Eagle Materials Inc

Good day, everyone, and welcome to Eagle Materials' second quarter of fiscal 2020 earnings conference call. This call is being recorded. At this time, I would like to turn the call over to the Eagle's president and chief executive officer, Mr. Michael Hack. Mr. Hack, please go ahead, sir.

Thank you. Good morning. Welcome to Eagle Materials' conference call for the second fiscal quarter of 2020 earnings 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.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 the call. These statements are subject to risks and uncertainties that can 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 the press release. Let me begin this morning by updating you on our announced plan to separate the heavy and light sides of our businesses into two independent, publicly traded companies. The separation process is on track and is still expected to be complete in the first half of calendar 2020. If there are important developments that occur between now and then, you can be assured that we will brief you in a timely manner. After the separation, the company's Heartland Cement Plant System will operate as a distinct pure play. The business will be the largest U.S.-owned cement producer and will have excellent future prospects. These cement assets and their productive capacity give this business substantial scale to stand alone independently. The business also owns ample 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 the U.S. Sunbelt markets with long-lived raw material reserves. The business has uniquely distinguished itself through industry business cycles and has achieved industry-leading levels of customer satisfaction. In short, as per our previously announced separation plan, we are creating two independent benchmark businesses, businesses that new and existing investors will be able to devalue based on each business's distinct operational and financial results and future prospects. We also stated in our press release that we would continue to evaluate any additional opportunities to create shareholder value that may arise prior to the completion of the separation. We remain fully committed to that intention. To underscore this commitment about shareholder value creation, it is worth noting that during the first half of our fiscal year, we repurchased nearly 3.6 million shares, or 8% of our shares outstanding, and returned over $320 million to our shareholders through a combination of share repurchases and dividends, illustrating our confidence in these businesses and their prospects. We made these repurchases without jeopardizing our financial flexibility to pursue any attractive growth or improvement opportunities that may emerge. That is all I'm prepared to comment upon today regarding the separation and share repurchases. nor will we be able to answer questions about these matters at the end of the call today. Now let me turn it to our business results for the quarter. It was a record quarter for Eagle in terms of both our top and bottom lines, and the outlook for the rest of the year remains positive. First, the heavy side. Cement sales volumes for the quarter were a record 1.8 million tons, 14% over the prior year, and earnings were up 16%. We are operating at high levels of capacity utilization and the demand outlook remains positive. We are especially encouraged by recent U.S. state-level approvals for infrastructure spending plans in key states across our U.S. heartland footprint, which should further tension the supply over the years to come. Notably, these states include Illinois and most recently, Wyoming. This past quarter, we acquired a small concrete and aggregates operation complementary to our cement footprint. While in general we tend not to favor downstream integration, this was a unique opportunity for us. We will always look favorably at these types of acquisition opportunities in geographies where our primary cement operations are located and our criteria for growth investment, both strategic and financial, can be met. We have a balanced strategy in cement on growth and improvement. I would add much of our strategic improvement emphasis actually supports our growth intentions. We have a track record of consistent reinvestment in our business through cycles to lower costs, create more value for our customers, and realize the full earnings potential of our assets. Three of the specific ways we do this are by investing to optimize the match of our clinker capacity with our grinding capacity, ensuring that we have terminal reach to serve customers on a timely basis with volumes they need, and having the cement storage capacity to ensure that our product is available when seasonal demand is greatest. Our recent investments in a vertical mill in Sugar Creek, the expansion of our distribution network in Altoona, Iowa, and the completion of our rail loading project in Illinois are but a few of the most recent examples. All of these investments lead to increased sales volume and better customer support. Identifying and pursuing these improvement opportunities Opportunities that lower cost, increase saleable volumes, and provide better customer support, and importantly, doing all of these safely, are the top priorities for me personally. We are well recognized for our strong operational performance position, but I want to assure you we still have a lot of runway in front of us to achieve the earnings improvement and find the prospects here very exciting. Turning to the light side, Results on the gypsum wall boards were more mixed. Volume was up 8% in the quarter to about 680 million square feet, but net sales prices declined 10%. Volumes reflect continued strength in the end-use markets, notably the housing and repair and remodeling. We see this business still on trend for its low single-digit growth that we have been discussing, recognizing that pre-buy activity, hurricanes, and the like seldom make growth a straight line. Our price performance simply reflects pressures in the commodity market environment. I would add that pricing has been fairly flat since June. We remain close to the 10% market share of the U.S. wallboard market today. Residential construction drives wallboard demand, and with fundamentals here clearly on the upswing, we look forward to the coming year with a degree of optimism. We are also currently enjoying an operating cost tailwind in wallboard due to the lower recycled fiber costs for our paper board that we expect to remain with us for the foreseeable future. China's exit from the U.S. recycled paper market is a development that supports the near-term outlook for stabilized OCC costs. In our heavy light business separation announcement, we had indicated that we are also exploring strategic alternatives for our sand business and that process is underway. In the meantime, we are making adjustments that will continue to enable us to operate at roughly cash cost neutrality during periods like this where the business conditions are challenged and while we explore strategic alternatives. That's all for me as far as the introductory remarks. Now let me turn it over to Craig to go through the financials for the quarter.

Thank you, Michael. EGLE's second quarter revenue was a record $415 million, an increase of 9% from the prior year. reflecting increased cement sales volume and pricing, improved wallboard and paperboard sales volume, and the results of a recent acquisition in the aggregates and concrete segment. The acquired business contributed approximately $8.5 million of revenue during the quarter. Second quarter earnings per share was also a record $1.72, reflecting improved earnings from the heavy materials business, and a 12% reduction in our diluted shares outstanding. The current share count is EGLE's lowest share count on record. Also, included in the quarterly corporate G&A cost is approximately $2.7 million of costs related to the separation process. 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 22%, driven primarily by a 14% improvement in cement sales volume, improved pricing in both cement and concrete, and the results of the recent acquisition. Operating earnings increased 20%, again reflecting the improvement in sales volume and pricing. Moving to the light materials sector on the next slide. Improved wallboard and paperboard sales volume was offset by a 10% decline in wallboard prices, which kept light materials revenue nearly flat with the prior year. Quarterly operating earnings in our light materials business declined 11% to $49 million, reflecting lower net sales prices partially offset by higher sales volume. Recycled paper costs continued their downward trend year over year, and Republic Margins were the highest in the last three and a half years. In the oil and gas profit sector, second quarter revenue was down 41%, and we had an operating loss of $5 million. During the second quarter, operating cash flow increased 44% to $134 million, and capital spending was down slightly to $38 million. As we've noted earlier, we completed the acquisition of a small aggregates and concrete company during August with a purchase price of approximately $31 million. Also during the quarter, we returned nearly $120 million to shareholders through a combination of share repurchases and dividends, which represented 167% of our net earnings during the quarter. Finally, on this last slide, our debt to cap ratio was 49% at September 30th. While Eagle's leverage has increased, it continues to be at the lower end of the range for our industry. We have $54 million of cash on hand at September 30th, and we have ample operating cash flow and flexibility to meet investment opportunities as they arise. Thank you for attending today's call. We will now move to the question and answer session.