David B. Powers - Eagle Materials, Inc. Craig Kesler - Eagle Materials, Inc..

Blake Hirschman - Stephens, Inc. Brent Edward Thielman - D.A. Davidson & Co. Scott Schrier - Citigroup Global Markets, Inc. (Broker) Jim Barrett - C.L. King & Associates, Inc..

Good day, everyone, and welcome to the Eagle Materials Second Quarter of Fiscal Year 2017 Earnings Conference Call. 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. Good morning to all and welcome to Eagle Materials' conference call for the second quarter of fiscal year 2017. We're glad that you could be with us bright and early this morning. Joining me today are Craig Kesler, our Chief Financial Officer; and Michael Haack, our Chief Operating Officer.

There will be a short slide presentation made in connection with this call. To access it, please go to eaglematerials (sic) [eaglematerials.com] (00:45), and click on the link to the webcast. While you're accessing the slides, please note that the first slide covers our cautionary disclosures 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 the disclosure, which is also included at the end of our press release.

I would like to begin today with some perspectives on our Gypsum Wallboard, our Cement, and our Proppants businesses. And then Craig will walk us through our second quarter financial results. Gypsum Wallboard demand continues to grow. Industry shipments were up nearly 7% versus prior year.

Household formations are increasing, and we believe housing has room to run. Accordingly, we anticipate demand for Wallboard to be up consistent with the outlook for housing starts. We have announced a January 2017 Wallboard price increase, and we look forward to sharing the results of that increase with you early next year.

Our Cement business performed well, but was affected by weather, especially in Illinois, Missouri and Oklahoma. We believe that strong underlying demand fundamentals are intact and evident. We anticipate trend improvement in our Cement business consistent with our improved outlook for infrastructure, residential, and nonresidential construction spend.

We believe that our oil well cement and our Proppants businesses are in the bottoming process. It is also our expectations that we will experience significant growth and demand for oil well cement and proppants over the next several years.

In short, all of our businesses are positioned to enjoy improved fundamentals and earnings performance going forward. I also want to take a moment to highlight our announcement last month that we entered into a definitive agreement to acquire Cemex's cement plant in Fairborn, Ohio. The transaction is expected to close in December.

All of our criteria boxes have been checked with this investment. It's a low production cost, high-margin plant. It's geographically close to its market and it's complementary with Eagle's existing cement assets and its distance from imports.

This plant will increase our annual cement capacity to nearly 6 million tons and provide an immediate and meaningful contribution to cash flow and earnings. We're very excited about this opportunity to grow Eagle with some truly outstanding assets, as well as welcome a talented group of new employees to Eagle.

Now, let me turn it over to Craig to review our second quarter results..

Thank you, Dave. Eagle's second quarter revenues were a record $333 million and improved 1% from the prior year. Our second quarter earnings per share increased 112% to $1.25 per diluted share as our Cement business reported record second quarter results.

A 3% increase in our average Cement sales price along with improved sales volumes in our Aggregates business were the primary drivers of the increase in Eagle's quarterly comparative of Cement, Concrete and Aggregates revenues.

Operating earnings from our Cement, Concrete and Aggregates businesses improved 6% to a record $55.5 million, reflecting improved pricing and good cost control. Increased Wallboard and Paperboard sales volumes drove a 6% increase in our quarterly comparative of Wallboard and Paperboard revenues.

Operating earnings in our Wallboard and Paperboard business increased 8% to $51.9 million for the second quarter. Eagle's Oil and Gas Proppants' financial results continue to reflect the difficult business conditions in the oil and gas sector. The second quarter operating loss of $4.1 million includes depreciation and amortization of $4.3 million.

While business conditions in the frac sand business remained at low levels, as Dave mentioned, we believe we have bottomed out, and volumes are anticipated to improve. Cash flow generation during the quarter was exceptional, and cash flow from operations increased 22% to $106.1 million.

Excess cash flow was used to pay dividends, repurchase shares and reduce outstanding borrowings. Second quarter capital spending of $9.3 million was down from the prior year, reflecting sustaining capital levels. Also during the second quarter, nearly $26 million of cash flow was returned to shareholders in the form of share buybacks and dividends.

We repurchased nearly 2.7 million shares of our stock since the buyback authorization was increased in 2015. As this last slide reflects, the cash flow generation results of our highly competitive, low cost position, our net debt-to-cap ratio was 27% at September 30, 2016.

In August, we successfully completed Eagle's inaugural public debt offering, which consisted of 10-year, $350 million senior unsecured notes, with an interest rate of 4.5%.

Proceeds from the offering were used to pay down outstanding borrowings under our $500 million unsecured revolver, providing us with ample liquidity to fund the acquisition of the Fairborn cement plant from Cemex. Thank you for attending today's call. We'll now move to the question-and-answer session..

And our first question comes from the line of Trey Grooms of Stephens Inc. Your line is now open..

Yeah. Thanks. It's actually Blake on for Trey this morning. First question, wholly-owned cement volumes were down 4% in the quarter. Weather in the Midwest was called out in the press release.

But I was wondering if you could talk about how some of your other markets are performing as well as how that Midwest cement market is performing outside of the weather that you called out?.

Well, our Cement volumes was really affected by just two operations in Oklahoma and Missouri, and that makes the entire extent of it. The other markets performed just well..

