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

Trey H. Grooms - Stephens, Inc. Brent Edward Thielman - D.A. Davidson & Co. Scott Schrier - Citigroup Global Markets, Inc. Ben Burud - Goldman Sachs & Co. LLC Adam Robert Thalhimer - Thompson Davis & Co., Inc. Collin Verron - Jefferies LLC Kevin Hocevar - Northcoast Research Partners LLC Joshua K. Wilson - Raymond James & Associates, Inc..

Good day, everyone and welcome to Eagle Materials Second 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 Chief Executive Officer, Mr. Dave Powers. Mr. Powers, please go ahead, sir..

Thank you, Hayley. Good morning to all. Welcome to Eagle Materials conference call for our second fiscal quarter of 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 our 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 the 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.

Let me begin by saying that anytime we post quarterly earnings per share up 17% on record revenues, it's a good quarter. Having said that, weather did not help us at all, quite the contrary.

It gave us a one-two punch, one in the gut on the Heavy side with wet weather in the Midwest and Texas in particular and the other with an uppercut on the Light side with Hurricane Florence in the Carolinas. The weather has limited our short-term sales opportunities in many markets.

This has been well-chronicled and I'm probably about as tired of talking about it as you are about hearing about it. The only thing that I'm really happy about is that our employees and our facilities are unharmed. Let me offer some commentary on each of our businesses. First, the Heavy side, notably, cement.

We are operating at high levels of utilization at most of our cement facilities. Hence, weather interruption can have a very visible short-term impact on results.

Heavy Materials revenues were off 1% and operating earnings decreased by 4%, primarily because of lower profits at our Texas cement facility and by extension, Concrete and Aggregates, all of which were affected by unusual wet weather during the quarter. As you are probably aware, Texas experienced one of the wettest Septembers on record.

Our backlogs in this business are good however and we've announced price increases in several of our markets for January. Turning to the Light side, wallboard and paperboard operating earnings were up 18%, reflecting lower operating costs and improved wallboard net sales prices more than offsetting our increases in freight.

Quarterly wallboard sales volumes were affected by unusual weather and were down approximately 3%, reflecting the disruption from Hurricane Florence in our southeastern markets. I should add that we're well positioned and fully committed to supporting the rebuilding efforts in this hard hit region.

Now to the frac sand segment, our completion of the Utica frac sand drying plant was coincident with the ripple effect of the period of decreasing demand in the Permian. Oil pipeline capacity limitations have reduced completion activity. Experts suggest that it's probably 9 to 12 months before the situation is remedied.

Volume and pricing in this business did come under pressure during the quarter with increased availability of local sand in the Permian. We have built a low-cost system where we can flow high-quality northern white sands across a portfolio of oil basins. And as oil prices rise in these basins and become more active, we would expect volumes to improve.

I should add that $9.4 million of depreciation, depletion and amortization was charged against the business, affecting the earnings level, which of course is not reflective of the segment's cash generation. As a company, we continue to generate cash flow, significant cash flow and I firmly believe we will continue to do so.

That combined with a strong capital structure and leverage under 1.5 times further strengthens our financial flexibility. Our priorities going forward remain the same, to continue to grow our businesses in ways that meet our strict, strategic and financial return criteria and to continue to improve our low cost competitive positions.

As I've said in the past, we have never lowered our standards or loosened our criteria at times when we've had more money in our pocket. We operate in cyclical industries and we understand cycle management.

We recognize that over the course of cycles, our cash flow generation can at times exceed our ability to invest for growth and improvement and still remain true to our strict criteria. In these cases, we would point to another track record of ours and that is one of returning cash to shareholders.

In fact, it's worth noting that our share count today is one-third less than it was 25 years ago, which brings me to my final comment about the quarter. Perhaps for many, one of the most notable developments has been the retreat of construction stocks this year. They've been hammered, ours included.

We continue to implement our share repurchase program and we see good value in our shares. It's worth mentioning that we repurchased approximately 740,000 shares during the second quarter. Now, let me turn it over to Craig to go through the financial results..

Thank you, Dave. Eagle's revenue was a second quarter record $381 million, an increase of 1% from the prior year, reflecting improved pricing across most of our businesses and the addition of the Wildcat Minerals business. Eagle's quarterly earnings per share also improved 17% to $1.53.

