Eagle Materials Inc

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

Good morning. Welcome to EGLE Materials' conference call for our third fiscal quarter of 2020. We are glad you can 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 ecomaterials.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 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 the press release. Our results this quarter have been consistent with the outlook that we have been sharing with you, and business conditions remain favorable across our construction markets. Moving forward, we continue to expect demand growth in the low single digits for this foreseeable future. On both the heavy side, notably the Portland cement, and on the light side, specifically in gypsum wallboard. We also recognize that there are risks to this outlook, but as I have stated before, we continue to believe these risks tilt to the upside for calendar 2020. Overall, it was a solid quarter for Eagle Materials. Consolidated revenues were up 5% driven by increased cement and wallboard shipment, strong operational execution, and improved cement pricing. Our cement sales volumes were up 7% to a record 1.4 million tons. Operating earnings from cement were up 15% over the same quarter a year ago due to higher sales volumes. Wallboard demand remained healthy. and our shipments were up 2%. However, soft pricing in wallboard was a headwind affecting operating earnings for the segment this quarter. We do have price increases out across all markets in wallboard and in cement as well. I'd like to take a moment to update you on major expansion developments underway at both the heavy and light sides of our businesses. Starting with the light side, we announced a significant expansion project at our Republic Paperboard operations aimed at expanding productive capacity there by roughly 20%. The goal of this expansion is to meet market demand, lower current costs, and minimize future cost exposure to white fiber. The project entails the installation of proven technology, but it is technology that is new to Gypsum-Walgworth paper manufacturing industry. Republic is a world-class operation, and the talented team there will utilize this technology to further extend our competitive advantages on paper performance. The project is expected to be complete this spring, and we expect to begin ramping up paper production in the second calendar quarter of 2020. Most of the equipment spend is complete for this project. On the heavy side, we announced during the quarter that we entered into a definitive agreement to purchase the Cosmos Cement Plant, seven terminals, and related assets from the Zemeck-Bootsy Joint Venture. We are on track to close on this transaction in the fourth fiscal quarter and begin enjoying an immediate contribution to cash flow starting next fiscal year. The transaction has now cleared HSR review. We are quite excited about the acquisition as this further extends our reach in the U.S. Heartland footprint consistent with our growth and plant network strategy. This acquisition will also provide the cement business with even more capacity to serve U.S. Heartland cement markets. The timing of this transaction could not have come at a better time given our intentions to separate the company into heavy and light stand-alone entities this summer. While we are on the topic of that separation, I want to underscore that we are still on track for a summer launch of the two parts of the company, as we have indicated in prior communications. Also, as a prelude to the separation, we have been evaluating options for the non-core heavy side assets, specifically including our Braxan processing and distribution assets. While we continue to work on this process, I have no announcements to make yet other than to say this quarter we wrote down the practice and assets and have continued to operate this business on a near cash flow break-even basis while we have been evaluating the alternatives. It is worth noting that excluding this non-routine impairment items Our adjusted net earnings per share was up 22% over the third fiscal quarter a year ago. That's all from me as far as introductory remarks. Now let me turn it over to Craig to go through the financials for the quarter.

