Eagle Materials (EXP) Q2 2017 Results - Earnings Call Transcript

| About: Eagle Materials (EXP)

Eagle Materials, Inc. (NYSE:EXP)

Q2 2017 Earnings Call

October 24, 2016 8:30 am ET

Executives

David B. Powers - Eagle Materials, Inc.

Craig Kesler - Eagle Materials, Inc.

Analysts

Blake Hirschman - Stephens, Inc.

Brent Edward Thielman - D.A. Davidson & Co.

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

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

Operator

Good day, everyone, and welcome to the Eagle Materials Second 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.

David B. Powers - Eagle Materials, Inc.

Thank you. Good morning to all and welcome to Eagle Materials' conference call for the second quarter of fiscal year 2017. We're glad that you could be with us bright and early this morning. Joining me today are Craig Kesler, our Chief Financial Officer; and Michael Haack, our Chief Operating Officer. There will be a short slide presentation made in connection with this call. To access it, please go to eaglematerials (sic) [eaglematerials.com] (00:45), and click on the link to the webcast.

While you're accessing the slides, please note that the first slide covers our cautionary disclosures 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.

I would like to begin today with some perspectives on our Gypsum Wallboard, our Cement, and our Proppants businesses. And then Craig will walk us through our second quarter financial results. Gypsum Wallboard demand continues to grow. Industry shipments were up nearly 7% versus prior year. Household formations are increasing, and we believe housing has room to run. Accordingly, we anticipate demand for Wallboard to be up consistent with the outlook for housing starts. We have announced a January 2017 Wallboard price increase, and we look forward to sharing the results of that increase with you early next year.

Our Cement business performed well, but was affected by weather, especially in Illinois, Missouri and Oklahoma. We believe that strong underlying demand fundamentals are intact and evident. We anticipate trend improvement in our Cement business consistent with our improved outlook for infrastructure, residential, and nonresidential construction spend. We believe that our oil well cement and our Proppants businesses are in the bottoming process. It is also our expectations that we will experience significant growth and demand for oil well cement and proppants over the next several years.

In short, all of our businesses are positioned to enjoy improved fundamentals and earnings performance going forward. I also want to take a moment to highlight our announcement last month that we entered into a definitive agreement to acquire Cemex's cement plant in Fairborn, Ohio. The transaction is expected to close in December.

All of our criteria boxes have been checked with this investment. It's a low production cost, high-margin plant. It's geographically close to its market and it's complementary with Eagle's existing cement assets and its distance from imports. This plant will increase our annual cement capacity to nearly 6 million tons and provide an immediate and meaningful contribution to cash flow and earnings. We're very excited about this opportunity to grow Eagle with some truly outstanding assets, as well as welcome a talented group of new employees to Eagle.

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

Craig Kesler - Eagle Materials, Inc.

Thank you, Dave. Eagle's second quarter revenues were a record $333 million and improved 1% from the prior year. Our second quarter earnings per share increased 112% to $1.25 per diluted share as our Cement business reported record second quarter results. A 3% increase in our average Cement sales price along with improved sales volumes in our Aggregates business were the primary drivers of the increase in Eagle's quarterly comparative of Cement, Concrete and Aggregates revenues. Operating earnings from our Cement, Concrete and Aggregates businesses improved 6% to a record $55.5 million, reflecting improved pricing and good cost control.

Increased Wallboard and Paperboard sales volumes drove a 6% increase in our quarterly comparative of Wallboard and Paperboard revenues. Operating earnings in our Wallboard and Paperboard business increased 8% to $51.9 million for the second quarter.

Eagle's Oil and Gas Proppants' financial results continue to reflect the difficult business conditions in the oil and gas sector. The second quarter operating loss of $4.1 million includes depreciation and amortization of $4.3 million. While business conditions in the frac sand business remained at low levels, as Dave mentioned, we believe we have bottomed out, and volumes are anticipated to improve.

