Q2 2020 Earnings Call

Everyone and welcome to Eagle materials second quarter fiscal 2020 earnings conference call.

This call is being recorded.

At this time, we'd like to turn the call over to the Eagles, President and Chief Executive Officer, Mr., Michael Huh.

Mr. <unk>. Please go ahead Sir.

Thank you.

Good morning, welcome to Eagle materials Conference call.

Quarter 2020, we're glad you couldn't be with us today.

Joining me today, a breakout our chief Financial Officer, Bob Stewart Executive Vice President strategy corporate development and communications.

Yes.

She made in connection with this call to access it. Please go to W. W. W Eagle materials and click on the link to the webcast.

While you're accessing the slides. Please note that the first part which are 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.

Further information please refer to this disclosure, which is also included at the end of the press release.

Let me begin this morning.

You are announced plans to separate the heavy and light side for businesses into two independent publicly traded companies.

The separation process is on track is still expected to be completed the first half calendar 2020.

Our important developments that occur between now and then you can be sure that we will brief you in a timely manner.

After the separation the company's Heartland Smith system operates as a distinct pure play.

This will be the largest U.S. only producer <unk> excellent teacher prospects.

Assets under productive capacity give this business substantial scale to stand alone independently.

Isn't that also own Apple ample raw material reserves that will supply its operations over the long term.

You go like materials business comprised of gypsum wallboard and recycled paperboard.

The long track record of superior margin performance.

These financial results are driven by sustainable low cost producer positions in the U.S. sunbelt markets with long lived raw material reserves.

Ted uniquely distinguished itself through industry business cycles, as achieved industry, leading levels of customer satisfaction.

In short as per our previously announced separation plan, we're creating two independent benchmark businesses. This is that new and existing investors will be able to value based on each business is distinct operational and financial results and future prospects.

Well, so staying in our press release that we continue to evaluate any additional opportunities to create shareholder value that may arise prior to the completion of the separation.

We remain fully committed to that intention.

To underscore those commitments about shareholder value creation is worth noting that during the first half of our fiscal year, we repurchased nearly 3.6 million shares or 8% of our shares outstanding every turned over 320 million to our shareholders right combination of share repurchases and dividends.

Illustrating our confidence in these businesses and their prospects.

We made these repurchases without jeopardizing, our financial flexibility to pursue any attractive growth or improvement opportunities that may emerge.

Oh prepared to comment on today regarding the separation and share repurchases, nor will we be able to answer questions about these matters at the end of the calls today.

Now, let me turn it to our business results for the quarter.

It was a record quarter for Eagle in terms of both our top and bottom line and the outlook for the rest of the year remains positive.

First the heavy side.

And then sales volumes for the quarter were a record 1.8 million tons.

14% over the prior year in earnings were up 16%.

We are operating at high levels of capacity utilization in fanned out what remains positive we are especially encouraged by U.S.

Recent U.S. state level approvals for infrastructure spending plan.

Across our U.S. heartland footprint, which should further attention the supply over the years ago.

Notably these states, including Illinois, and most recently Wyoming.

Just last quarter, we acquired a small concrete and aggregates operation complementary to our Smith footprint, while in general we tend not to favor downstream integration. This was a unique opportunity for us we will always look favorably at these sites acquisition opportunities in geographies, where our primary summit operations are located and our criteria.

We are for growth investment, both strategic and financial can be met.

We have a balanced strategy and summit on growth and improvement.

I would add much for our strategic improvement emphasis actually supports our growth intentions.

We have a track record of consistent reinvestment in our business through cycles to lower cost create more value for customers and realize the full earnings potential of our assets.

Three of the specific ways, we do this our by investing to optimize the match of our clinker capacity with our grinding capacity.

During that we have terminal reached to serve customers on a timely basis with volumes they need.

And having the cement storage capacity to ensure that our product is available when seasonal demand is greatest.

Our recent investments in a vertical mill in sugar free expansion of our distribution network in Altoona, Iowa, and the completion of our rail loading project in Illinois, our but if you are the most recent examples.

All of these investments lead to increased sales volume and better customer support.

