David Powers - CEO, President & Director Craig Kesler - EVP, Finance & Administration and CFO.

Trey Grooms - Stephens Inc. William Newby - D.A. Davidson & Co. Scott Schrier - Citigroup Benjamin Burud - Goldman Sachs Group Stanley Elliott - Stifel, Nicolaus & Company Adam Thalhimer - Thompson, Davis & Company Philip Ng - Jefferies Joshua Wilson - Raymond James.

Good day, everyone, and welcome to Eagle Materials' First Quarter of Fiscal 2019 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..

Thanks, Jimmy. Good morning to all, and welcome to Eagle Materials' Conference Call for our First Quarter of Fiscal 2019. We're glad that you could be with us today. Joining me today are Craig Kesler, 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 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 risk 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. This morning, I'm pleased to report record revenues and as importantly that our quarterly earnings are up 22%.

All in all, we had a very good quarter. Our business results overall are consistent with our base-case thesis that this construction cycle will be a relatively flatter and longer one than seen in prior decades, and one that will be supportive to increase profitability for well-positioned players like Eagle.

Our three major business lines often show somewhat different cadence in earnings growth, and this quarter is no exception, with Wallboard clearly gaining altitude, Cement steady and on course, and our Proppants business now on deck and ready to climb. Let me say a few words about each.

Quarterly earnings in Wallboard were up 15%, notwithstanding freight headwinds of around $2 per thousand on our mill nets. Strong volumes and prices were positive factors that propelled earnings substantially higher. Next quarter, we should see the results of the Wallboard price increase that American Gypsum implemented on July 16.

We believe the mid-term outlook for this business is very good indeed, and it would generate a lot of cash, which we intend to put to good use. Our Paperboard plant is sold out and posted almost $10 million in operating earnings as a result of improved operating efficiencies and lower OCC prices.

Our quarterly comparable results in Cement were affected by the timing of our Fairborn, Ohio routine maintenance. There was no outage at this plant a year ago quarter because we took the outage shortly after the acquisition. Our Cement volume for the quarter overall was flat after a strong start in April.

There were some notable delays of work in several Midwest markets that affected overall volumes in the second half of the quarter. We do expect trend growth to continue, recognizing individual monthly and quarterly volumes can be irregular at times.

Additionally, our Concrete and Aggregates volumes, although a relatively smaller part of our business, were lower during the quarter, reflecting the timing of the commencement of bid work in those markets and our posture to push price during the past quarter. Backlog from our customers are encouraging.

Our Proppants business is poised to deliver meaningful results. We completed our planned Utica, Illinois sand processing expansion ahead of schedule and under budget. We shipped the first unit train on July 18. The majority of our sand that's available at both Illinois and our Wisconsin mines is spoken for.

We set out to build a business with a flexibility to serve any shale play with low-cost, high-quality sand and can now tie up ribbon on that accomplishment. Although our aspirations represent only a comparatively small share of the U.S.

frac sand market, we expect the earnings here to be meaningful and our return consistent with other heavy site investments over time. And final and an important note, our cash flows continue to be robust, up over 50% compared to last year, and they are growing. This provides us substantial flexibility in creating value for our shareholders.

In this regard, it's worth noting that we repurchased over $50 million in Eagle shares - $50 million in Eagle shares last quarter with an average price of $104. I look forward to keeping you updated on our progress. Now let me turn it over to Craig to discuss the financial results..

Thank you, Dave. Eagle's first quarter revenue were a record $394 million, an increase of 8% from the prior year, reflecting improved sales volume and net sales prices across nearly all of our businesses. Eagle's quarterly earnings per share improved 22% to a first quarter record of $1.38.

This next slide highlights the results of our Heavy Materials sector, which includes our Cement, Concrete and Aggregates segments. Revenue was slightly higher versus the prior year, with improved pricing partially offset by lower Concrete and Aggregates sales volume. Operating earnings declined 13%.

Timing of the maintenance outage at our Fairborn cement plant impacted the comparability of the results. We had last completed an outage of the Fairborn facility shortly after our purchase of the plant. Therefore, there was no outage in the quarter ended June 30, 2017.

Moving to the Light Materials sectors, which includes our Wallboard and Paperboard segments. Improved Wallboard sales volume and prices drove an 11% improvement in our quarterly comparative of Light Materials revenue.

