Q3 2020 Earnings Call
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Good day, everyone and welcome to Eagle materials third quarter fiscal 2020 earnings Conference call. This call is being recorded at this time I would like to turn the call over to Eagles, President and Chief Executive Officer Mr., Michael Hack. What's your act. Please go ahead Sir.
Good morning.
Some people materials conference call for a third fiscal quarter 2020.
He was up today.
Joining me today are great Katzenberg, our Chief Financial Officer, Bob Stewart Executive Vice President strategy corporate development in communications.
There will be a slide presentation, maybe actually what this call to access it. Please go to material Dot com and quick on the way the webcast.
While you're accessing the side.
No. The first slide covers our 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.
Our results this quarter had been consistent with the outlook that we had been hearing with <unk>.
Business conditions remain favorable across our construction markets.
Moving forward, we continue to expect demand growth in the low single digits for the foreseeable future.
On both the heavy side.
The Portland cement and on the lifestyle, specifically in gypsum wallboard.
We also recognize that there are risks to this outlook, but as I've stated before we continue to believe these risks so the upside for calendar 2020.
Overall, it was a solid quarter for Eagle materials.
So they did revenues were up 5% driven by increased <unk> wallboard shipments strong operational execution and improve cement pricing.
Our cement sales volumes were up 7% to a record 1.4 million.
Operating earnings from summit, where a 15% over the same quarter a year ago due to higher sales volumes.
Well worth demand remained healthy and our shipments were up 2%.
However, soft pricing in wallboard was a headwind affecting operating earnings for the segment this quarter.
Do you have price increases.
Across all markets in wallboard and in summit as well.
I'd like to take a moment to update you on major expansion development underway at both the heavy and light thoughts of our businesses.
Starting with the like side.
We announced a significant expansion project at our Republic Airport operations aimed at expanding productive capacity there by roughly 20%.
The goal. This expansion is to meet market demand lower current costs and minimize future cost exposure to wildfire.
Project in healthy installation of proven technology, but it is technology newsy gypsum wallboard paper manufacturing industry.
Republicans World class operation and a talented team there will utilize this technology to further extend our competitive advantages on paper performance.
The project is expected to be complete this spring and we expect to begin ramping up paper production in the second calendar quarter of 2020.
Most of the equipment spend is complete for this project.
On the heavy side, we announced during the quarter that we entered into a definitive agreement to purchase the Kosmos met by.
Seven terminals and related assets from the email you joint venture.
We're on track to close on this transaction in the fourth fiscal quarter and begin enjoying an immediate contribution to cash flow starting next fiscal year.
The transaction has no bearing HSR review.
There are quite excited about the acquisition as is further extends our reach in the U.S. heartland footprint.
Consistent with our growth and plant network strategy.
This acquisition will also provide cement business, but even more capacity to serve U.S. heartlands met markets.
The timing of this transaction cannot at a better time, given our intention is to separate company into heavy and light standalone entities. This summer.
Well, we're on the topic of that separation I want to underscore that we're still on track for a summer launch of the two parts of the company has we have indicated in prior communications.
Also as it relates to the separation, we have been evaluating options for the noncore heavy side assets.
Specifically, including our Frac sand processing and distribution assets.
Well, we continue to work on this process.
I have no announcements to make yet other than to say this quarter, we wrote down the frac sand assets and have continued to operate this business on a near cash flow breakeven base.
Well, we have been evaluating the alternatives.
It is worth noting that excluding this non routine impairment items.
Our adjusted net earnings per share was up 22% over the third fiscal quarter a year ago.
That's all for me as far as introductory remarks, now let me turn it over to Craig you go through the financials for the quarter.
Thank you Michael.
He goes third quarter revenue improved 5% to $350 million, reflecting increased cement sales volume and pricing.
Prude wallboard and paperboard sales volume.
And the results of the small concrete and aggregates acquisition.
Do you acquired business contributed approximately $9 million revenue during the quarter.
Third quarter EPS was a loss of $2.77, which includes the impact of several non routine items during the quarter, most notably in asset impairment charge of $224 million related to the oil and gas profits business.
Other non routine items were business development costs and the effect of an outage linked to the planned expansion for paper mill.
Excluding the impact of these non routine items adjusted EPS was $1.51.
Turning now to segment performance.
Next slide highlights the results were heavy materials sector, which includes our cement and concrete and aggregate segments.
Revenue in the sector increased 18% driven primarily by 7% improvement and submit sales volume improved pricing, both <unk> and concrete.
And the results of the concrete and aggregates acquisition.
Operating earnings increased 19% again, reflecting the improvement in sales volume and price.
Moving to the light material sector on the next slide.
Improve wallboard and paperboard sales volume was offset by an 8% decline in wallboard prices, which led to 4% decrease in life materials revenue.
Quarterly operating earnings and our light materials business declined 7% $48 million, reflecting lower lower net sales prices.
Finally, offset by higher sales going.
In connection with the expansion of our paper mill, we took an extended outage during the quarter to tie into equipment.
The impact of this outage was approximately <unk> million and a half dollars during the quarter.
In the oil and gas proppant sector third quarter revenue was down 48% and we had an operating loss of 7 million.
During the first nine months in fiscal 2020 operating cash flow increased 9% to $321 million in capital spending was down slightly to 84 million.
We completed the acquisition of small concrete and aggregates company during August when the purchase price of approximately 30 million.
It is advance of our pending acquisition of Cosmos led company as well as the company separation, we'll pause the share repurchase program to manage our capital structure.
Finally, our debt to cap ratio was 51% at December 31st 2019.
The $126 million of cash on hand.
Our net debt to EBITDA leverage ratio was approximately 1.8 times at December 31st.
