Earnings Call: Q1 2020

Jul 30, 2019

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 Hack. Mr. Hack, please go ahead, sir. Thank you. Good afternoon. Welcome to EVO Materials conference call for our 1st fiscal quarter of 2020. We are glad you could be with us today. Joining me today are Craig Kessler, 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 dot 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 sides of our business into 2 independent publicly traded companies. This separation is expected to be complete in the first half of calendar twenty twenty. 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 two 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 the capital structure that is tailored to the needs of the business, allocate resources and deploy capital in a manner consistent with its strategic priorities and finally, it will allow new and existing investors to value the new 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. Elo'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 $200,000,000 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 upon 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. Now 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, but operating earnings were up 5% due to increased freight costs 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 a lack of progress in those two 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 material revenues were up 10% and operating earnings were down 21% on lower volumes and sales prices. We still see low single digit volume growth for the full fiscal year, recognizing the mix 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 Profit 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 go through the financial specifics for the quarter. Thank you, Michael. 1st quarter revenue was $371,000,000 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 Q1 included $0.19 of non routine 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 Aggregates 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 costs, 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. Quarterly operating earnings in our wallboard and paperboard business declined 21 percent to $48,000,000 reflecting lower wallboard sales volume and net sales prices, partially offset by lower recycled fiber costs. In the oil and gas profit sector, revenue was down 45%, and we had an operating loss of $4,000,000 So our sales volume improved 11%, reflecting the results of our new facility in Illinois. During the quarter, operating cash flow declined to $51,000,000 consistent with the net earnings decline and capital spending declined to $22,000,000 As Michael mentioned, we returned over $200,000,000 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 will now move to the question and answer session. Andrew? Thank And our first question comes from the line of Trey Grooms with Stephens Inc. Your line is now open. Hey, good afternoon. Hey, Trey. I guess first one is on wallboard. So the pricing down some 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 it 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 kind of stabilize 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 pre buy activity at all as you kind of moved in through the July timeframe or maybe even late June? Trey, we haven't seen much of a tick up that we contribute to pre buy 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 pre buy. Okay. Fair enough. And I'm guessing with the tougher comps from the year ago period, the pre buy 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 those low single digits you guys had pointed to for the full year? Yes, Trey. As we factor out the pre buy 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, are kind of growing this low to mid single digit type of improvement and we seem to be on that trend. Okay. Thanks for that. 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 maybe closer to 2%. Can you give us any more 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 on what's going on with the competitive situation? And is that something that weather may have played a role in and that maybe we could see some 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 is the Illinois market and we see that as weaker. However, we also see 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. Okay. Well, thanks for that color and I'll turn it over. Thanks a lot and good luck. Thanks, Trey. Thank you. And our next question comes from the line of Brent Thielman with D. A. Davidson. Your line is now open. Great. Thanks. Good afternoon. Could you guys clarify the price increase for wallboard that you announced for August? Yes. So our price increase was effective August 3rd and we did not give a specific amount. Those were going to be communicated directly to customers. Okay. Okay. And then, Craig, the overhang of the higher freight costs into the 2nd fiscal quarter, Could we see that as significant as what you saw in the Q1? 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 markets. So we'd 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 the 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 it. But with the housing starts where they are and being stagnant to slightly improving with it, that's when we get pricing pressure. 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. And it's 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 and A number in that $10,000,000 range, I guess, without these non routine items going forward? Yes. That will be the range. Okay, great. Thanks, guys. Thank you. And our next question comes from the line of Scott Schrier with Citi. Your line is now open. Hi, good afternoon, gentlemen. 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 in the last 5 years or so. Obviously, losing $10 of pricing is tough to offset. But if I look at the production costs, 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, if we're 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. You think about 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 negative absorption of fixed cost on lower volumes. Other than that cost would have been very, very strong. Got it. Thanks. 