Thank you, Michael. Eagle's third quarter revenue improved 5% to $350 million, reflecting increased cement sales volume and pricing, improved wallboard and paperboard sales volume, and the results of a small concrete and aggregates acquisition. The acquired business contributed approximately $9 million of revenue during the quarter. Third quarter EPS was a loss of $2.77, which includes the impact of several non-routine items during the quarter, most notably an asset impairment charge of $224 million related to the oil and gas profits business. Other non-routine items were business development costs and the effect of an outage linked to the planned expansion of our paper mill. Excluding the impact of these non-routine items, adjusted EPS was $1.51. Turning now to segment performance. This next slide highlights the results of our heavy materials sector, which includes our cement and concrete and aggregate segments. Revenue in the sector increased 18%, driven primarily by a 7% improvement in cement sales volume improved pricing in both cement and concrete, and the results of the concrete and agarics acquisition. Operating earnings increased 19%, 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 an 8% decline in wallboard prices, which led to a 4% decrease in light materials revenue. Quarterly operating earnings in our light materials business declined 7% to $48 million, reflecting lower net sales prices, partially offset by higher sales volume. In connection with the expansion of our paper mill, we took an extended outage during the quarter to tie in new equipment. The impact of this outage was approximately $1.5 million during the quarter. In the oil and gas prop and sector, third quarter revenue was down 48%. and we had an operating loss of $7 million. During the first nine months of fiscal 2020, operating cash flow increased 9% to $321 million, and capital spending was down slightly to $84 million. We completed the acquisition of the small concrete and aggregate company during August with a purchase price of approximately $30 million. In advance of our pending acquisition of Cosmos Cement Company, as well as the company's separation, We have paused the share repurchase program to manage our capital structure. Finally, our debt-to-cap ratio was 51% at December 31, 2019, with $126 million of cash on hand. Our net debt-to-even-dollar average ratio was approximately 1.8 times at December 31st. In advance of the Cosmos cement acquisition, we established a $665 million term loan facility in December, providing us with a low-cost financing source. Post-acquisition, pro forma leverage will be at or slightly below three times, with good visibility to de-lever post-acquisition. Cosmos cement assets will increase our annual cement capacity by nearly 25% to more than 7.5 million tons, and provide an immediate contribution to annual cash flow. As Michael said, we expect the pending acquisition to be completed during our fiscal fourth quarter. We are very excited about this opportunity to grow our cement position and to welcome a talented group of new employees to EGLE. Thank you for attending today's call. We will now move to the question and answer session. Catherine?

Thank you. To ask a question, you'll need to press star one on your telephone. To withdraw your question, press the pound key. Please limit yourself to one question and one follow-up. Again, that's star one to ask a question. And it looks like our first question is coming from Trey Grooms with Stevens. Your line is open.

Thank you. Good morning. So I guess the first one is on the Cosmos acquisition. So Getting you deeper into that geographic market, you know, I guess it's also bringing more long haul or maybe more, you know, barging into the picture with the seven terminals. Can you talk about kind of how that plant fits there, you know, in your network, in the market that it serves, you know? What's the kind of demand and pricing been like in that market and kind of the outlook? And then Also, how this plant might compare to others in your network, just from an efficiency or profitability standpoint.

Sure, Craig. When we looked at this asset, we're very excited, as Craig and I alluded to, to get this asset into our network. When we looked at this transaction, this opportunity, we're really looking at our cement plant as a network asset. We have, you know, Illinois cement, Airborne cement, and Sugar Creek that are all in this area. And this further enhances, it kind of knits those together to provide, you know, better service to our customers throughout this area. As for the plant itself, it was redone in 2002. So it's a modern plant. with a large capacity plan. So we feel it's a perfect fit for us to expand our reach and extend our capacity in that market, and as I said, knitting that together as one unit in that area.

Okay. Thank you for that, Michael. And then kind of sticking with the cement, you know, there had been some more kind of competitive behavior, I guess, or maybe more competitive than we would have thought at this stage in the cycle. you know, within some of your cement markets anyway over the last few years, you know, and it seems like the stage should be set for pretty good pricing realization this year given the demand outlook. Can you talk about any early reads that you may have around that cement price increase specifically as we look into the spring season given that backdrop and then Kind of tying that in, any early comments around the wallboard pricing for January as well? Thank you.

Yeah, Terry, when you look at it, you know, we're out in all of our markets with the cement price increase. It's too early to really tell what the market's going to – the market will determine that price, and it's too early to tell what that's going to be. We're out everywhere with it. Wallboard is the same thing. We're out with a wallboard price increase, and we just don't have enough time yet to see where that's going to settle out. We'll have more information here over the coming months to see what the market determines that price to be.

Okay. Well, we'll stay tuned. I'll pass it on. Thank you very much.

Thank you. And our next question comes from Brent Thielman with DA Davidson. Your line is open.

Great. Thank you. Good morning. Could you guys clarify the price increases you're out with in the market on light and heavy?

Sure. Brent is correct. On the cement side, we are out generally around $8 a ton for in every one of our markets, and generally those are for the springtime, closer to April 1st. There's a couple markets that we were up in January, but it's generally $8 in April. And then the wall board price was a January price that we were communicating to customers.