Cash flow generation during the quarter was exceptional, and cash flow from operations increased 22% to $106.1 million. Excess cash flow was used to pay dividends, repurchase shares and reduce outstanding borrowings. Second quarter capital spending of $9.3 million was down from the prior year, reflecting sustaining capital levels. Also during the second quarter, nearly $26 million of cash flow was returned to shareholders in the form of share buybacks and dividends. We repurchased nearly 2.7 million shares of our stock since the buyback authorization was increased in 2015.

As this last slide reflects, the cash flow generation results of our highly competitive, low cost position, our net debt-to-cap ratio was 27% at September 30, 2016. In August, we successfully completed Eagle's inaugural public debt offering, which consisted of 10-year, $350 million senior unsecured notes, with an interest rate of 4.5%. Proceeds from the offering were used to pay down outstanding borrowings under our $500 million unsecured revolver, providing us with ample liquidity to fund the acquisition of the Fairborn cement plant from Cemex.

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

Question-and-Answer Session

Operator

And our first question comes from the line of Trey Grooms of Stephens Inc. Your line is now open.

Blake Hirschman - Stephens, Inc.

Yeah. Thanks. It's actually Blake on for Trey this morning. First question, wholly-owned cement volumes were down 4% in the quarter. Weather in the Midwest was called out in the press release. But I was wondering if you could talk about how some of your other markets are performing as well as how that Midwest cement market is performing outside of the weather that you called out?

David B. Powers - Eagle Materials, Inc.

Well, our Cement volumes was really affected by just two operations in Oklahoma and Missouri, and that makes the entire extent of it. The other markets performed just well.

Blake Hirschman - Stephens, Inc.

Great. Thanks. And then, for some detail on the Fairborn acquisition, specifically on the market it serves. Could you talk about how the growth profile looks there, how pricing compares to other cement markets that you're in or anything else notable about the cement market that the Fairborn plant operates in?

David B. Powers - Eagle Materials, Inc.

First of all, it's a very good market, and the projections going forward are to be up at least as much as the national average. We like the market because all the customers and volumes are nearby the plant. And the pricing is very favorable in the market, at least at this point.

Blake Hirschman - Stephens, Inc.

All right, great. And then, just one more for me. You haven't touched on any synergies related to that ag acquisition. I know the margins of that plant are already pretty high, but I was wondering if there's any potential synergies that you guys see on the sales side of things. Thanks.

David B. Powers - Eagle Materials, Inc.

Well, there's a few synergies. We currently sell slag in the market. And I think having a product offering of slag cement and regular cement is going to help us. They also have a very good packaging facility there that's a good little business. And we think we can grow that a little bit over time.

Operator

Thank you. And our next question comes from the line of Brent Thielman of D.A. Davidson. Your line is now open.

Brent Edward Thielman - D.A. Davidson & Co.

Hi, thanks. Good morning. The cement JV, I still saw some volume improvement there. I guess I would've expected a little more of an impact from weather. Can you just discuss that a little bit more?

Craig Kesler - Eagle Materials, Inc.

Sure, Brent. So, we probably saw the majority of our volumes associated with the oil and gas sector fall off in calendar 2015. So, here in calendar 2016, we have some pretty good comparables year-over-year. And where we are positioned in Texas, the weather was pretty, pretty well normal.

Brent Edward Thielman - D.A. Davidson & Co.

Okay. And then the Aggregates volume growth was pretty meaningful this quarter. Any specific market driving this?

David B. Powers - Eagle Materials, Inc.

Yes, it was basically Northern California and Austin. Both markets report very, very strong sales.

Brent Edward Thielman - D.A. Davidson & Co.

Okay. And just lastly, I mean looking beyond kind of the Ohio deal and presuming cement is still the side of the business you're interested in growing, are there other Cement assets out there in the market right now that you think could be coming to the market that you're watching or is it more likely you could look at maybe some internal plant expansions?

David B. Powers - Eagle Materials, Inc.