Quarterly operating earnings improved 24% to $60 million, reflecting higher Wallboard sales volume and net sales prices as well as lower recycle fiber costs. Eagle's Oil and Gas Proppants revenue improved 15% to $22 million, reflecting a 16% improvement in quarterly sales volume.

The operating loss during the quarter increased from the prior year, primarily due to costs incurred during the start-up of our new facility in Utica, Illinois. Operating cash flow during the first quarter was up 53% from the prior year, reflecting improved net earnings and lower working capital. Capital spending increased to $51 million.

This amount included investments to improve and replace existing equipment, complete our frac sand drying facility in Illinois, enhance Eagle's distribution capabilities and to continue to improve our low-cost operations.

During the quarter, Eagle returned over 86% of our net earnings to shareholders through a combination of share repurchases and dividends. This last slide reflects the cash flow generation results of our highly competitive, low-cost position. Our debt-to-cap ratio was 31% at June 30, 2018. Thank you for attending today's call.

Jimmy, we'll now move to the question-and-answer session..

[Operator Instructions]. Our first question comes from Trey Grooms with Stephens..

First, on the Heavy Materials side. Dave, I know you mentioned some delays in work in the Midwest and some other things, kind of, impacting the quarter. And - but you also mentioned backlog encouraging.

And just kind of looking at the timing there, would you expect to see these delays, kind of, creep into the current quarter? Or is that those delays, kind of, worked themselves out quicker than that? Just trying to get a sense for where should we be - what should we be thinking about as far as acceleration of volume on that side of the business..

No, we expect these delays to work themselves out over the next couple of quarters. One quarter does not a year make. And sometimes, these volumes for month-to-month and quarter-for-quarter do fluctuate and go up and down. But our overall thesis about continued long-term growth for the Cement business remains very positive..

Okay. And just to be clear, is that - some of the delays you're talking about. Were those delays impacted - or impacting primarily the wholly owned? Because you mentioned Midwest.

Or is there some other things going on, on the JV side as well?.

They were affecting the wholly owned. A lot of it was weather in the Midwest. As you know, in Texas, we're sold out. Our plant is sold out, and we're maximizing the amount of imports. So there's not much more we can do in Texas..

Okay. And then just to be clear, though, the outage for maintenance in Fairborn, that wouldn't really have much of an impact on volume in the period, would it? I mean, I would think you guys have built some inventory in anticipation of that, but just to be clear..

It had no impact on volume..

Okay. And then on freight. So that's, obviously, been an issue for you guys. I think, Craig, on the last call, you mentioned, expecting freight on the Wallboard side to be up something like 10% to 12%, I think.

Looked like it kind of shook out in that neighborhood, but it looks like a lot of freight rates in flatbed and just really across the board seem to be up, maybe even more than that now as we're looking into the summer months.

How should we be thinking about that on the Wallboard side? It's - any update there? Any change as far as the impact on the mill net?.

No, Trey. As we highlighted last quarter and included in the press release, trucking utilization rates continue to be very high. Freight rates have gone up in that 10% to 12% range as we expected. You're doing the best that you can, and so you start shrinking your shipping radius in order to offset some of the freight increases.

And which you do your best and keep it underneath the umbrella of the facility. But - and I'll tell you, it impacts not just the Wallboard business, but we highlighted it for the Cement business as well. And frankly, the frac sand business, the rails - railroads have continued to try to push pricing as well.

So you're trying to meet your customer needs the best that you can, and minimizing the freight bill, where you can as well. And I think our guys have done a very good job of doing that..

Yes.

And just - all else being equal, if we were just to, kind of, strictly freight, mill net impact, Wallboard $2 per MSF in the quarter, is that similar to what we should be thinking about? Again, all else equal, not taking into any - not taking into account any impact from the increase that you guys are [indiscernible] on July 16?.

Yes. That's right, that's right..

Okay. And then lastly, on that July 16 increase, just any color you can give us on the magnitude you guys went out with or just any other color. I understand it was on the timing and so forth.

But - and it's in response to higher costs and fright, but just any other color you can give us on that increase?.

We've been invoicing our customers up since July 16, the last two weeks. We feel - at this stage of it, we feel really good about it, and we expect the increase to more than offset our additional costs in freight and overhead. Price is always determined in the marketplace, but as of today, two weeks into it, we feel pretty good..

And our next question comes from Bill Newby with D.A. Davidson..

Bill Newby on for Brent Thielman today.