Identifying and pursuing these improvement opportunities opportunities at lower cost increase saleable volumes and provide better better customer support and importantly doing all of these safely are the top priorities for me personally.

We are well recognized for a strong operational performance position, but I want to assure you. We still have a lot of what runway in front of us to achieve the earnings improvement and find the prospects here very exciting.

Turning to the like side.

Results in the gypsum wallboard for more mixed volume was up 8% in the quarter to about 680 million square feet, but net sales prices declined 10%.

Well I have to reflect continued strength in the end use markets, notably the housing in repair and remodeling.

You see this business still on trend towards low single digit growth that we have been discussing recognizing that pre buy activity hurricanes.

And the like sell them make growth a straight line.

Our price performance simply reflects pressures in the commodity market environment.

That pricing has been fairly flat since June we remain close to 10% market share of the U.S. wallboard market today.

Residential construction drives wallboard demand and with fundamentals here clearly on the upswing, we look forward to coming this coming year with injury free of optimism.

We're also currently enjoying an operating cost tailwind in wallboard due to the lower recycled fiber costs for our paperboard that we expect to remain with us for the foreseeable future.

China, that's it from the U.S. recycled paper market to the development that supports the near term outlook for stabilized those easy comps.

In our heavy like business separation announcement, we had indicated that we're also exploring strategic alternatives for sand business and that process is underway.

In the meantime, we're making adjustments that we'll continue to enable us to operate at roughly cash cost neutrality during periods like this where the business conditions are challenged and while we explore strategic alternatives.

That's all for me as far the introductory remarks now let me turn it over to Craig to go through the financials for the port.

Thank you Michael.

Eagle second quarter revenue was a record $415 billion, an increased 9% from the prior year, reflecting increased cement sales volume and pricing.

Prove wallboard and paperboard sales volume.

And the results of recent recent acquisition and the aggregates in concrete segment.

The acquired business contributed approximately $8 million revenue during the quarter.

Second quarter earnings per share was also a record $1.72.

Reflecting improved earnings from heavy materials business, and a 12% reduction in our diluted shares outstanding.

The current share count is equals lower share count on record.

Also included in the quarterly corporate GE in a cost is approximately $2.7 billion of costs related to the separation process.

Turning out of the segment performance.

This next slide highlights the results of our every materials sector, which includes our cement concrete and aggregates segments.

Revenue in the sector increased 22% driven primarily by 14% improvement at summit sales volume improved pricing in both cement and concrete.

And the results of the recent acquisition.

Operating earnings increased 20% again, reflecting the improvement in sales volume and pricing.

Moving to like material sector on the next slide.

Improved wallboard and paperboard sales volume was offset by 10% decline in wallboard prices, which kept like materials revenue nearly flat with prior year.

Quarterly operating earnings in our life materials business declined 11% of $49 million.

Reflecting lower net sales prices, partially offset by higher sales volume.

Recycled paper cost continued their downward trend year over year.

Republican.

Margins were the highest in the last three and a half years.

In the oil and gas profit sector second quarter revenue was down 41% and we had an operating loss of $5 million.

During the second quarter operating cash flow increased 44% $234 million.

Capital spending was down slightly to 38 million.

As we've noted earlier, we completed the acquisition of a small aggregates in concrete company during August with the purchase price of approximately 31 million.

Also during the quarter, we returned nearly $120 million to shareholders through a combination of share repurchases and dividends.

This represented a 167% of our net earnings during the quarter.

Finally on this last slide our debt to cap ratio was 49% at September Thirtyth.

Well the Eagles leverage has increased it continues to be at the lower end of the range for our industry, we had $54 million of cash on hand at September Thirtyth.

And we have ample operating cash flow and flexibility to meet investment opportunities as they arise.

Thank you for attending today's call, we will now move to the question answer session.

[noise].

Your first question comes from the line of Mr. Trade groups. Your line is open.

Thank you thanks for taking my questions and congrats on a great quarter.

So the cement business summit volume very strong, Texas, clearly strong and I think this is some of the best organic volume growth, we've seen on the wholly own side and in quite some time.

And.

