Steven R. Rowley - Chief Executive Officer, President, Director and Member of Executive Committee D. Craig Kesler - Chief Financial Officer and Executive Vice President of Finance & Administration.

Trey Grooms - Stephens Inc., Research Division Garik S. Shmois - Longbow Research LLC Jerry David Revich - Goldman Sachs Group Inc., Research Division L. Todd Vencil - Sterne Agee & Leach Inc., Research Division Brent Thielman - D.A.

Davidson & Co., Research Division James Barrett - CL King & Associates, Inc., Research Division Jake Thomson - Odey Asset Management LLP Christopher E. White - Thompson Research Group, LLC Dillard Watt - Stifel, Nicolaus & Company, Incorporated, Research Division.

Good day, ladies and gentlemen, and welcome to the Q2 2015 Eagle Materials Inc. Earnings Conference Call hosted by Mr. Steve Rowley. My name is Tracey, and I'm your operator for this call. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr.

Steve Rowley, President and CEO of Eagle Materials. Please proceed, sir. Thank you..

Thank you, and welcome to Eagle Materials' conference call for the second quarter of fiscal year 2015. Joining me today are Craig Kesler, our Chief Financial Officer; and Bob Stewart, Executive Vice President, Corporate Development & 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 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.

Eagle's second quarter revenues of $253 million were an all-time quarterly record, and operating earnings and earnings per share increased significantly as a result of much improved net sales prices and improved sales volumes across nearly all business lines.

We began mining at our Northern Illinois frac sand mine during the quarter, and the first barges of our sand were shipped to Corpus Christi during September. We are very pleased with the progress of our frac sand operations, and we eagerly await final approval on our pending acquisition of CRS Proppants.

Finally, as we mentioned in the press release, during the quarter, we incurred costs related to the pending acquisition of CRS Proppants as well as litigation cost that impacted our quarterly EPS by approximately $0.03.

A 6% increase in our Cement sales net sales prices and improved Cement and Concrete sales volumes were the primary drivers of the increase in Eagle's quarterly comparative Cement, Concrete and Aggregates revenues. Quarterly Cement earnings of $38.5 million represent an all-time record high.

Cement shipments this quarter continued to be impacted by rail congestion in the Midwest. Year-over-year, our second quarter Cement prices increased $5.00 per ton as last year, we successfully implemented price increases across all of our Cement markets.

We also just recently implemented a $10.00 price increase in Texas effective October 1, and Cement price increase announcements have been made for early calendar 2015 for all of our other Cement markets.

Increased Wallboard average net sales prices and increased Wallboard and Paperboard sales volumes drove an 11% increase in our quarterly comparative of Wallboard and Paperboard revenues. Operating earnings in our Wallboard and Paperboard businesses increased 22% to $45 million for the second quarter.

Second quarter revenues from our Oil and Gas Proppants business continued to represent third-party sand sale levels. During our second quarter, we began mining operations at our frac sand mine in Utica, Illinois, and the first shipments of our own sand from Illinois to Corpus Christi occurred this quarter.

We have begun ramping up production and sales and expect our Corpus Christi operation to be at full capacity by the end of our fiscal year. Now let me turn this over to Craig Kesler for more details on the financials..

Thank you, Steve. Cash flow from operations during the first half of the year were $118 million, up 48% from the prior year. Capital spending of approximately $40 million was used primarily towards the continued buildout of our frac sand business and maintenance capital. Excess cash flow was used to pay dividends and reduce outstanding borrowings.

The effective tax rate for the first half of the year was slightly over 32%. As this last slide reflects, Eagle is generating meaningful cash flow from operations as we benefit from improvement in market conditions across a larger footprint of operations, while improving on our low-cost competitive position.

We have primarily used this cash flow to reduce debt and improve our financial flexibility. Our net debt-to-cap ratio was 25% at September 30, 2014. Thank you for attending today's call. We'll now move to the question-and-answer session.

Tracey?.

[Operator Instructions] Your first question is from the line of Trey Grooms from Stephens Incorporated..

So looking at the frac sand, thank you guys for breaking that out, that's helpful.

And if I heard you right, Steve, you said that you expect to be running at about a full capacity run rate by the end of fiscal '15, and that's on the 1.5 million tons there in Corpus, just for clarity?.