I guess, just, kind of, piggybacking off of that last question, how are you guys thinking about, I guess, further price increases this year in Wallboard or Cement? Is there any - I mean, are you considering another one later this calendar year?.

We've made no decisions regarding price on either one of those businesses going forward. And when we do, we will communicate that directly to our customers..

Okay, fair enough. And I guess, on the frac business, with Utica up and running.

I guess, can you talk about the potential for that Proppants business to hit profitability at some point fiscal - this fiscal year?.

Yes, Bill, that business started up here late June, early July. And so a little too early to give quantitative specifics. But the profitability of that facility on an operating earnings level will be an improvement. It doesn't have near the depreciation and depletion that our acquired business does in Wisconsin.

So we look for the profitability for that business to improve here in the fairly near term..

I mean, I guess, is it - is that fair to say that, I guess, that Proppants business as a whole, the goal is to hit net profit this year?.

It is certainly trending in the right direction. And, again, looking at not just the earnings level, but the cash flow generation of that business, the cash flow continues to improve. And this will be a meaningful change to that business.

We're effectively doubling the capacity of that business with the new facility in Illinois going from - we have been running about 1.6 million, and this is adding 1.5 million tons to the network..

And our next question comes from Scott Schrier with Citi..

First question just quickly on Cement pricing. Was there anything in regional mix that impacted Cement pricing.

It didn't sound like there was anything out of Fairborn and understanding that you had about $1.50 of freight hit the mill net?.

Every market's a little different, and we experienced a little bit of variation in price from market to market. And overall, we were probably up 3.5%, but freight took 1.5% of it away from us..

And I'd add to that, Scott. We see this typically when you get into the summer months. You have, certainly, the northern markets that have a much stronger pull during the construction season. And so as we look at market to market, it's really how you have to look at the overall change in the Cement price increase.

And I would tell you, individually, some markets actually improved greater than the average. You just have some geographic mix that does impact the overall average. But that's what we've seen historically, so very consistent..

Got it.

And then can you put any context behind how much of the 9% of Wallboard increase could have been from a prebuy?.

The prebuy, this time, was considerably less than in prior periods. We're estimating somewhere between, for us, 10 million to 20 million foot could have been prebought in late June and early July, which is down substantially from prior increases..

Scott, when you get to this point as home building has really recovered, the other piece to that is, it's hard to distinguish prebuy from increasing general activity. So it was one thing to look at prebuy years ago, and you could see it very clearly.

You're just seeing a nice improvement in residential construction activity that is masking - you see the improvement across all the business..

Got it. And one more on frac sand. I know in the past, I think you spoke about around 80% of the incremental volumes being spoken for from Utica.

Is that still the same way to think about the demand there?.

That's exactly how we look at it..

And our next question comes from Jerry Revich with Goldman Sachs..

This is Ben Burud on for Jerry.

Just wanted to get your guys end market views, if you will, for the back half of the year, specifically what you guys are seeing in the public construction side of things as well as private nonres?.

Our customers tell us they have a pretty good backlog, both from the Cement side and the Wallboard side at this point. In terms of commercial roadwork, I mean, we're - our customers are telling us, specifically in Colorado and Texas, they have increased bidding activity in those 2 areas.

So based upon what we hear from customers, we feel pretty good about the second half of the year..

And then can you guys give us an update on the M&A environment? How are you viewing conditions right now, and any thoughts on those type of actions going forward?.

Yes. We continue to be pretty optimistic with the M&A activity. We've been fortunate in the last few years. We've had some good opportunities and have been able to follow up on those. Fairborn being a very good example of that.

We, obviously, won't talk about any specifics, but we continue to look at a number of opportunities, and we have a balance sheet and cash flow, certainly, to follow through on those. The question will be, from a returns perspective, right, we won't minimize our return requirements just - in this current - in this environment.

So we'll continue to look through them and find opportunities to continue to grow Eagle, and to the extent those opportunities don't meet our hurdle rates. The other thing that we've done historically is balanced the external growth within our share repurchase program. As you saw this past quarter, we repurchased over 500,000 shares of stock.

So it's a balance of those two things. And we'll remain pretty opportunistic..

And finally, we talked about freight inflation.

Can we spend one minute on labor? Are you guys ramping headcount? Is that an issue in any of your plants?.

Fortunately, labor is not a major cost input to any of our businesses. You've got 2,200, 2,300 employees for this size company. So we are able to hire the folks that we need, and labor is just not a major cost component..