I'm sure there was some catch up there from bad weather earlier in the year, but can you talk about you know how the demand shook out you know kind of within your plant network and maybe your outlook for the different markets you're in there I know there is some concern that some of the Midwest states might be.

Slowing a little bit but these results certainly wouldn't suggest that so any color you could give us a on that Mike will be Greg.

Yes, no problem trade yeah, when we look across the network you know we've had good growth in all of our markets or a you know we were a little more accounts do you know where were heavy into the oil and gas industry, which is primarily you know our Oklahoma based but other than that trade.

Every every one of our markets have performed better we do see some infrastructure builds coming into play that should help us and give us some uplift here in some of the state there most challenged which which is Illinois and also with Wyoming. So we have a positive outlook on on the markets.

Okay, great. Thanks for that.

And then.

Oh the margins on the cement business you know made some some good headway.

But still down a little bit by Mount Math was right can you can you talk about some of the cost there and maybe what you're seeing on that front and then you know how we should be thinking about.

Submit margins as we as we look forward.

Yeah trace so.

Encourage you to look at EBITDA margins, we as Michael is laid out last couple of calls Weve made some investments over the last year and a half so depreciation is running higher that that's a big contributor and certainly but even at that level.

The margins were down 60, or 70 basis points a lot of that is attributed to some fixed costs that we had at some of our Smith plans and then we did still see some freight increases we talked about that last quarter, I'm, especially the Midwest, where a feel they were recovering from some of the flooding but.

But those are really the two primary contributors there okay in a in the freight.

Others that have you know.

Had to deal with that a as the years gone on it seems like that's kinda lingering somewhat it's is that expected to eat.

As we get a kind of going into this this quarter here the December quarter.

Yes, you will start to see that we saw that improve a little bit as we went through the summer and into the early fall shipping lanes are starting to open so yeah that should be behind virtually behind us.

Okay Perfect Man and then last one for me.

So Michael you mentioned, you know wallboard volume kinda on track for low single digits courses quarterly there's been some pretty big swings. This year, but you know this year, we had in COVID-19.

You know clearly a pause in the housing market.

You know with starts but it looks like that's.

And proving the homebuilder commentaries seems very good the outlook for start seems better. So how are you thinking about the wallboard demand you know looking out a little bit further maybe into calendar 20 with this backdrop of of you know Reds a clear.

Really expected to.

Improved.

That trade, we see kind of the same trend that we've been talking about for for a while now that we see you know steady steady growth in the low single digits area. A you know a like you said there was a pause midyear with it but a you know it seems to get some more momentum now and if we factor out some of the.

A onetime events with hurricanes pre buys and everything we've been consistently in that low single digits growth and that's what we're using going forward.

Okay Fair enough I'll pass it on thanks a lot.

Your next question comes from the other enough Jerry.

Thank you your line is an open.

Hi, Good morning. This is nothing going on for Joe Your knowledge or just sort of recent just a question on the scene in shipments actually if we apply normal seasonality Siemens shipments for the December quarter.

That would imply easily yield growth of about nine bus and is that the cadence we should be thinking about or was demand would full would put him in a given the Siemens shipments grew 14% sequentially.

Our fiscal Twoq.

Yeah, I would encourage you to look at over the last almost five or six quarters, we've seen a tremendous amount of wet weather across almost every one of our markets and as we've been talking about what ends up happening in those situations as projects don't.

Cancelled they just get delayed that gets pushed out and I think you're seeing that in the this market right now where those projects for its been dry right. We enjoy the dry summer a in into the early fall and that's a reflection, we don't necessarily want to.

Given guidance on the quarter to quarter shipments in some is but I think as we've been saying we feel good about the underlying demand fundamentals of our business, we're seeing encouraging signs at the state level or infrastructure spending and at this point, we continue to see frozen Hersman business.

Okay. Thank you.

Your next question comes from the line feed them sell him Airlines Jonathan.

Hey, Good morning, guys, Craig I, just get you to on expand on that a little bit because you talked about.

In Wallboard, you said, it's kind of low single digit growth environment, What's your best guess for.

So Matt if you normalize weather.

