kesler - Executive Vice President - Finance and Administration and Chief Financial Officer

Analysts

Trey H. Grooms - Stephens, Inc.

Adam Robert Thalhimer - BB&T Capital Markets

Scott Schrier - Citigroup Global Markets, Inc. (Broker)

Jerry Revich - Goldman Sachs & Co.

John Baugh - Stifel, Nicolaus & Co., Inc.

Jim Barrett - C.L. King & Associates, Inc.

Operator

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

Dave Powers - President and Chief Executive Officer

Thank you, Kevin. Good morning to all. Welcome to Eagle Materials' conference call for the first quarter of fiscal year 2017. We are 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 are accessing these slides, please note that the first slide covers our cautionary disclosure regarding forward-looking statements made during the call. These statements are subject to risks and uncertainties that could cause results to differ from those discussed during the call. For further information, please refer to the disclosure, which is also included at the end of our press release.

Let me preface by saying that we're on our call today from New York City, not our Dallas headquarters as is customary. The reason relates to the companion press release this morning with our earnings release that provides the details of our inaugural debt offering, a milestone for the company. We expect to price the notes this Friday, and so we are in New York as part of the launch and road show.

We expect BBB and Ba1 ratings from S&P and Moody's respectively. These ratings are gratifying and a reflection of our track record of superior competitive performance through the cycles. Our debt offering will allow us to extend our debt maturities to better match our long-term asset base without long-term debt, and to do so at a time when borrowing costs are near all-time low. Clearly, this will provide us greater flexibility going forward for a number of purposes, including acquisitions and expansion pursuits.

We are not trying to infer that acquisitions are not imminent, as we never elaborate on the status of our deal pipeline. I will reiterate what we've said numerous times, we are highly interested in growing the heavy side of our business, especially Cement assets, given the long-term outlook for well-positioned U.S. assets, which would match our investment criteria. I also want to continue to emphasis that we do not intend to compromise our returns criteria in making such acquisitions.

Before Craig walks us through the financial results and the details on our bond offering, let me just offer a comment on our business conditions, and all of our construction businesses performed very well during the first quarter. Simply put, we continue to see trend improvements for our Cement, our Concrete, our Wallboard and our Paper businesses. And the midterm outlook for volume and pricing remains good.

Now, let me turn it over to Craig to review our financial results.

Craig Kesler - Executive Vice President - Finance and Administration and Chief Financial Officer

Thank you, Dave. Eagle's first quarter revenues improved 4% to a record $297.5 million, and first quarter earnings per share increased 24% to $0.93, as our Cement and Paperboard businesses reported record first quarter results.

Moving into the Cement business, a 4% increase in Cement sales volumes combined with a 2% increase in our average total net Cement sales prices along with improved sales volumes in our Concrete and Aggregates businesses were the primary drivers of the increase in the Eagle's quarterly comparative of Cement, Concrete and Aggregate revenues.

Operating earnings from our Cement, Concrete and Aggregates businesses improved 28% to a record $35.3 million, reflecting improved pricing, good cost control and the addition of the slag cement facility we acquired from Holcim midway through last year.

Moving on to Wallboard; our first quarter Wallboard sales volumes improved 2% from the prior year. The improvement in sales volumes comes on the heels of a very strong fourth quarter that benefited from customer surge buying ahead of American Gypsum's frame wallboard price increase.

To see positive sales volumes this quarter speaks to the strength of the underlying construction market. Operating earnings in our Wallboard and Paperboard businesses improved 8% to $50.6 million for the quarter. Wallboard net sales prices improved 3% sequentially. And finally, Republic Paperboard continues to perform exceptionally well and set a quarterly record for operating earnings.

Eagle's Oil and Gas Proppants financial results continue to reflect difficult business conditions in the oil and gas sector. The first quarter operating loss of $5.9 million includes depreciation and amortization of $5.2 million. Near-term demand and pricing outlook for proppants remained limited, and we continue to right-size our business, while focusing on running the business at close to cash flow breakeven levels until business conditions improve.

Operating cash flow during the quarter increased 162% to $54.1 million. Excess cash flow was used to pay dividends, repurchase shares and reduce outstanding borrowings. First quarter capital spending of $9 million was down significantly from the prior year, reflecting sustaining capital levels.