And our next question comes from Stanley Elliott with Stifel..

Could you talk a little bit about the Bernalillo plant? How that is up and running? And maybe, kind of, since it was restarted back in September, things may be that you've been able to take from best-practice perspective to other markets or - really just trying to get a little flavor on how that's progressing..

Well, we just started up the plant last September. It's running well. We started it up at half mast. It's a peaker plant for us. When the orders are there, we run it and ship it, and we're now running five days, day shift only. So we're running - and we're running really well. We're just running a few products. It's very efficient.

We're pleased with the cost structure, and I like where we're at..

Perfect.

And then on the frac sand piece with, kind of, some of the delays we've seen with the rails, you - is there any risk to the 80% of the volumes that are spoken for? You've - either delays or anything along those lines with what we're seeing at the freight level?.

I think there's a little risk in delays. We do have some customers that are moving fleets from one base into another, which is causing a little bit of a lag. And we do have some congestion in the railroad that will get freed up one of these days and might cause us a little bit of a delay in shipments.

But overall - when I look at that business, the orders come in, there's a little bit of ebb and flow, but for us, overall, it is increasing..

Perfect. And then lastly, Craig, you talked a little bit about the M&A environment.

Should we think that it's fairly opportunistic across the broad, or is there more focus on the heavy side like there has been in the past?.

Yes. We have been very clear with our desire to continue to grow the heavy side of the company. We generated significant about of cash flow on the light materials and wallboard and paperboard, but we've been - I think, the returns for us, at this point in the cycle, are generally good, and the activity is going to be more towards the heavy side..

And our next question comes from Adam Thalhimer with Thompson Davis..

The Wallboard margins are really impressive in the quarter. I just wanted to get your thoughts on the potential for continued margin expansion as the year unfolds..

Adam, the Wallboard and the paper mill performed very well this past quarter, and very consistent with what we would expect from that business. They've been performing that way for many, many years. And we would expect to see continued expansion in their margins.

They do have the headwinds on the freight side, but they're able to overcome some of those. And we're not quite yet where we peaked before, and we think we can get there again..

Okay. And then, on the last call, we talked about the potential for a mid-year cement price increase in select markets, not widespread.

But what would be your thoughts on this at this point?.

We're evaluating that right now. But we have made no decisions at this point..

Okay.

And then with regards to Wallboard pricing, can you give us any kind of color for how it trended during the quarter?.

No, it was relatively flat. We had really very little movement one way or another. It was just pretty solid..

Yes, if you look at them effectively, if you take out the freight impact sequentially, pricing is effectively flat from where we were in the March quarter..

Okay. And then just last one from me, kind of a housekeeping.

The other revenue line, is that recurring?.

Yes. It's smaller business. Certainly, the business that we acquired last year, Wildcat, would roll up into there as well. But that will remain there..

Roughly the same run rate of revenue and profit, you think?.

That's right..

And our next question comes from Phil Ng with Jefferies..

Freight is clearly a headwind for everyone.

But can you provide a little more color in how you're thinking about? Is that starting to level off the rest of the year, or could that actually accelerate? And do you have any initiatives out there to kind of better manage it?.

It's hard to predict, but we've negotiated most of our freight rates for up to a year. We probably expect an extra dollar or so on the Wallboard side through the balance of the year. But we don't know for sure..

Got it.

Any color on trends in July in Cement and Wallboard? Appreciating you're seeing some of that delay impact in the Midwest for Cement, and any - just want to appreciate if there's any hangover effect from prebuy for Wallboard in fiscal 2Q?.

Well, I'll just give you a little insight on Wallboard. The first two weeks of it - of the month July were outstanding. We sold more than we could possibly make. And the last two weeks have been as expected because of the prebuy, just a little bit less. But all in all, the trends are strong..

Okay, that's helpful. And just on Wallboard, just given some of the freight dynamics, at least we've heard it through the channel that, that has actually led to some of these producers shipping shorter distances and that has actually tightened the market.

Curious if you've seen any of that on your business, and how the rest of the initiatives reacted as well?.

That's our experience as well. We're attempting to ship shorter distances and reduce the freight bills as we go forward. And many of our customers are working with us as well..

Okay. And just one last one for me. On Cement, certainly freight had an impact. But curious - just price, in general, was a little less than we would have thought, given how tight the market is.