Got it. Okay, and then on Wallboard, maybe you could just talk about the demand environment. It seems like some of the early signs are looking healthier. You guys seem to sort of outperform with what we see in the broader market. Talk about what you're seeing in some of your regions from a demand perspective on the Wallboard side.

Yeah, you know, the underlying fundamentals look good, you know. You know, we've consistently said, you know, we see low single-digit growth in the foreseeable future, and that's kind of what we're planning around. And there's nothing to deter us from planning around those numbers, low single-digit growth.

Okay. Thank you.

Thank you. And our next question comes from Anthony Petanari with Citigroup. Your line is open.

Good morning. I was wondering if you could touch a little bit on the demand you're seeing in some of your regional cement markets. I think you've talked about, you know, strength in Texas and Colorado and some weakness in Illinois. Just wondering if you had any kind of additional color on regional market strength.

Anthony, I think as we've said in the past, you know, we are seeing improvement in all of our markets. And the rate of the pace of increase might be slightly different. But I mean, to put it into perspective, The state of Texas in calendar 19 was pushing 18, 19 million tons of demand. We continue to see good growth here in the state of Texas. That is an enormous number. But even across our other states, we're seeing it. You're also seeing states becoming more creative or more aggressive in the way they finance their infrastructure spending. You mentioned Illinois. Illinois is a good example where they put some spending budgets in place in order to improve their infrastructure. If that doesn't happen overnight, it happens over a period of time. But we are seeing improvement across all of our markets.

Okay, that's helpful. And then just on the paperboard side, as you think about costs for 2020, you know, last year we saw this collapse in OCC prices. I guess they exited the year $20, $25 a ton, kind of historic lows there. As you think about paperboard costs for the next 12 months, specifically on OCC, are you expecting kind of prices to remain near these levels and any other kind of cost items that you call out?

Yeah, really with regards to the OCC pricing, we're projecting that, you know, it's a very cyclical market, but it's been fairly flat over the last, you know, with a slightly declining trend over the last, you know, 12 months. And we think that it's kind of stabilized and expecting a stabilization of that price through. There will be minor variances on a month-to-month basis, but overall we're expecting a fairly flat to slightly rising trend there.

Okay. That's helpful. I'll turn it over.

Thank you. And our next question comes from Jerry Ravitch with Goldman Sachs. Your line is open.

Yes, hi. Good morning, everyone.

Jerry.

I'm wondering if you could talk about how you're thinking about your Heaviside network, assuming the transaction that you highlighted earlier closes. How do you view other white space within the U.S. geography? Just qualitatively, what markets would you view as attractive? Any parameters would be helpful.

Yeah, so I'm not going to speculate on, you know, what becomes available or what markets come open, but if you see our historical performance of where we've invested our money, you can see this one does fill a white space in our network, and, you know, that's kind of how we look at our network as a whole, how we bring those clients together, and that's what we use as our strategy, filling those white spaces, so...

Okay. And in the past, you folks have spoken about really focusing on landlocked parts of the network. Obviously, we've got some barge exposure on the proposed assets. Can you just talk about how your thought process there has evolved and the opportunity in terms of why this particular barge-served asset is interesting to you folks?

Yeah, it really resolves the skin around the location and how it fits with our other facilities. So, you know, when you look at that asset and how it ties together, like, you know, I said a little bit earlier was, you know, we have Illinois cement, we have Fairborn, we have Sugar Creek. This completes a nice area. And the extended reach, while we haven't been you know, participating in that market in the past, this does have the extended reach that it fills all those markets with it. So it's, you know, how we've determined it is barge is one mode of transportation where we've done, you know, rail and truck in the past with it, and this just completes that network in that area and ties everything together. So that's why this was a very attractive opportunity for us to participate in.

Okay, thanks.

Thank you. And our next question is from Adam Thalhammer with Thompson Davis. Your line is open.

Hey, good morning, guys. First question on Cosmos. Is the pricing similar in that region to the rest of your wholly owned regions?

Yeah, it'll be pretty close to the average, yeah.

