Earnings Call: Q2 2018

Oct 25, 2017

Good day, everyone, and welcome to Eagle Materials' Conference Call for the Q2 of Fiscal 2018. 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. Thank you, Nova. Good morning, and welcome to Eagle Materials' conference call for our Q2 of fiscal 2018. We're glad that 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 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 that could cause results to differ from those discussed during the call. For further information, please refer to this disclosure, which is also included at the end of our press release. It can be no surprise to anyone that our country has experienced some of the most disruptive weather events of the past decade, including 2 hurricanes that hit major U. S. Economic centers. The immediate effects have been production and demand interruption. These disruptions will give way to increased demand for construction materials that are vital in the rebuilding. We are allocating our resources accordingly in service of this need as we speak. As a side note, in order to help with the relief effort, we've begun donating material and have discounted product to lend immediate assistance. Let me provide some specifics on the storm effects of our quarter. Our Walbur plant suffered no damage as a result of the hurricanes. However, we did shut our South Carolina plant down for 4 days. Our wallboard shipments to Florida and Southern Texas substantially slowed for a 2 to 3 week period during and after the storms. Today, however, our wallboard back order is very strong. We had no damage to our cement terminals and our cement plant in South Texas. Shipments were also disrupted for about 2 weeks. We also had several significant jobs that have been deferred into next quarter or the spring due to weather and timing issues. Our frac sand and proppants business was generally unaffected by weather. Longer term demand will continue to be driven by the fundamentals. And for us at this time, these fundamentals and the outlook for each of our businesses are very good. We anticipate trend demand growth in housing, as well as an accelerating growth in repair and remodeling, which are the primary end use drivers of all of our gypsum wallboard businesses. We also expect trend demand growth in cement against the backdrop of highly concentrated U. S. Manufacturing supply. American Gypsum has announced a system wide price increase in wallboard for January 1, 2018 of 18%. We have also communicated to our cement customers that our prices will be going up from $6 to $8 per ton depending on the region. Implementation will vary by market between January 1 April 1 next year. I'm proud of the progress that our proppants business has made in improving its profitability, even at current suppressed oil price levels. Volumes and spreads continue to grow and we generated $6,700,000 of cash during the quarter. With the completion of our previously announced drying capability at our flagship mine in Utica, Illinois next summer and with the integration of our Wildcat Materials acquisition, we will be well poised to profit the growing demand for high quality sand across key basins. OCC costs are a noteworthy development for paperboard. They peaked during the quarter and have since declined $50 a ton. The negative impact to our cost during the quarter was about $2,000,000 We expect the impact to this cost to be positive next quarter, roughly a $3,000,000 to $4,000,000 reversal. In closing, want to underscore that the fundamentals of our construction businesses remain strong and intact. Market tailwinds are behind our backs and we are operating well. We continue to exercise discipline on new investment in terms of strategic fit, quality and returns. Now let me turn it over to Craig for the financial details. Thank you, Dave. Eagle's 2nd quarter revenues were a record $376,000,000 an increase of 13% from the prior year, reflecting improved sales volumes and prices across most of our businesses. Eagle's quarterly earnings per share improved 5% to $1.31 and were the 2nd highest quarter on record. This next slide highlights the results of our cement, concrete and aggregates businesses. A 9% improvement in cement sales volumes and improved cement, concrete and aggregates pricing were the primary drivers of the 14% increase in Eagle's quarterly comparative of cement, concrete and aggregates revenues. Operating earnings also improved 14% to a record $64,000,000 reflecting improved sales volumes and pricing. Moving to our wallboard and paperboard businesses, lower sales volumes in the paperboard business were the primary driver of the 1% decline in our quarterly comparative of wallboard and paperboard revenues. Quarterly operating earnings in these businesses declined 11% to $46,000,000 reflecting higher recycled fiber costs and the costs associated with opening our previously idled facility in New Mexico. Eagle's oil and gas proppants financial results improved from the prior year and the near term prospects for our frac sand business have improved significantly from this time last year, which is reflected in a 2 50 percent increase in our 2nd quarter frac sand sales volumes. This improvement in sales volumes helped generate cash flow of almost $7,000,000 during the quarter. Operating cash flow during the Q2 was down 7% from the prior year, reflecting the timing of certain working capital items, while capital spending increased to $28,700,000 which includes investments in our Nevada cement facility, the Bernalillo wallboard plant startup and construction of our new frac sand drying plant in Illinois. And as we previously discussed, we completed our acquisition of Wildcat Minerals early in the quarter with a purchase price of $36,800,000 Excess cash flow was used to pay dividends, repurchase shares and reduce outstanding borrowings. This last slide reflects the cash flow generation results of our highly competitive low cost position. Our net debt to cap ratio was 32% at September 30, 2017. Thank you for attending today's call. We'll now move to the question and answer session. Operator? Thank And our first question comes from the line of Brent Thielman of D. A. Davidson. Your line is open. Yes. Hi, thanks. Good morning. Good morning. On the wallboard side, the 6% to 8% demand growth, I think we talked about earlier this year, I was kind of hopeful for the full year. Is that range out the door with some of the disruption to the industry this