Also during the first quarter, nearly $45 million of cash flow was returned to shareholders in the form of share buybacks and dividend. We repurchased 525,000 shares at an average price of $74.55 during the quarter. That brings total repurchases underneath our increased buyback authorization to just about 2.5 million shares.

This last slide reflects the cash flow generation result of our highly competitive low cost position. Our net debt to cap ratio was 32% at June 30, 2016. In this regard, let me close with a few remarks on our debt offering. As Dave said, we are planning an inaugural public debt offering which will consist of $300 million of senior unsecured notes. Proceeds from the offering will be used to pay down outstanding borrowings under our $500 million unsecured bank facility, increasing pro forma liquidity to over $400 million.

In conjunction, we are also extending our $500 million unsecured bank facility. Given this is a leverage-neutral transaction, pro forma leverage will remain in a 1.3 times range. And while we expect to generate sufficient cash flow to pay off existing debt over time, long-term debt provides us financial flexibility and improved liquidity.

Moreover, the timing is opportune in this low interest rate environment and the extended debt maturity schedule better matches our long-term asset base with long-term debt as our private placement notes come due over the next three years.

Thank you for attending today's call. We'll now move to the question-and-answer session. Kevin?

Question-and-Answer Session

Operator

Our first question comes from Trey Grooms from Stephens, Inc.

Trey H. Grooms - Stephens, Inc.

Congrats on a great quarter.

Craig Kesler - Executive Vice President - Finance and Administration and Chief Financial Officer

Thanks, Trey.

Trey H. Grooms - Stephens, Inc.

Okay. So, just on Paperboard, I mean, very solid results there. Can you talk about the drivers behind that both on top line but also how we should think about the margins there and is this sustainable?

Dave Powers - President and Chief Executive Officer

Trey, we have a very good quality paper product, and the customers that Republic sell are demanding more and more paper from us. So, their current customers are making Republic the larger share of their business, and we don't expect that to change going forward.

Trey H. Grooms - Stephens, Inc.

Okay. And then, on the Wallboard side, just overall Wallboard, as you kind of look at your cost basket, as we progress through your fiscal 2017, are you expecting any or seeing any changes there on the horizon? Also trying to kind of think about the margins there as we look forward.

Dave Powers - President and Chief Executive Officer

In terms of costs, Trey? No, sir. Not at all.

Trey H. Grooms - Stephens, Inc.

Okay. And then, last one for me. I guess this would be for Wallboard and Cement, just Dave, any color you could give us on how trends progressed through the quarter or any broad comments on how demand has been trending through July?

Dave Powers - President and Chief Executive Officer

The volumes in both businesses are actually exceeding our expectations a little bit. When I look at the Wallboard volume, if I were to take the months March, April, May and June, a four-month period, which neutralizes the effect of any price increase, our volume versus those same months prior year are up nearly 11%.

And Trey, when I look at June and July on a per day basis, we're probably up 9% versus the prior year. And Cement is also very strong. It's exceeding our internal expectations through June and July.

Trey H. Grooms - Stephens, Inc.

Great. Thank you very much. I'll hop back in queue. Thank you.

Operator

The next question comes from Adam Thalhimer with BB&T.

Adam Robert Thalhimer - BB&T Capital Markets

Hey. Good morning, guys. Congratulations on the start of the year.

Dave Powers - President and Chief Executive Officer

Good morning. Thank you.

Adam Robert Thalhimer - BB&T Capital Markets

On the wholly-owned cement side, the volume growth is very strong there. Is that fairly even across the country or are there some regions that are outperforming others?

Craig Kesler - Executive Vice President - Finance and Administration and Chief Financial Officer

You know, Adam, we are, as Dave said, we're seeing, across all of the different markets that we compete in, good growth in the Cement volumes. So, it's pretty evenly spaced.

Adam Robert Thalhimer - BB&T Capital Markets

Okay. And then, on the wallboard side, you mentioned in the press release you have a little bit of a reduced headwind from natural gas prices. Does that make it harder for you to increase prices?

Craig Kesler - Executive Vice President - Finance and Administration and Chief Financial Officer

No.

Dave Powers - President and Chief Executive Officer

No, it really doesn't. I think what you need to look at is housing starts going forward. That's a pretty good barometer for us.