Yeah. So look I would point you to the PPA those type of forecast cement demand over a long period of time grows low single digits. That's that's what we have the underlying businesses that rolling out for the last couple of years.

But that's been difficult for external people to see right. We've seen whether it was hurricane Harvey in Houston, a year ago Midwest flooding of last in the spring time, it's been massed by a significant weather issues and you finally seen a quarter where.

Whether it's clear the sudden with shining and ER and we were able to ship.

Pretty well so.

You know again low single digits in cement is what we typically see and against the backdrop of already high utilization rates.

And then in the past when you've had situations like this that catch up period, I mean, just don't get caught up in a quarter or does take a couple of quarters to flow through.

No. It doesn't it takes a little while the there so it's been wet for so long, but it does these jobs to drag out and Ah you eventually pick them up.

Okay, and one question on cement pricing last quarter, you talked about some competition.

I believe in a couple in markets that improve.

In Q2.

Yeah, I'd say, it's always competitive market, but Ah we had price increases that went into effect in April across the majority of our markets you've seen the pricing price improvement that we saw this quarter is up about 2% I'd say that's been pretty consistent.

And then last one from me can you just give.

Some additional color on this acquisition, where it was it and what are the annual revenues you expect.

Yes, so I'll update you on that a little bit you know what do we look at acquisitions. You know typically we don't do a bunch of downstream acquisitions. When we look at what's a favorable outcome for us well, we look at markets that a you know we have a cement and in those those markets we look at markets.

I'll have or.

Not a broad based you know not a 30 different operations are not for that our competitors in that market and this one met our financial and strategic goals I intend to west is actually all support to our.

Our Nevada operation with it and it's in the Reno market area.

You know.

We haven't been a big buyer of ready mix, and we won't be big Barb ready mix unless it meets our strategic and operational goals that we see that adds value to our to our plant network.

Kind of six weeks of that you had it in Q2, maybe it's a 60 70 million dollar business, it's not that size, it's a seasonal business in that marketplace and so its segment is significantly less than that but it's relatively small but certainly in important addition to our asset.

Okay. Thanks for the time.

[laughter].

Your next question comes from the line.

Hey, guys I'm glad to see the strength in some mad and you obviously sounds pretty optimistic about the outlook can you give us any early read on how backlogs are shaping up for summit for calendar 2020.

Good improvement and as Craig talking about you know with these backlog of projects as long as the weather hold out we see strong fundamentals in the market not only from our traditional end market users, but also from some of the infrastructure projects that we were optimistic that should come through.

With the announcements recently in some of the states we participate in so it should be a solid demand picture going forward.

Would you be able to help quantify that or at least directionally, how stacking up this year versus unlike last year at this time.

You know like like ER, Craig was saying you know, we see low single digits growth and then the only variable in that will be what backlogs move into that projects that are are held up that move into the current picture, but you know our model. It's always been in a low single digit growth for the.

Yes.

All of our price increases you know ER, we evaluate all the markets we participate in and we will have those discussions with our customers and determined by market by market basis of what those increases will be a you know we have not announced anything at this time.

You know our customers will be the first to know on what those prices increases will be.

Okay. Thanks, a lot I appreciate it.

Your next question comes from the line of Josh Wolfson. Your line is open.

Good morning, Thanks for taking my questions and congrats on the quarter.

Yes, the outlook on pricing the same is kinda witness a Matt we're evaluating a what that price increase will be and we will again, we will that our customers know they will be the first to know we have not announced anything at this time, yet we know some of our.

Our competitors have announced but we were independently looking at this and seeing what and our customers will be the first no. So.

Okay.

And then regarding the the acquisition can you give us a sense of so how its margins compare with the lake rest of the legacy business and weather had any impact on the margin or pricing in the quarter.

Yes, so it's been a very attractive business force and it has a margin profile better than than our other businesses.

And pricing wise it is a slightly higher priced markets at our average.

How that's progressing or any sense of rough timing of when you might have more of an uptick.

Yes, So Josh you know as we've always said we are constantly looking at opportunities and weighing those in terms of the financial value that we are.

Paying for and the return on investments and.