And then how much volume should we bake in, Craig? Should we use that $1.7 million figure?

Similar to a lot of the U.S. industry, utilization rates are pretty high. We don't own it today, but certainly utilization rates are pretty high in that marketplace.

Okay, just getting ready for when it closes. And then on the paper board side, pricing down 11%. You said there were some pricing provisions in our long-term sales agreements that brought that down. What's going on there? How does that play out?

So like we've said in the past, most of our volume is contractually sold. Those contracts have inflators and deflators based on the price of inputs. So there's the price and the major one being OCC or recycled fibers. And as that price has come down, the price we charge to customers comes down with it. So it's been pretty consistent.

Okay, and then paper, board, volumes. Would you bake in the full 20% increase in Q2 of 20, or does it just kind of layer in?

Yeah, no, I think as Michael alluded to in the outset, this will be a ramp over a period of time, and it will come up in the March-April timeframe. It takes a little while to line out the machine, and then over the next several months, we'll begin to move it into the market. But, yeah, it'll ramp over a broader period of time than that.

Okay, perfect. Thanks, guys.

Thank you. And our next question comes from Filling with Jeffries. Your line is open.

Hey, guys. In your cement business, assuming demand holds up okay in the fourth quarter, it looks like you're running north of your reported clinker capacity this year. So is there more you can do to unlock more supply, and does this Cosmo acquisition free up some of that capacity as well for you?

Yeah, so, you know, if you look at it, we always look at it as a 12-month rolling, too. So, you know, we do have some less busy times a year that we are able to produce more clinker and store that clinker. We also, on the last call, talked about some of the additional grind capacity we had matched into some of our facilities where we were able to take that clinker out of storage and grind it and sell it in the market. So we still feel comfortable with that side of running these plants full year and storing that clinker for the busier times of year to meet some of that increased demand.

Got it. When we think about calendar 2020, you know, using your outlook of low single-digit growth, does it feel like you have enough supply to meet that demand, and are you kind of running into a situation you run full out? I imagine you're pretty close. So with that backdrop, what kind of conversations are you having with your customers on pricing, and are they approaching those conversations only differently, just wanting to make sure they have supply secure? Yeah.

Yeah, so, you know, we've been able to satisfy our customers' needs. We think we're going to be able to satisfy those needs, you know, through this next calendar year also. As Craig stated, you know, we were out with the $8 number across that market, and we're having those conversations currently with the customers to see where that settles out. Oh, wow. Yeah.

Got it. And I guess switching gears to Wal-Mart, we look at your volumes pretty solid in a choppy housing environment, but it lagged the region broadly. Curious what's driving that, and if you saw any increased competition in the quarter with your ASPs slipping a little bit.

Yeah, I would tell you we're very happy with where our markets are performing. Our regions, as they have done recently, have outperformed the national average. And we're excited, and look, the latest print on home building was pretty positive, and we think calendar 2020 will be another good year for volume.

Okay. And just one last one for me on wall board. Did you see any pre-buy on the quarter? I know it gets kind of noisy, and how should we think about that in the upcoming quarter, normalizing all that stuff out? Thanks.

Yeah, Phil, I don't think there was any significant pre-buy activity. And as you said, it's a little noisier as demand is improving. Pre-buy was easier to spot four or five years ago. It's a little less meaningful today than what it was. We just see home building starting to improve.

Thanks. Appreciate it, Phil.

Thank you. And our next question comes from Josh Wilson with Raymond James. Your line is open.

Good morning. Thanks for taking my questions. Thanks, Josh. First off, just a housekeeping question. Can you give us a sense of where your wall board price was exiting the quarter so we know where to start the January from? It was pretty consistent with the quarterly average. Okay. And what was the revenue impact of the outage in the paper board plan?

It isn't as much of a revenue impact as it is a cost efficiency impact.

So then in terms of the margin benefit year on year, adjusting that out, what were the drivers there?

Look, OCC prices, as we've been saying, are very pretty low, even in energy prices have remained low, but OCC is the major driver there on the margin.

Got it. And just to re-ask the prior question then, do you feel like your market share is okay in Wallboard and that there was nothing timing related or something like that?