Adam Robert Thalhimer - BB&T Capital Markets

Okay. So, what do you expect the – because remind us, I think the price increase was 15%. You got 3%. I mean, do you think more of the 15% will filter in as the year progresses?

Dave Powers - President and Chief Executive Officer

No, I don't. We were disappointed that we only got 3%. We have some competitive situations in parts of the country that we chose to meet, and it's going to settle in about where it is right now.

Adam Robert Thalhimer - BB&T Capital Markets

Okay. Helpful. And then lastly, on the JV cement prices, do you think this is roughly the bottom for those prices?

Craig Kesler - Executive Vice President - Finance and Administration and Chief Financial Officer

Adam, with what's happening in the oil well cement, that's a lot of what the pricing changes as we talked about in the press release, just a shift away from oil well cement, more in the construction grade cement price or cement product. But we did achieve a spring price increase in construction grade product in Texas. So that shift is just about – we've seen this over the last 18 months. So, while we won't talk about future prices, we do feel good about the construction grade cement prices we got this spring.

Adam Robert Thalhimer - BB&T Capital Markets

Got it. Okay. Thanks again.

Operator

Our next question comes from Scott Schrier with Citi.

Scott Schrier - Citigroup Global Markets, Inc. (Broker)

Hi. Good morning. Thanks for taking my call and congrats on the progress. First, I wanted to talk about the wholly-owned cement pricing. So, it looks like the 6% year-on-year is nice, and if I look at historical trends sequentially, it tends to trend down in 1Q, and now you've got a little bit. So, as we think about the full $7 to $12 price increase, I know there's a little bit of lag there, how can we expect wholly-owned cement pricing to trend as we go forward and you look to fully realize those price increases?

Craig Kesler - Executive Vice President - Finance and Administration and Chief Financial Officer

Yeah, I think as we've said over the last few quarters at least, we continue to see utilization rates increase and price increases were implemented this spring, and we feel good about the pricing environment. As you mentioned, sometimes regional changes can modify that wholly-owned price a little bit. And if that just is due to the averaging of the price during the year, but on average, prices are holding in very firm.

Scott Schrier - Citigroup Global Markets, Inc. (Broker)

And on that region, I believe last quarter you had maybe more of a percentage of your cement sales coming from Illinois, which maybe had a slightly lower percent or price point. Has that moderated?

Craig Kesler - Executive Vice President - Finance and Administration and Chief Financial Officer

The Illinois market continues to be very, very strong. So – but then, we achieved price increases in that market this spring.

Scott Schrier - Citigroup Global Markets, Inc. (Broker)

Got you. And then, on the JV cement side and I know in Texas in the past you've talked about total Texas supply versus total Texas demand. And now that we've replaced with construction grade cement the oil well cement, and cement is tight, can you talk about, and I know you just mentioned that you had some price increases go through, how the price increase goes through versus now that we're relying more on imports in some of the Texas markets to meet that demand?

Craig Kesler - Executive Vice President - Finance and Administration and Chief Financial Officer

Yeah. So, as we said last quarter, our cement plant down in Buda, Texas continues to be sold out. And in that environment, we are able to achieve price increases this spring. And the state of Texas continues to remain oversold with a very robust construction market.

Scott Schrier - Citigroup Global Markets, Inc. (Broker)

Great. Thanks for taking my questions and good luck.

Operator

Our next question comes from Jerry Revich with Goldman Sachs.

Jerry Revich - Goldman Sachs & Co.

Hi. Good morning, everyone.

Dave Powers - President and Chief Executive Officer

Hey. Good morning.

Jerry Revich - Goldman Sachs & Co.

I'm wondering if you can comment on potential markets where you could see another price increase over the balance of this year, can you talk about areas that are tight enough where you might consider it or any price increase announcements that you've publicly made? Thanks.

Dave Powers - President and Chief Executive Officer

Jerry, those conversations and announcements are between us and our customers and there's nothing more I can really say to that at this point.

Jerry Revich - Goldman Sachs & Co.

Okay. And on the Wallboard business, as we had a strong price increase last year to kick off the year then we'd had competitive situations over the balance of the year, I guess, as you said today, are you comfortable with the price increase that you put through is taking over the balance of the year, any context that you could give us maybe on how that's holding through July?