We're always looking for opportunities, and we don't really comment on any future MMA (sic) [M&A] (10:09) activities, but we're looking at a few things.

Brent Edward Thielman - D.A. Davidson & Co.

Okay. Great. Thank you.

Operator

Thank you. Our next question comes from the line of Scott Schrier of Citi. Your line is now open.

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

Hi. Good morning. Thanks for taking my question.

David B. Powers - Eagle Materials, Inc.

Good morning.

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

First, I wanted to touch on the Wallboard and the pricing, the decline on a sequential basis, was that a geographic mix or product mix, or were there any kind of share issues in there?

David B. Powers - Eagle Materials, Inc.

There was slight geographic mix. Southeast at this point has a little less than some of our other regions, but I would attribute some of it to that and a little bit of price movement over the quarter, very small however.

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

Got it. And then, on the JV cement, it looks like your operating margins are strong. Can you talk about possibly what some of the drivers of that margin are? And going forward, what kind of trends can we see if purchased cement improves and if we see a return to oil well cement? How should we think about the operating margins in JV cement going forward?

Craig Kesler - Eagle Materials, Inc.

Yeah. Thanks, Scott. That plant continues to remain sold out and, in fact, the Texas market continues to remain sold out. And so, as we talked about over the last several quarters, as we shifted towards more construction-grade cement, we backed off a little bit on the purchased product that was necessary in calendar 2015. It's a little lower margin sale product for us. So, going more to more manufactured tons, but as we also said, as we switch over from producible oil well cement to construction-grade cement, that's a little lower cost of manufacturing. And so, that's why you continue to see very strong margin profile with that business.

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

Got it. And lastly on the oil proppants, can you just talk a little bit about how you're thinking about what needs to happen in the market before you start to bring back some of those idled assets?

David B. Powers - Eagle Materials, Inc.

Well, right now, our customers are telling us that they expect increased demand for sand over the next 12 to 18 months. And that's kind of based on many of the customers' beliefs that oil prices will be going up modestly over the next several years.

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

Got it. Thanks. I appreciate you taking my questions, and good luck.

David B. Powers - Eagle Materials, Inc.

Thank you.

Operator

Thank you. Our next question comes from the line of Jim Barrett of C.L. King & Associates. Your line is now open.

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

Good morning, everyone.

David B. Powers - Eagle Materials, Inc.

Hi. Good morning.

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

Just two questions. Dave, can you discuss the trends in housing starts in the market area served by your Wallboard plants. And your single-family starts versus multi-family growth trends, do they differ much from the national average?

David B. Powers - Eagle Materials, Inc.

They really don't. Actually, we're in very strong markets in the Sunbelt. So, we think we have a little advantage going forward. The most recent housing starts that came out this week were actually somewhat pleasing to me. Even though they were down a little bit, the single-family housing starts were up over 8%. And as we all know, single-family housing starts consume three times to four times the amount of Wallboard as a multi-family housing start does.

So, when you put the math to it, even though the numbers were down a little bit, the housing starts that were reported are going to require more gypsum wallboard. Then if you look at the permits, the permits were up over 6% to $1.2 million. So, we were actually pretty pleased by the housing start numbers that came out last week.

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

Good. And the EBITDA margins for the Fairborn plant that's being acquired, does that include any corporate allocations expense from Cemex and, if so, how would these allocations expense compare to what you would expect under your ownership?

Craig Kesler - Eagle Materials, Inc.

The numbers that were reported are just plant-level EBITDA. There will be a process that Cemex will go through for the carve-out financial statements. But similar to our existing assets and how we run our company, we would expect very low overhead structure associated with that plant. It's already a very robust margin plant adding, as Dave mentioned earlier, some outstanding new employees to Eagle, and there's not a lot overhead required there.

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

Thank you both.

Operator

Thank you. And I'm showing no further questions at this time. I would like to turn the call over to management for closing remarks.

David B. Powers - Eagle Materials, Inc.

Thank you for participating in our call, and we look forward to talking with you early next year.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!