quarter? Do you still think there's opportunity to make that up? Well, Brent, I will tell you the last 6 years demand for wallboard has increased 8,000,000,000 foot from 17,000,000,000 to 25,000,000 and that's a compounded annual growth rate of 6.5% over the last 6 years. I probably don't expect that rate to continue at that level the next 3%, but I do feel that going forward we're mid single digits. Okay. That's helpful. And then I guess any additional kind of start up costs for the Bernat Leelow wallboard plant or is that fully operational now? It is fully operational. We actually started it up in August. We shipped our first product September 1. Startup was very successful. We did struggle a little bit with some delay issues. And the last 3 weeks, we've been running really well. But we did incur startup costs of about $2,500,000 Okay. All right. Thank you. Our next question comes from the line of Trey Grooms of Stephens Inc. Your line is open, Trey. Good morning. Good morning. To the extent you can, can you guys try to quantify at all the negative impact you may have seen in the quarter on the cement business and wallboard business from the storms and other weather events? I know you mentioned you were down X number of days in different businesses and your Georgetown plant was impacted. Is there any way to put numbers around that, Craig? Trey, this is Dave, and I will attempt to do that. Georgetown plant, our shipments were down 35% for the 2 weeks following the storm. I estimate that we probably lost during the quarter 15,000,000 to 20,000,000 foot of product going to the Southeast. Our Duke plant, which services South Texas, we were down 10% to 15% for a 2 week period after the storm. But then our shipments out of Duke, the last 2 weeks of September were higher than I would have normally expected. So I estimate we lost about 5,000,000 foot out of that plant. But in general, you're looking 25,000,000 to 30,000,000 foot that we would attribute to those 2 hurricanes for wellbore. In terms of cement, our cement terminals in South Texas, we didn't operate those for a couple of weeks and we were at half mast and we estimate 20,000 tons to 25,000 tons of product that we did not ship during the quarter that we normally would have been expected to ship. In addition to that, we have a list of at least 15 jobs in the airport, several other jobs that total in the area of about 100,000 tons that have been delayed as a result of weather events, hurricanes and other weather events and some timing issues. And some of these will get done this quarter, but more than likely the bulk of them won't come to fruition until the spring. That's about as close as I can get for you, Trey. Okay. Thanks, Dave. That's super helpful. And then you mentioned that underlying demand is good. It sounds like the backlog is good. I think you mentioned just a minute ago something like mid single digits is an expectation for overall kind of wallboard demand going forward. When we look at even more near term post the storms and since things have started to dry out and the sun has started to shine a little bit out there, are you starting to see some of those demand drivers on the wallboard side start to come back now? Or is that also going to be more of something that will take place later on? It's actually both. I mean, I look at what happened at Katrina and some of this played out over 3 years. Some of it was immediate. Some of these people moved to other locations and built homes elsewhere. But I normally don't give you mid quarter numbers, but I will tell you on Wallboard for the 1st 15 shipping days of October, we're shipping at a pace on a per day basis of more than 10% higher than what we did during the quarter, just to give you a feel. All right. Thanks, Dave. I appreciate that. And then, last one for me. On the paperboard business, I know that you guys you highlighted that there was kind of a shift to contracted customers and the volume was impacted as a result. Can you help us understand how the mechanics work around that? And on a go forward basis, kind of how we think about the what the volume could look like on the paperboard business given the changes that have gone on there? Yes. This is Craig. So if you look at on a trailing 12 month basis or even look at last year's, we shipped almost 320,000 tons, and that's pretty near full utilization. And in the prior year, there have been some extra opportunity to strategically sell some other customers. As we continue to see the needs of our contracts under customer grow, those opportunities to sell external customers are being changed and moving away from that, so that we can satisfy our own internal needs as well as our contracted customers. So the paper mill is at a nearly sold out position, and that's why you see that shift in volumes. And sorry, just kind of follow on to that. On the margin side of paperboard with all those changes in the fluctuations we've seen in OCC, obviously that's been very volatile. Is there a sense that we'll start to see the return to higher margin starting in this December quarter? Or does that take a little bit longer to kind of parse out as well? Yes. No, I think as Dave mentioned, we saw a pretty steep decline in OCC prices here in October, so subsequent to the quarter that would improve the profitability of the paper mill pretty quickly. Okay. Thanks a lot, guys. I appreciate the color on all that. Thank you. Our next question comes from the line of Scott Schrier of Citi. Your line is open, Scott. Hi, good morning. I wanted to follow-up on that last question on the OCC. And I know Dave, you had called out you should see about a $3,000,000 or $4,000,000 tailwind in paperboard. Can you talk about the how we should think about the impact in wallboard and when what quarter we should start to see the talent in pay pay and wallboard rather? As you know, there's a 1 quarter lag on fluctuations in OCCs that we pass on to our customers. And the last three quarters, Republic has been underwater and now they're going to start passing them back to customers. And I would estimate that you'll see American Gypsum take in the area of about a 3% price increase on paper. Okay, great. And then on wallboard pricing, it looks like it declined a bit, both sequentially and year on year. Just wanted to see, is that just market fundamentals or is there a mix issue there? Or how can we think about what caused the decline in that wallboard pricing? It was not a mix