Without getting into the details on that you know that as a continuous process here and we're constantly looking those opportunities and then as you've seen from us.

Other part of that capital allocation program is the share repurchase program and it's a balance between a desire to continue to grow the business, but at a good values with good returns and profitable growth. If those returns as those investment opportunities don't meet our return criteria. We are happy to return cash to shareholders.

We've done.

Got it good luck with an export.

Thank you. Your next question comes from the line Keith You Your line Jonathan.

Oh, Thank you on the share count.

So what was can you give us roughly the number.

Yes, so it would have we were buying shares.

Yeah, It's certainly a a discussion topic I'll tell you there is always lots of factors as to how we go about the share repurchase program, whether that is investment opportunities and weighing those are certainly looking at the financial the capital structure of the company.

Making sure that the balance sheet is in good health, which which it absolutely is so there are lot of factors that affect or the pace at which we repurchased shares a we're we're very comfortable with where we are leverage is somewhere around two times and then that's a very manageable number for Regal and.

So it's a lot of factors such as an individual one.

Okay final question on wallboard pricing the price you saw in the quarter was that roughly equivalent.

To what you exited the prior quarter out on a sequential basis.

Yes, so as we said back in the last call in July prices have really been flat since June and that was consistent throughout this quarter.

Okay. Thank you very much.

Thank you. Your next question comes from the line up Zane Perini. Your line is open.

Right.

So are the province losses, this quarter effectively what you'd expect thing going forward and are there any opportunities for improvement even if the market.

I am it doesn't really change.

Yeah, I think look we're very proud of that management team and the way they that were effectively able to keep the set of cash flow breakeven level business.

In the environment that they're operating within and so on an EBITDA basis, and there was actually in inventory impairment in that business during the quarter, but absent that it was effectively cash flow breakeven quarter I'm in a in a very tough environment.

Your next question comes from the line Mr., Paul Roger and realize that hoping.

[noise].

Since then congratulations on Q3 I'm not just following up on some of the questions on on the outlook I mean, clearly you sound quite confident so do you all competitors and yet when we look at some of the theater data like for example, the Altbach contracts awards. They think quite weak this year, how do you reconcile you allow.

Comments would would not type of data on how you concerned about not at all.

Yeah, I think we would suggest that a as you look at the U.S. economy, you've got to sustain job growth you've got low interest rate environment. A those are generally very good factors for construction activity in the U.S. as as we pointed out a little bit earlier, we actually also have states.

They see good volumes ahead, as well and so and it's our markets you know we're not across the U.S., but in our markets. We are we're seeing.

Good good demand levels.

I'm just just a fundamental question on the M&A side I feel competitors have also tones file the pipeline improving recently.

Something you've seen in could you be interested maybe doing something a little bit because in the deal you've announced today all will hold up pretty much after they have to wait until this destination next year.

There's always a pipeline of opportunities and we're constantly weighing those opportunities against our return criteria and then that's about where we would like.

[laughter] some slump.

Thank you. Your next question comes from the line it's Kevin.

Well see var. Your line is open.

Can you talk about the competitive environment in wallboard it seemed like in the in the June quarter. There was a pretty intense pricing competition that seem to just completely go away.

Here and this really at the end of June . So can you kind of talk about what changed there and why do you think that that was able to stabilize was just a function of the.

Underlying indicators housing getting better volumes were good in the quarter just curious your thoughts there.

Yeah, Kevin I guess I would you just see it's always competitive marketplace.

That doesn't change, but certainly.

Over the summer as interest rates, though you can look at sale housing sale trends housing start trends those things started to improve.

And right that's the other day, what the impacts the business as the demand band improving as a good thing.

Okay, and then the $2.7 million of costs that you incurred this quarter related to the the separation do you have an expectation for how much of that'll continue.

Going forward.

Our reps going through the FCC reporting process, so you're incurring costs and they'll they'll fluctuate a little bit as you go forward here, but certainly quantify that for you.

Okay, great. Thank you very much.

We don't have any questions just fine.

Yes, I just want to say thank you for participating in today's conference call and webcast and we look forward to talk into early next year.

Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect have a crazy.

Okay.