That's correct..

Okay. And since you guys -- you broke out kind of the revenue and EBIT contribution there, which obviously isn't very meaningful now.

But just for -- as we're kind of thinking about our models and looking forward and with this run rate that you're describing here, can you give us some sense of how to think about the cost profile there as we're looking into the -- at least the 1.5 million tons that we're talking about?.

I think we said that -- and I'll just say what I've said all along, we expect that to have very strong margins. And margins, at least as good if not better than typical margins in our Cement operations.

And we don't see any reason not to believe that, that's going to be -- continue to be the case going forward, and hopefully be a little stronger than that, especially with the logistical advantage..

Okay, great. And then on the acquisition that you guys did in the sand space recently, can you talk a little bit more about the acquisition? Obviously, that gets you into the Permian.

But any other advantages you guys get from that acquisition? And also, there were some detail in the press release from when you guys announced the acquisition about some of the historical EBIT and contribution things.

But from a go-forward basis, can you talk a little bit about kind of a pro forma EBIT potential for that business as it rolls out that 2 million tons?.

Sure. We can do this, and obviously, there's some synergies associated with combining both businesses. So we'll talk a little bit about that as well.

But in reality, when we did the Lafarge acquisition, we talked about it being a perfect piece of a puzzle as far as combining our Cement operations and allowing them to work really as one unit and flex from one market to another. It was very difficult for us with a barging system to get a lot of the shale plays.

It's just hard to barge out the West Texas, for example. And so we had been, all along, targeting a play that, in particular, would be on the Union Pacific rail line, and we're excited that we could get this, so -- to be able to reach other very, very important shale plays with frac sand.

And this was a perfect fit for us, and it allows us then to take advantage of the Southern Texas market, primarily out of Corpus Christi. And then kind of waterfall some of the CRS sales over into the West Texas market, which is very important, as well as just pick up in Wisconsin to go to a lot of other basins as the customer sees fit.

So really excited to be able to put these 2 companies together. It's a great opportunity to watch these 2 companies together with all the synergies that we talk about. As far as the go forward, as far as financials with CRS Proppants, I think what we stated were financially the results for 9 months.

The first 3 or 4 months were not near as profitable as the last 3 or 4, 5 months, and say, probably on average, the last 3 or 4, 5 months in average EBITDA of about $2.5 million per month..

Okay, that's helpful. And just -- my last one is just really just kind of a housekeeping, I guess. But you guys had an impact on the Cement side from rail congestion, and you saw it in the prior quarter as well. Can you give us a sense for the -- how many tons that impacted in the quarter? And then that's all for me..

Yes. It was about the same as last, so let's say 50,000 to 60,000 tons in the rail. They told us in the spring that it probably wouldn't be until the fall until things would ease up.

It does look like the congestion is easing up a little bit, but we're almost near the end of the shipping season now for Cement, certainly, in the northern part of the country as Thanksgiving is just around the corner, and winter weather will hit..

Your next question is from the line of Garik Shmois from Longbow Research..

I'm just wondering on your expansion program on the Oil and Gas side of the business, can you speak to -- with oil prices here in the low 80s, has that impacted your strategy at all on how you go to market, whether it's frac sand? How quickly are you looking to grow the business? Obviously, you just recently made an acquisition.

But does it give you any pause? And maybe how you're looking to target oil well cement as well?.

Pretty easy question, and thank you for the soft ball. We are not slowing down our frac sand development plans one iota..

Okay. I'll try to have some harder ones here. On -- with respect to the rail congestion issue on the Cement side, you indicated that it's starting to ease a little bit just maybe due to seasonality, it sounds like.

Is this -- as you look out to calendar '15, as demand continues to improve organically in the industry, is it fair to assume that these can congestion issues will probably impact calendar '15 as well?.

The -- it really was a separate issue. So over the winter, there was a heavy drain season, then we had the terrible winter, and the rail yards in the Kansas City area just got full. So full that they started filling up actually main rail lines with railcars. So you had this big buildup of cars, and then they have to switch them all in and out.