issue. We had some competitive price issues in June July that we chose to meet. And as I mentioned on the last call, I felt prices this calendar year would play out very similar to how they played out last year. Okay. And then lastly, I wanted to ask a little bit more on the macroeconomic environment, particularly the public infrastructure spending. Obviously, it looks like you've been able to get a good amount of cement pricing. But what we're seeing, I know the volumes were impacted by weather this quarter, but the public spending data hasn't really materialized yet to how some folks were hoping and I know some of that was due to weather. I'm just curious what you're hearing maybe from some of your cement customers on how we can think of the cadence and the timing of the ramp in the public infrastructure spend? Well, a lot of it has to do with the infrastructure bill getting passed. But when I look at the industry associations and the analysts, they're all projecting single digit growth for next year and quite a bit higher once the infrastructure bill gets passed. But it is true there probably are some local communities that have projects ready to go that they're debating whether to do them or wait for some support from the federal government. So, there are some legs in some of those. And it's really hard to predict when those will go. Great. Thank you. Thank you. Our next question comes from the line of Adam Thalhimer of Thompson Davis. Your line is open. Hey, good morning, guys. Good morning. Would it surprise you if the Oil and Gas segment was profitable in Q3? Brent or Adam, the Oil and Gas segment has a significant amount of depreciation, depletion and amortization, which we provide in the back of the earnings release. So we're generating good cash flow out of that business. We do have some opportunities to continue to improve the profitability of that plan. So without getting into specific timing to where it generates positive operating income, We continue to get much closer. But we look at that business and value it on an EBITDA basis. But we're certainly getting much closer. And with the volumes that we've seen, it wouldn't surprise me to see that business move positive in the near term. Got it. And then you talked about earlier in the call, you talked about mid single digit volume growth at Wallboard. Does that is the restart of the Vernalillo plant increase that for you? Just a little bit. As you know, we're running that as a peaker plant. We have day shift only and we're going to run it when the orders are there, whether it's 2, 3 or 4 days. So it gives us a greater opportunity to service Houston when the need arises and to service Arizona as that market picks up. Okay. And the $6 to $8 I think you said on the cement prices, is that a January 1 event for the cement price increase? Some of them are. The majority of them are in April, however. Okay. And then last one for me. I wanted to ask about kind of trends within the frac sand business. The just from some of the Schlumberger's and Halliburton talked about the Permian still using more sand per well, but other basins you've seen sand per well use flattening out. I'm just curious your thoughts on whether that's flattening out in some of those basins is a bad thing or We haven't seen that. Our indications are they're using more sand per well. Not just in the Permian, but other basins as well? That is correct. Okay, great. Thank you. Our next question comes from the line of Kevin Hocevar of Northcoast Research. Your line is open, Kevin. Hey, good morning, everybody. Wondering if you made a comment earlier that seeing a 10% improvement in wallboard in October, I was wondering if that comment was in relation to a year over year improvement? Or was that kind of sequentially compared to the September quarter? Coincidentally, it's both. Got you. Okay. And then on the cost associated with installing the pollution equipment in the Nevada cement plant, are those all contained within the September quarter or do you expect to have a little bit more spill into the December quarter? They'd be contained into the September quarter. Okay, got you. All right. Thank you very much. Our next question comes from the line of Jerry Revich of Goldman Sachs. Your line is open. Hi, good morning everyone. Good morning. I'm wondering if you could talk about in the Nevada plant, what's the solid waste tolling revenue opportunity post upgrade? And are there any other plants that have a similar architecture where solid waste burn is possible where you haven't rolled it out yet? Yes. Jerry, this is something that you're right. Any project to reduce costs is something that we explore, whether it's improving just the fuel consumption or the fuel that they're burning. And we do that at all of our facilities, not just in Nevada. This was just an opportunity as we were installing some pollution control equipment to put in this opportunity to burn solid waste fuels. And we expect to continue to look at those opportunities across the whole network. The Sugar Creek facility we have in Kansas City is a great example of that as are many others. And Craig, in terms of the incremental revenue or should we think about it as a tolling opportunity or are we just talking about substituting natgas or coal to product where you don't have a cost to it? Yes. No, it's not a totally arrangement. It would be a cost reduction. And the equipment is up and running, so we haven't quantified it. But it's just will continue to help us lower the cost structure of that facility. Okay. And I know you folks work on capacity moving higher over time within paperboard. I'm wondering if you could just talk about since now we're at a point where we're meaningfully supply constrained, what are the incremental opportunities to either run additional over time or other CapEx opportunities for to take paperwork production higher? Can you just flesh out for us how you're thinking about that? Jerry, we are looking at some opportunities to incrementally add a little bit of capacity at that plant over the next couple of years. I can tell you that to take care of our customers' needs. Okay. All right. Thanks, everyone. And ladies and gentlemen, we have no further questions in queue at this time. I'd like to turn the call back to your CEO, Mr. Dave Cowars for closing remarks. I'd like to thank all of you for participating in the call, and we look forward to talking with you after the holidays. Thank you much.