Our market share hasn't changed more than 40 basis points in five years.

Okay. And then last one for me, your inventory days and payable days were down a fair amount year on year. Was that timing as well or is there a shift or some activity there?

Yeah, I think as Michael said, on the Smith side, we made some investments on grinding that's allowed us to eat through some of the clinker inventory. And we're always managing working capital to the best of our abilities and to maximize cash flow. But a lot of it is just seasonal timing as well. Got it. Thanks.

Thank you. And our next question comes from Paul Roger with BNP Paribas. Your line is open.

Hi, this is Rob Whitworth on for Paul Roger. I wanted to start by asking, can you comment on the outlook for cost inflation and sort of remind us of your hedging policy, especially for natural gas? Thank you.

We sit here with the majority of our cost inputs, no significant inflation. You think about things like OCC, natural gas, that's more on the light side. On the heavy side, it is energy-oriented. with electricity and fuels, and you're seeing some inflationary pressures, but nothing unusual there across the business platform. In terms of hedging, with gas well below $2 now, we are putting some hedges in place for certainly the next 12 months and looking out to fix those costs in at these very low levels.

Great, thank you. And just one follow-up. Obviously, you'll be closing the Cosmos deal shortly. Would you look at making more investments into cement, obviously despite the upcoming separation? Is that something that you would look at doing?

You know, right now, Paul said, you know, we always look at any opportunities that come available. You know, I don't want to really discuss on, you know, if we'd be open to investing more into the thing. You know, what we're concentrating on right now is, you know, the separation of these two companies that will happen in the summer months. So that's where the management team is focused right now.

Fair enough. Thank you.

Thank you. Our next question comes from Adrian Huerta with J.P. Morgan. Your line is open.

Thank you, and thank you for taking my question. Two very specific questions. One on cement freight cost. You said in the prior quarter that costs were stabilizing. Can you tell us how the cost was this quarter? And the second question is on the separation cost, that it was a little less than $3 million in the previous quarter. What was the amount in this quarter? Thank you.

Yeah, I'll answer your last question first. So we were $3.4 million, as we highlighted in the press release, for kind of what I'll call business development costs. That certainly included the separation. It also included fees around and costs associated with the Cosmos acquisition that we incurred just prior to the announcement. And then in terms of cement freight, and I'd say freight in general, You know, we're not seeing major changes there. The trend has been pretty flat, benign, you know, for the last 12 months. And, you know, again, there's always a little bit of cost pressure there, but nothing like what we saw two years ago.

Thank you.

Thank you. And we have a follow-up from Brent Thielman with DA Davidson. Your line is open. Thank you.

Hey, thanks. Just one quick one on the Cosmos transaction. In the original release, you guys talked about this $120 million in tax benefits. Any more color to that and kind of how we could think about you recognizing that once this is done?

Yeah, Brent, that's a great question. It's a very important part of the investment. So with tax reform, we're able to – immediately expense or deduct a significant amount of the purchase price. We're going through that process right now, but using the Fairborn allocation as a barometer, there will be a pretty significant depreciation deduction here in year one right upon closing of the transaction that will very likely move us into an NOL position from a tax perspective, and that will be able to be carried forward with both of the companies even post-separation. So we'll be in the enviable position of minimal taxes being paid. So, again, all about free cash flow, and that will be improved as a result of this. But that's where that $120 million comes from, is that immediate deduction for a big chunk of the purchase price.

Okay, that's great. Actually, one more quick one on the paper, Mel. Do you expect any more outages or downtime here as this expansion gets wrapped up that might have some impact on the cost basis?

Yes. That will – we, as Michael said, will wrap that up here this spring. So very likely in March will be a pretty extended outage, even more so than this past quarter. And we'll certainly quantify that for everybody on the call. But that will impact our March quarter to tie in the new – the total equipment package.

Yep. Okay. All right. Thank you.

Thank you. And I'm showing no further questions at this time. I'd like to turn the call back to Mr. Michael Heck for closing remarks.

Thank you, everybody, for attending the call today, and we'll look forward to speaking with you again in the summer.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day. Thank you.