Are you seeing a little more competition? I just want to get a sense if you're seeing any impact on that front?.

We're seeing just a little bit more competition. But when I look at price, it was basically decided six months ago on the first part of the year when it was a little softer. It's a little tighter now..

And our next question comes from Josh Wilson with Raymond James..

I wanted to dig into the Concrete results a little more. You mentioned your firmness in pricing having an impact on your volumes.

What are your thoughts on that going forward? And how do you decide the balance between price and volume?.

Well, it's always a balance between volume and price. And during the quarter, we did attempt to get some margin improvement during the past quarter. And we ended up sacrificing one job or two along the way. But our backorders - our backlog of business, as of today, appears to be pretty good at all three of our locations.

And it's just a small percentage of our total business..

And then regarding Wallboard, can you give us an update on what your lead times are currently standing at versus history, and whether there's any talk of going on allocation?.

As of today, I like our lead times. We're in a good position to service customers, and we have a good backlog. I like where we're at..

And then regarding the freight cost in Cement, you talked a little bit about what the potential outlook was in Wallboard.

Could you give us some similar color on what, sort of, the key moving parts are in the Cement freight, and how much that may or may not move going forward?.

Yes. The answer would be fairly similar to Wallboard. We can't predict anything on freight. But we experienced some increased freight this past quarter. And we don't see any other major changes to that for the balance of the year..

Got it.

And any shifts in - as we look out over the next 12 months, shifts in the timings of outages? Or is everything pretty much in the quarter that's going to be going forward in terms of the downtime?.

Yes. So most of our facilities, all of our facilities are generally taken down in this April-May timeframe, so in this June quarter. Fairborn being a recently acquired plant, getting them on to that same cadence, so we'd expect to see that be consistent going forward..

And we have a follow-up question from Trey Grooms with Stephens..

Just quick housekeeping, and I'm sorry if I missed this.

But the start-up costs in the frac sand business, is that pretty well behind you guys? Or should we be expecting any to, kind of, linger into the September quarter at all on frac?.

Yes, the plant facility really started up in late June and then in early July, you're working through some kinks in the system, you're aligning things out. So there'll be a little bit here in July. But it should get up and running fairly smoothly..

Okay. And then just, kind of, thinking about the cadence of getting that plant up not necessarily from a volume standpoint, but really just, kind of, to where you would we expect profitability and the EBIT contribution from that plant.

Any sense of timing on how quickly you get that ramped up to your full expectations?.

Yes. In the general sense, it's a fairly quick start-up, and that facility should start to generate meaningful cash flow. We're not trying to pin it month-to-month or quarter-to-quarter. But by the end of the year, we should see the profitability of that facility start to improve..

Okay. And then one follow-up to one of Dave's comments earlier. The question was asked around Cement pricing. And you said it was set six months ago, and now things are a little tighter now.

Is that just more of a seasonal uptick? Or - now with some weather events that you experienced in June quarter, with that - those things behind yes, are you implying that things have kind of picked up a little bit there? Or just any more color around that comment..

At this time of the year, the volumes have picked up. And like I mentioned, we haven't made any decisions yet regarding pricing going forward. But we are looking at it..

And we have a follow-up question from Scott Schrier with Citi..

Scott, are you there?.

Yes. Sorry about that. I just wanted to actually follow up on one of Trey's follow-ups on frac sand. And I'm curious now that you have it. I know it's early stages.

If we think about the cost structure and how you look at contribution margins in the business? Is it may be comparable to how Cement performs over the cycle or Wallboard? Just any indication of how we can think about bracketing the contribution margins of the business?.

No, Scott. That's a fair question. I'll tell you, it's a pretty new business for us and certainly a brand-new facility for us. The margins have very widely, over the last several years, and we've recently seen an improvement the last, call it, 18 months as volume came back.

So your incrementals, whenever you start a new facility like this or a new business, your incrementals on volume are very strong given that you're starting from basically zero. So that will factor into the general profitability of the facility as it start-ups and starts moving some volume. That should improve pretty significantly.

But beyond that, the margins would be also depended upon market environments, pricing and other things like that..

And, speakers, I'm showing no further questions in the queue at this time. I'd like to turn the call back over to Dave Powers for any closing remarks..

We thank you all for your participation in the call, and we look forward to talking with you in the fall..

Ladies and gentlemen, this does conclude your program for today, and you may all disconnect. Everyone, have a great day..