That bid -- big buildup of railcars in the Kansas City area and on some mainline tracks have been slowly diminishing over the summer and is getting to a point where the tracks are nearly empty again. So I would not anticipate this going forward, unless we have another crazy winter again..

Okay. And then I believe last quarter, you were able to break out, to some degree, volume and pricing with respect to the frac sand business, and then provide your revenues and operating profit again this quarter.

Is it possible to break out or give us maybe a sense of what the volume tonnage look like or what the pricing look like in that business?.

Sure. Garik, this is Craig. The -- so as Steve mentioned, we're still kind of in the startup mode selling third-party purchase sand, so the volumes were not all that dissimilar from where we were last quarter. So kind of in that same run rate. It's really now that we have the mine open, as Steve alluded, to the ramp-up. So that's about where we were..

Okay. And then I guess just my last session, you called out some litigation expenses in the quarter. A larger competitor of yours, actually, just last week, settled a piece of litigation that you're involved in.

Could you comment at all if this -- if the settlement is a path that you're exploring as well?.

Really, we don't have any comments at this time..

Your next question is from the line of Jerry Revich from Goldman Sachs..

Can you, gentlemen, talk about where capacity utilization is at your Corpus Christi processing plant today or in October? And just give us a sense now that you're shipping from Illinois, considering how much you have to build inventories, what proportion of your sales in the December quarter into the Eagle Ford do you expect to come from your own sand versus third party?.

So I've mentioned, we are ramping up this quarter and next quarter to full production. And I can say, in the month of October, we're almost going to produce and sell as much as we did in October as we did last quarter..

Okay. And in terms of -- in the Utica, I think you received permanent approval recently for the sand processing facility there. Can you give us an update on when the facility will be online for you to service that? I think you're planning for the Utica and the Mississippian from there.

Is that right?.

That's correct. We're in the final stages of design. Effectively, it is designed and getting ready to apply for all of our permits and go out to bid. I do not anticipate complications with the permitting here and don't see why that plant shouldn't be up and running within a year..

And lastly, in Cement, can you just talk about the price increases by region a bit more that you've notified customers about for 2015?.

Yes. Pricing increases range from, let's say, $7 or $8 to $10 per ton across all of our markets. And I think they're a little less out on the Western side. So if you look at the West Coast, in the Colorado range, that's more in the $7, $8 range, and all other price increases are $10 or better..

Your next question is from the line of Todd Vencil from Sterne Agee..

I don't think anybody has asked you about Wallboard, so let's talk a little bit about Wallboard. Their price increase is out, letters out for next year. I'm guessing that you're beginning to have conversations with your customers.

Can you give us any color at all on how those are going yet?.

Yes. Again, not dissimilar then from previous years. There's a very strong support from the customer base for next year's price increase..

Your next question is from the line of Brent Thielman from Davidson..

The Wallboard volumes, I guess it was slower than what you've seen in prior quarters.

Is this a representative of the end market? Or are there logistical issues there that might be having some impact as well?.

Yes. So we noticed the kind of a summer lull kind of towards the middle-end of summer. But since then, in October, things have really picked back up, and sales have really strengthened dramatically, again, since late September or October. So really pleased with where volumes are in that segment..

And is that within all your perspective regions or some specific markets?.

That is across the board. That's across the board, yes..

Okay.

And then CRS, the acquisition, are they experiencing any similar issues within the rail network that might be distorting the financials you guys have disclosed?.

Well, clearly, in the first quarter, and I think we mentioned that their earnings were off in the first quarter of this calendar year, so yes, there was impact as all sand companies up in Wisconsin were impacted with the brutal winter.

But once summer came around, and things thawed out, things improved very rapidly as far as logistics and transportations at Wisconsin..

Okay. And Steve, I'm sorry, if you said this before, the capacity the CRS itself is adding.

When does that become available?.

That will become available kind of, let's say, somewhere between March and April..

Your next question is from the line of Jim Barrett from CL King & Associates..

Steve, could you just briefly talk about the Texas Lehigh JV? Yes, 12% growth, as I recall.

Was all of that third-party cement? And on a related note, can you give us a sense as to what percent of the production in that facility is now oil well cement?.