This next slide highlights the results for Heavy Materials sector, which includes our cement, concrete and aggregate segments. The revenue was down 1% with improved pricing offset by lower sales volume, while operating earnings declined 4%, primarily because of the unusually wet weather during the quarter and higher freight costs.

Moving to the Light Materials sector, which includes our wallboard and paperboard segments, improved wallboard net sales prices drove a 3% improvement in our quarterly comparative of Light Materials revenue.

Quarterly operating earnings in our Light Materials businesses improved 18% to $54 million, reflecting higher wallboard net sales prices and lower recycled fiber costs. Eagle's Oil and Gas Proppants revenue declined 13% to $19 million, reflecting lower sales prices, partially offset by a 2% improvement in sales volume.

The quarterly operating loss increased primarily associated with lower sales prices and increased depreciation associated with the new facility in Illinois. During the quarter, pricing for our frac sand came under pressure as the demand for frac sand was impacted by a slowdown in completion activity in the Permian Basin.

We expect these conditions to persist into calendar 2019. Operating cash flow during the second quarter declined 6% from the prior year, reflecting improved net earnings, offset by the timing of certain working capital items. Excluding the payment of the Direct Purchaser Settlement claim, operating cash flow improved 30% from the prior year.

Capital spending increased to $40 million. This amount included investments to improve and replace existing equipment, complete our frac sand drying capacity, enhance Eagle's distribution capabilities and to continue to improve our low-cost operations.

During the quarter, Eagle returned over 100% of our net earnings to shareholders through a combination of share repurchases and dividends. And finally, this last slide reflects the cash flow generation results of our highly competitive low-cost position. Our debt-to-cap ratio was 31% at September 30, 2018. Thank you for attending today's call.

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

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

Hi, good morning..

Good morning..

I guess first on, you mentioned I believe on the cement pricing announcements for January, could you quantify that at all kind of what you guys have out in the market in the different markets you serve?.

I can, Trey. We've announced three markets, Nevada, Wyoming, and Ohio and we're up $8 in two of those markets, and $6 in one of them. Those are the announcements we've had on the Street to-date..

And expectation for any additional announcements in some of the other markets or is it just too early to know?.

Actually, we're communicating with customers as we speak about what our intentions are going forward..

Okay. And then, I know you guys have mentioned some more competitive type of behavior on the cement pricing front, maybe more competitive than you would have expected given the demand levels.

Has that changed at all as we've kind of progressed through the year and given the backdrop we have had, demand may be a little less than we initially anticipated, but could you just comment on that competitive dynamic and any expectation there?.

We did experience a little bit of competitive situations in the March, April, May timeframe. I haven't experienced any since then..

Okay, that's helpful. And then, lastly on wallboard, clearly people are a little more concerned as you mentioned. I mean, the stocks have all been under pressure. And clearly, people are more concerned about the housing environment as we look out with a bit of a pause maybe that we're experiencing here.

With that backdrop, and I'm not looking for any specific guidance or anything like that, but maybe directionally, how are you guys thinking about wallboard demand as we look forward?.

Trey, we're looking at modest growth going forward. When I look at housing starts, the first nine months of this year, they're up 6% over the prior year. And even the last three months, were up 3% to 4% over the prior year, those same three months. So we're planning on modest growth in our wallboard business going forward..

All right. Thanks for taking my questions. I'll jump back in queue, and good work given the backdrop with the tough weather environment..

Thank you much..

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

Great. Thanks. Good morning. Dave, on Proppants, I mean, it sounds like this tough environment is going to persist here maybe for the near term.

Based on where you see things now pricing, volumes, do you think you can continue to run this business, I guess, at minimum at a cash breakeven level or better?.

Brent, I do and that's our plan going forward into next year. At least, the next two quarters I'd say, I believe where we're headed and we're rightsizing our business as we speak to make that happen..

Okay. And then, on Texas, I mean, volumes here have been under pressure out of the JV for a few quarters now, understand pretty tough September. Could you just give us a little more context about what you've seen in that market, maybe outside of September, what activity level is better? Any thoughts there..