Great. Thanks. And then, for some detail on the Fairborn acquisition, specifically on the market it serves.

Could you talk about how the growth profile looks there, how pricing compares to other cement markets that you're in or anything else notable about the cement market that the Fairborn plant operates in?.

First of all, it's a very good market, and the projections going forward are to be up at least as much as the national average. We like the market because all the customers and volumes are nearby the plant. And the pricing is very favorable in the market, at least at this point..

All right, great. And then, just one more for me. You haven't touched on any synergies related to that ag acquisition. I know the margins of that plant are already pretty high, but I was wondering if there's any potential synergies that you guys see on the sales side of things. Thanks..

Well, there's a few synergies. We currently sell slag in the market. And I think having a product offering of slag cement and regular cement is going to help us. They also have a very good packaging facility there that's a good little business. And we think we can grow that a little bit over time..

Thank you. And our next question comes from the line of Brent Thielman of D.A. Davidson. Your line is now open..

Hi, thanks. Good morning. The cement JV, I still saw some volume improvement there. I guess I would've expected a little more of an impact from weather.

Can you just discuss that a little bit more?.

Sure, Brent. So, we probably saw the majority of our volumes associated with the oil and gas sector fall off in calendar 2015. So, here in calendar 2016, we have some pretty good comparables year-over-year. And where we are positioned in Texas, the weather was pretty, pretty well normal..

Okay. And then the Aggregates volume growth was pretty meaningful this quarter.

Any specific market driving this?.

Yes, it was basically Northern California and Austin. Both markets report very, very strong sales..

Okay.

And just lastly, I mean looking beyond kind of the Ohio deal and presuming cement is still the side of the business you're interested in growing, are there other Cement assets out there in the market right now that you think could be coming to the market that you're watching or is it more likely you could look at maybe some internal plant expansions?.

We're always looking for opportunities, and we don't really comment on any future MMA (sic) [M&A] (10:09) activities, but we're looking at a few things..

Okay. Great. Thank you..

Thank you. Our next question comes from the line of Scott Schrier of Citi. Your line is now open..

Hi. Good morning. Thanks for taking my question..

Good morning..

First, I wanted to touch on the Wallboard and the pricing, the decline on a sequential basis, was that a geographic mix or product mix, or were there any kind of share issues in there?.

There was slight geographic mix. Southeast at this point has a little less than some of our other regions, but I would attribute some of it to that and a little bit of price movement over the quarter, very small however..

Got it. And then, on the JV cement, it looks like your operating margins are strong.

Can you talk about possibly what some of the drivers of that margin are? And going forward, what kind of trends can we see if purchased cement improves and if we see a return to oil well cement? How should we think about the operating margins in JV cement going forward?.

Yeah. Thanks, Scott. That plant continues to remain sold out and, in fact, the Texas market continues to remain sold out. And so, as we talked about over the last several quarters, as we shifted towards more construction-grade cement, we backed off a little bit on the purchased product that was necessary in calendar 2015.

It's a little lower margin sale product for us. So, going more to more manufactured tons, but as we also said, as we switch over from producible oil well cement to construction-grade cement, that's a little lower cost of manufacturing. And so, that's why you continue to see very strong margin profile with that business..

Got it.

And lastly on the oil proppants, can you just talk a little bit about how you're thinking about what needs to happen in the market before you start to bring back some of those idled assets?.

Well, right now, our customers are telling us that they expect increased demand for sand over the next 12 to 18 months. And that's kind of based on many of the customers' beliefs that oil prices will be going up modestly over the next several years..

Got it. Thanks. I appreciate you taking my questions, and good luck..

Thank you..

Thank you. Our next question comes from the line of Jim Barrett of C.L. King & Associates. Your line is now open..

Good morning, everyone..

Hi. Good morning..

Just two questions. Dave, can you discuss the trends in housing starts in the market area served by your Wallboard plants.

And your single-family starts versus multi-family growth trends, do they differ much from the national average?.

They really don't. Actually, we're in very strong markets in the Sunbelt. So, we think we have a little advantage going forward. The most recent housing starts that came out this week were actually somewhat pleasing to me. Even though they were down a little bit, the single-family housing starts were up over 8%.

And as we all know, single-family housing starts consume three times to four times the amount of Wallboard as a multi-family housing start does. So, when you put the math to it, even though the numbers were down a little bit, the housing starts that were reported are going to require more gypsum wallboard.

Then if you look at the permits, the permits were up over 6% to $1.2 million. So, we were actually pretty pleased by the housing start numbers that came out last week..

Good.

And the EBITDA margins for the Fairborn plant that's being acquired, does that include any corporate allocations expense from Cemex and, if so, how would these allocations expense compare to what you would expect under your ownership?.

The numbers that were reported are just plant-level EBITDA. There will be a process that Cemex will go through for the carve-out financial statements. But similar to our existing assets and how we run our company, we would expect very low overhead structure associated with that plant.

It's already a very robust margin plant adding, as Dave mentioned earlier, some outstanding new employees to Eagle, and there's not a lot overhead required there..

Thank you both..

Thank you. And I'm showing no further questions at this time. I would like to turn the call over to management for closing remarks..

Thank you for participating in our call, and we look forward to talking with you early next year..

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day..