Yes. That -- we've been sold out of our manufactured product for 4 or 5 years there. So any incremental increase in sale is through third-party purchases, either through some nearby competitors, in this state or neighboring states, or we are maximizing the amount of Cement that we're importing through our import terminal in the Houston area.

So the growth has been all purchased, and pricing has firmed up, as we mentioned, in Texas, so our margins even our purchase products have improved for Texas Lehigh.

So -- and as far as percent oil well, we are now, as far as manufactured sales, we're going to approach at least looking forward into next year somewhere between 2/3 and 3/4 of our sales will be to the oil well cement market..

And is your pricing power on the oil well cement higher than it is on the portland cement?.

We'd say pricing is, and it typically -- when portland cement prices rise, the oil well cement prices tend to rise as well..

But by a similar amount, in other words?.

Exactly..

Your next question is from the line of Jake Thomson from Odey..

A couple of quick questions for me. Can you just run me through the cost of economics of frac sands, generally? So if I take a ton of frac sands, roughly, what's the sort of incremental oil production that, that might create? That's the first question..

Yes. We really do not have those numbers. Probably better to ask an E&P company..

Okay, fair enough. And the second question really is related to trucking costs or driver inflation and its impact on your Wallboard pricing..

Yes. It's up year-over-year. So if you compare the quarter, it's up another couple of bucks and continuing to creep up in that direction..

Okay.

That's a couple of bucks on the Wallboard or taking off the Wallboard price?.

That's correct..

And sorry, I'm not aware of the sort of trend.

It's that sort of, better say, more worse than what you're generally seeing over the year?.

I think we've seen this pretty steadily in the last couple of years, that general trend, and it impacts all of our businesses, both on the supply side as well as on customer delivery..

Okay.

And you expect that to continue going to next year, I guess?.

Correct..

Your next question is from the line of Kathryn Thompson from Thompson Research Group..

It's Chris, calling in for Kathryn today. Just one more question on your Wisconsin acquisition.

Could you drill down a little bit more on what you think your transportation advantages are in the area? And then, any other advantages you feel you have versus your peer in that region?.

What we really enjoy with the CRS acquisition is that most of the sales are for customer pickup. So we really don't have to worry too much about the logistics cost coming out of there and are very happy with the pricing, the pickup pricing, associated with the contracts with the CRS acquisition..

And any other advantages you feel you have versus peers in the region?.

Yes. For us, the advantages are how we mix and match. Then the final delivery with stuff down in Corpus. So everybody wins. The customers win, and we win together..

Your next question is from the line of Dillard Watt from Stiefel..

Guys, I wanted to just ask a couple more frac sand questions.

One is, do you have any sense -- I'm sure you do a CRS, and obviously, you do on your own, of what percent of orders are under take or pay contracts?.

Yes. So I think we mentioned in our press release that the majority of CRS as under take or pay contracts, the vast majority, not only of the existing business but as well as the expanded business. And we have a few contracts that we've entered into, but not many.

And this was probably, as by design, while we were wrapping up our business and in the process of this acquisition, realized that this is going to be the case, so we wanted a little flexibility..

Is that something you think you'll increase as you go forward or kind of leave it where it is?.

Yes, that is something that we will review, and see how it fits with the Corpus Christi operation.

We're -- we kind of like our position at Corpus Christi, and the fact that -- typically, the way that we design with a very large stockpile of material in Corpus Christi, it gives us some advantages when other logistic modes of transporting the sand down in Texas fail in cold winter weathers, we'll have a big stockpile of sand ready to supply it.

That bodes well for a spot market, so that's kind of our thoughts at the present..

Got it.

And lastly, have you disclosed what the reserves are for the CRS mines in terms of years?.

We have not, but we're very comfortable with the reserves there and actually have some of our own reserves at least option land in that area that we've been working on for the last couple of years. So we are comfortable that the reserves, while it may not be the 50 years that we have in Illinois, they're 25 or better..

I would now like to turn the call over to Mr. Steve Rowley for closing remarks. Please proceed, sir. Thank you..

Well, thank you, everyone. It's been a very exciting quarter for Eagle Materials, and it's just going to get more exciting as the next few quarters unfold, as we develop this new business and as the demand for construction products and building materials continues to improve. Thank you..

Thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. And have a very good day..