We still think the market is strong. It was flat for us, but strong. Other than the weather, we think it's a good market going forward for us. We really do..

Okay. And then, on wallboard, maybe some context just how the price trended during the quarter.

Were you able to exit the quarter at the average or somewhere above that?.

We were down just a hair, I would, say in the quarter..

Okay. And last one, if I could.

Just on the cement side as a whole, as you look at all of your markets, are you seeing any sort of renewed momentum in public sector work, notwithstanding the weather issues? Any more reasons to be optimistic there?.

Just slightly, Brent, we're just seeing slight improvement. Very low to modest growth at this point in that sector..

Okay. Great. Thank you. Appreciate it..

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

Hi. Good morning. Thanks for taking my questions. Following up on Brent's question on wallboard and wallboard pricing, obviously it looks like you had a decent amount stick from the mid-year price increase.

I'm curious though, can you talk about the impact from Georgetown had on mill net pricing understanding that's a lower priced plant, so less volumes from there would be a little bit of a tailwind to that headline price number?.

Well, let me tell you about Georgetown and the hurricane. We did shut down our operation seven days from a manufacturing point of view. There were six days, five-and-a-half days that we didn't ship. That probably equated to about 20 million foot that we didn't get out as expected.

It wasn't loss per se, probably just delayed into future months and it had a minimal impact on our mill net..

Okay. And on cement and Dave, I know in the past, you've stated that in order to really get a lot of pricing in cement, we need to have tension across the entire network and not just select places. Your commentary suggested a slight pickup in some of the public works demand, you talked about healthy backlog.

Are you starting to get some confidence, you have these price increases in the market for January, you're communicating more for April, there're some competitors with fairly large price increases in the market, I mean, are you getting from customers on the ground some confidence that we're getting to a level where we're starting to see some tension across the network in cement?.

Prices are always determined in the marketplace and I do have a pretty good feel, but we're early in the process on our conversations with customers, they are expecting some modest improvement and that's our plans going forward..

Got it. And last one, on the freight impact and you called it out in the press release, are you still – are you seeing any moderation in freight increases, whether it's on the Gypsum side or cement, are you still seeing the rail congestion? Just a little bit of color on the environment from the freight side will be great..

The freight increases have moderated. We've actually had a couple go down a little bit. There is a lot of extra truckers and truck from the Permian that are now available to offer a little bit of competition. So, for us, they've been flat..

Great. Thanks. Appreciate the color..

Thank you. Our next question comes from Jerry Revich of Goldman Sachs. Your line is now open..

Good morning, everyone. This is Ben Burud on for Jerry..

Good morning, Ben..

Good morning.

Besides what you've already mentioned on the call, can you give a high-level view where we stand in the current cement pricing cycle? Maybe heading into 2019, what do you guys think it would take for pricing to reaccelerate over the course of the year?.

Just a little bit of volume, I think modest growth. The scenario that we're in, I think will allow us to implement some price improvement..

Got it.

And then, can you please give us an idea of how you see wallboard demand, the wallboard demand can and tracking by region?.

No, I won't break it down by region, because it varies from month to month and quarter to quarter, but I do see modest growth in our wallboard business as a total across all the markets that we play in going forward..

Got it. Thank you..

Thank you. Our next question comes from Adam Thalhimer of Thompson Davis. Your line is now open..

Hi, good morning, guys.

The first on frac sand, the D&A in the quarter, is that the go-forward rate as well or was that unusually high?.

Yes, Adam, that generally peaks in this quarter and then, we'll start to trail off in the December and March quarter as the – especially, in Wisconsin, those mines shut down over the winter. I'd look to the cadence from last year, might be a little bit higher this year given the new plant, but the cadence would be very similar quarter to quarter..

Okay.

And then, have you done any projections for the Florence reconstruction possibility starting kind of next calendar year?.

Adam, it's probably, a little early to be doing that.

As we've said with other hurricanes in the past and Dave alluded to this, you go through a period, where a period of disruption kind of phase, three phases, the first phase being disruption, and then, what's what we saw in the market this quarter, and then you go through a second phase that is a very quick response to trying to get people back into homes and buildings, and then that last phase that you're asking about, that rebuilding effort, that takes years, right, whether you're talking about Houston, the Hurricane Harvey, they are in phase three.