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 the product around to make sure you're making the right volume and price decisions. Got it. And understand on cement, obviously, there was 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 aggregates producer today, either going forward or if any of that, 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 it's cyclical or structural considerations from that metric? No, we have not seen anything like that. Great. Thanks. I appreciate you taking my questions and good luck. Thanks, Scott. Thank you. And our next question comes from the line of Jerry Revich with Goldman Sachs. Your line is now open. Hi, good afternoon, everyone. Hi, Jared. In terms of the discussion around the transportation of 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 costs 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're very pleased with the price improvement that we achieved and those markets are doing very strong. Nikky highlighted one of the markets in the upper Midwest where, look, 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 the Southern market, for example. So not all the regions are acting in the same or 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're 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 actions? 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 get 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're able to achieve very good pricing improvement. You just have other regions that are a little behind. And eventually, they'll be in a similar situation where utilization rates grow and that'll give you the opportunity for incremental pricing. But I don't see it as necessarily a mid cycle pause. I think each region is acting as you would expect. Okay. And lastly on Wallboard, earlier in the cycle, you folks had the annual price increases and we've done away from that market structure. How are you thinking about strategically 2020 beyond? Are you thinking about going back to the January 1 price increases that 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 price increase for August 3 and we'll see what the market response to that and then we'll address that situation after that timeframe. Okay. All right. I appreciate the discussion. Thank you. Thank you. And our next question comes from the line of Adam Thalhimer with Thompson Davis. Your line is now open. Hey, good afternoon. 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, well, one of the first ones that talked about weather for many, many quarters in a row. And so there's no doubt that May and the 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 in that our regions are a little unique, but we just saw good improvement in when the sun did shine. That has continued into July. And I think just points more to the underlying demand environment than anything. I think hopefully 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 2 times, which is unusual for you guys. Yes. Look, I think we continue to see value in the shares. We're fortunate that 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 that 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's no bright line that we put in place, but just managing it appropriately given opportunities and given where we are in the cycle. Okay. Thanks, Greg. Thank you. And our next question comes from the line of Phil Ngai with Jefferies. Your line is now open. Hey, guys. The 2 markets you called out from increased competition in cement, have pricing in those markets stabilize? 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 play in the quarter? Yes. So I think you would be right on the assumption that that stabilized in those two markets with it. 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 the wet spring and thanks to some of 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 continue 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 depending on weather and other factors, we see it as being getting back to a good volume shipments over these next couple of months as long as the weather stays good. Got it. And then on your wallboard business, there's a price increase in the marketplace. And you commented a driver for increase you have out there is due to improved backlog and it's been pretty good. Can you provide any color how extended your backlog are for Walbourn and help compare it to where it was this time last year or perhaps just start the year? Thanks a lot. Yes. Phil, our backlog is going to be a 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 have dropped to in the last couple of months, 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 homebuilder. So we don't necessarily sell direct. We sell across whether it's repair and remodel, non res construction or residential. So we can look at our order patterns and they've been good. Got it. Thanks a lot guys. Thank you. And our next question comes from the line of Stanley Elliott with Stifel. Your line is now open. Hey guys, thank you all for fitting me in. A quick question, how much is left on the current share repurchase authorization? Yes. We've got 8,000,000 plus shares, if you recall, in late May, sometime in May, we made an announcement that we increased the share buyback to by 10,000,000 shares, which took it to 10,700,000 shares and we bought back 2,200,000 shares. So we've got a fairly large remaining authorization. And in some of the markets, I guess, we talked about the Illinois market being a little challenged in terms of cement. It sounds like that the funding 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, we'll 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 yield looks like that the planning environment is picking up? Yes, I think it's a little too early to call any definitive date. Yes, I understand. Thanks guys. Appreciate it. Thank you. And our next question comes from the line of Josh Wilson with Raymond James. Your line is now open. Good evening. Thanks for taking my questions. I have a couple of housekeeping items on my end. 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. They're on if you look at the quarter, CapEx was almost $22,000,000 I'd say about half of that was related to the paper mill expansion that is on time, under budget and should be ready then in this 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 of the finished paper product. But that was the biggest component there. Got it. Good luck with the next quarter. Thanks, Jeff. Thank you. And our next question comes from the line of Keith Hughes with SunTrust. Your line is now open. Hi, this is Josh Longert 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, natgas definitely hasn't gone up. I know that's 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 components, 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 usually paperboard, I think you've historically said as a 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 timeframe you guys have had out there on, like the split structure, like when you kind of come to that decision? Yes. No, we don't have any timeline on that right now. Okay, great. Thank you. Thank you. And that concludes today's question and answer session. So with that, I'll turn the call back over to President and CEO, Michael Hack, 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.