Dave Powers - President and Chief Executive Officer

It's holding through July. Much more than that it's competitive situation out there and I can't comment beyond that.

Jerry Revich - Goldman Sachs & Co.

Okay. And lastly, for the Proppants business, you alluded to more cost reduction efforts in the pipeline, can you give us some more context on the magnitude and timing?

Craig Kesler - Executive Vice President - Finance and Administration and Chief Financial Officer

Really, Jerry, a lot of that has already happened. As demand fell, we gave you our frac sand volumes for this quarter. And so a lot of those things have already been done. But we just continue to take costs out of the business where we can and make sure that we're able to meet customer needs when the market recovers, and making sure that we're poised for that as well.

Jerry Revich - Goldman Sachs & Co.

All right. Thank you.

Operator

Our next question comes from John Baugh with Stifel.

John Baugh - Stifel, Nicolaus & Co., Inc.

Thank you. Good morning. Congratulations. So, just a few quickies. The construction cement switch with wellhead in Texas, I think you talked about how that was like 80% done. I'm curious as we look at the margin structure of that trade, is that also now in all the financials, if you will, or will there still be some drag to EBIT in the ensuing quarters?

Craig Kesler - Executive Vice President - Finance and Administration and Chief Financial Officer

The vast majority of that has been done.

John Baugh - Stifel, Nicolaus & Co., Inc.

Okay. And then, was there any weather influence around the quarter? We heard a lot of wet weather in Texas, anything to note?

Craig Kesler - Executive Vice President - Finance and Administration and Chief Financial Officer

Yeah. Most of that occurred down in Houston, that's not a huge market for us. Central Texas and North Texas, they have pretty typical weather pattern.

John Baugh - Stifel, Nicolaus & Co., Inc.

Okay. And your EBIT performance in frac sand is phenomenal, given you really don't have any revenue. Is that indicative of the cost structure moving forward, number one? And I guess, number two, are there any signs that frac sand demand might pick up slightly given what oil prices have done? Thank you.

Dave Powers - President and Chief Executive Officer

Our performance is really indicative to a couple of things. Our cost structure, we've been very aggressive at rightsizing our business. And number two, we're not chasing non-profitable business. Those are basically the two issues. We think we're at the bottom of the cycle. We're in the bottoming process. And we believe in the next several quarters, we'll see improved opportunity.

John Baugh - Stifel, Nicolaus & Co., Inc.

Thank you and good luck.

Dave Powers - President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Jim Barrett with C.L. King.

Jim Barrett - C.L. King & Associates, Inc.

Good morning, everyone.

Dave Powers - President and Chief Executive Officer

Good morning.

Jim Barrett - C.L. King & Associates, Inc.

Craig, a question for you. The sustaining CapEx of $20 million to $25 million for the company, is that a good forecast for this year, given the fact, I know you spent $9 million in the first quarter?

Craig Kesler - Executive Vice President - Finance and Administration and Chief Financial Officer

Yes, yeah, that $25 million plus or minus a little bit from that is still a good number.

Jim Barrett - C.L. King & Associates, Inc.

Okay. And Dave, this may be a question for you, and you did comment on the Paperboard volume and the surge in business from external customers. That business volumetrically has been up two quarters in a row, and I just wanted to clarify that because of a shift by your customers there. Is the current level of external shipments going forward, is that likely to be driven by industry wallboard trends, or how should we think about that business' growth going forward given the type of growth you've seen in the last half year?

Dave Powers - President and Chief Executive Officer

(19:45) decisions we make and we've chosen with some of the outside customers to grow our business with them, and I see that continuing to grow a little bit over the next several quarters.

Jim Barrett - C.L. King & Associates, Inc.

Okay. Okay. Very good. Thank you both very much.

Craig Kesler - Executive Vice President - Finance and Administration and Chief Financial Officer

Thanks, Jim.

Operator

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

Craig Kesler - Executive Vice President - Finance and Administration and Chief Financial Officer

All right. Thanks, Kevin.

Dave Powers - President and Chief Executive Officer

Thanks to all. We look forward to seeing you again in the fall.

Operator

Hello, ladies and gentlemen, that does conclude today's presentation. You may now disconnect and have a wonderful day.

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