You'll see that Carolina is moving to that phase three in the near term. But to try to estimate that, it would be pretty tough..

Okay. And then you mentioned there were some markets on cement pricing where you're in communication with customers as we speak.

Is that for January or for April?.

So, Adam, I think stepping back, what we look at in the cement market is, you continue to have high utilization rates across many parts of the U.S. You have supply that is relatively constrained for new additions. And as Dave said, any demand improvements continue to push those utilization rates higher.

So we'll certainly communicate to customers whether it's a January or March or April. But as we look forward, there's reasons to be optimistic around cement prices for next year..

And last one for me, Craig, just your thoughts on tax rate going forward..

Yes. So we obviously were a beneficiary of the tax reform about a year ago and our tax rate has been in these low 20s. It might tick up a little bit here in the second half of the year, but we were at 21% for the six months. It could be in that same range, maybe 22%, somewhere in that neighborhood..

Great. Thanks..

Thank you. Our next question comes from Phil Ng of Jefferies. Your line is now open..

Hi. This is actually Collin on for Phil. I guess, just starting with cement business, you called out the wet weather hitting both your Midwestern and your Texas markets for cement.

Can you just give us some color on how demand was tracking in those markets excluding weather, maybe in some other month that didn't have that impact?.

We saw so much rain in most of September. Maybe the best way of answering that question is, when the sun shines there, we're moving a lot of product..

Okay. And then, you talked about the competitive pricing alleviating the cement business as well.

Have you seen any of your competitors announce similar price increases that you were discussing for the calendar year and 2019?.

That would be not appropriate for us to answer that question..

Okay. And I guess, just last question from me. You called out both the pre-buy and wet and the Hurricane Florence impacting your wallboard volumes.

Could you parse out just what demand would have been excluding these headwinds or what the drivers were from each of those?.

I mentioned earlier that we felt we were negatively impacted by the hurricane to the tune of about 20 million foot out of Georgetown. The pre-buy I mentioned on the last call I thought was 10 million to 15 million foot. It was probably a little higher than that, maybe 15 million to 20 million foot.

So, if you added 40 million to our numbers, you'd get an apples-to-apples comparison..

Great. Thank you very much..

Thank you. Our next question comes from Kevin Hocevar of Northcoast Research. Your line is now open..

Hi. Good morning, everybody. You mentioned in the frac sand business to an earlier question about actions you're taking to help with the EBITDA of the business. Wondering if you could give us some color on what those actions are, how long they take to execute.

When should the benefits start showing up in the results and what type of savings you can generate in the business?.

Well, as I mentioned earlier, our plan is to right-size the business and to become cash breakeven the next several quarters and we're doing what it takes to get that done..

Got you. Okay. And obviously, there're moving parts in the wallboard business in terms of some destocking after a pre-buy and with Hurricane Florence maybe impacting September. Wondering if you could just give us some color on how the wallboard volume trended through the quarter and maybe how it's doing here in October..

We have a pretty good backlog in October. I will tell you our shipments in October are at par or a little bit higher than they were last October..

Got you. Okay, great.

And then, last question, just for clarification, on freight, to an earlier question, I think you mentioned that you were seeing flat – does that mean sequentially, you're seeing it flatten out the September quarter to now or was that a year-over-year comment?.

It was sequentially..

Okay, great. All right. Thank you very much..

Thank you. Our next question comes from Josh Wilson of Raymond James. Your line is now open..

Good morning and thanks for taking my questions. You talked about impacts from Hurricane Florence.

Were there any impacts from Michael?.

Very little. We have very little participation in those markets at all. A little bit of wallboard business in the Panhandle, but it's not significant..

Okay.

And then, anything to call out on the cost outlook on the cement side particularly as it relates to energy?.

No. Josh, you're right, the cement business is predominantly an energy-related business. So it's solid fuels and electricity. We see inflationary changes on those annually, but no major changes in the outlook for those energy prices..

Thank you..

Thank you. Ladies and gentlemen, this concludes today's question-and-answer session. I would like to turn the call back over to Dave Powers for any closing remarks..

Thank you for your participation in our call. And we look forward to speaking with you in January..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may now disconnect. Everyone, have a great day..