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?