In advance of the Cosmo Summit acquisition, we established a 665 million dollar term loan facility in December providing us with a low cost financing source.
Post acquisition pro forma leverage will be at or slightly below three times with good visibility to de lever post acquisition.
Does most of it assets will increase our annual cement capacity by nearly 25% to more than seven of the half a million tons and provided an immediate contribution to annual cash flow.
As Michael said, we expect the pending acquisition to be completed during our fiscal fourth quarter.
We're very excited about this opportunity to grow our Smith position and to welcome a talented group of new employees Eagle.
Thank you for attending today's call. We now we'll now move to the question answer session.
Catherine.
Thank you to ask a question you'll need to press star one on your telephone to withdraw your question press the pound Keith.
Some yourself to one question and one follow up.
Again that star one to ask a question.
And it looks like our first question is coming from Trey Grooms with Stephens. Your line is open.
Thank you good morning.
So I guess the first one is a on the on [laughter] excuse me the Cosmos acquisition.
So getting a deeper into that geographic market I guess, it's also bringing.
More long haul or maybe more barging into the picture with a seven terminals can you talk about kind of how that plant fits their in your network in the market that it serves you know.
What's the kind of demand and pricing been like in that market and kind of the outlook and then also you know how this plant might compare to others in your network just from a efficiency or profitability standpoint.
Sure trade.
When we looked at it that said, we're very excited it's just crazy I alluded to it getting that that that into our and our topic when we look at it.
A transaction this opportunity you know, we're really looking at our cement plant as a network a we have a you know, Illinois basin that airborne cement and sugar agree that are all in this area and this further enhances it kinda in those together.
<unk>, a you know better service to our customers throughout this area.
As for the plane. So it was a reduction in 2000 too so it's a modern plant.
I would say large capacity plan. So we feel it gets a perfect fit for us to expand their reach and extend our capacity in that market as I said that he not together as one unit in that area.
Okay. Thank you for that Michael.
And then.
Sticking with this Matt.
There have been some more competitive behavior, I guess or maybe more competitive than we would've thought at this stage in the in the cycle.
Within some of your cement markets anyway over the last few years.
You know when it seems like the stage shouldn't be set for pretty good pricing realization a this year given the demand outlook can you talk about any early read that you may have around the that cement price increase specifically.
As we look into into the spring season.
Given that that backdrop, and then kind of tying that in any early comments around the the wallboard pricing for January as well. Thank you.
Yeah sure I wouldn't look at it we're out and all of our markets with US net price increase it's too early to really tell what the market's going into a market will determine that price and it's too early to tell what that's going to be a were fairly a you know we were out everywhere with it wallboard is the same thing we're out.
With a wallboard price increase and and we just don't have enough time, yet to see where that's going to settle out a we'll have more information here over the coming months to see what the market determines that price to be.
Okay, well a will stay tuned I'll pass it on thank you very much.
[music]. Thank you and our next question comes from Brent Thielman with D.A. Davidson. Your line is open.
Great. Thank you good morning, I could you clarify the price increases your out within the market on light and heavy.
Sure brothers, Greg the a under some insight, we or else us generally around $8 a ton a it every one of our mortgages and generally those or for the spring time Bush of April 1st a there's a couple of markets that we were up in January but it's generally a $8 in April.
And then the January of the Wallboard price was a January a price that we were communicating customers.
Got it Okay, and then on wallboard <unk>, maybe you could just talk about the demand environment. It seems like some of that the early signs are looking healthier you guys seem to sort of outperform before we see in the broader market you talk about what you're seeing in some of your regions just from a demand perspective in the wallboard fan.
Yeah, you know when are you know the underlying fundamentals look look good you know a you know we've consistently said you know we see low single digit growth in the foreseeable future and and that's kind of what we're planning around and there's nothing to deter us from planning.
Around those numbers both single digit growth.
Okay. Thank you.
Thank you and our next question comes from Anthony.
Pettinari with Citigroup Your line is open.
Hi, good morning.
Wondering if you could touch a little bit on the demand you're seeing in some of your regional cement markets I think you've talked about it you know strengths in Texas, and Colorado and some weakness in Illinois. Just wondering if you had any kind of additional color on regional markets right.
The entity or big as we've said in the past you know we are seeing improvement and all of our markets and Ah raises the pace of increase might be slightly different but I mean to put it into perspective, you know the state of Texas in calendar 19 was pushing you know 18 19 million tones.
Oh Man you know we continue to see good growth here in the state of Texas that is the enormous number but even across our other states. We're seeing it you're also seeing states, becoming a more creative or more aggressive in the way they finance their infrastructure spending.
You mentioned, Illinois, Illinois. Good example, where are they put some spending budgets in place in order to improve their infrastructure because that doesn't happen overnight. It happens over a period of time, but we're seeing a improvement across all of our workers.
Okay. That's that's helpful. And then just on the paperboard side as you think about costs for 2020, you know last year. We saw this collapse or knows he see prices I guess, they exited the year 2020, $5 a ton kind of historic lows as you think about paperboard costs for the next 12 months, specifically honestly see are you.
We're expecting kind of prices to remain near these levels than any other kind of cost the cost items that you'd call out.
Yes, really oh with regards to Yossi see pricing, we're projecting that you know, it's very cyclical market, but it's been fairly flat over the last you know a with a slightly declining trend over the last.
12 months, and we think that's kind of stabilized and we're protecting a stabilization of that price through there'll be minor variances on a month to month basis, but overall, we're expecting a a fairly flat to slightly rising trend there.
Okay. That's helpful I'll turn it over.
Thank you and our next question comes from Jerry Revich with Goldman Sachs. Your line is open.
Yes, hi, good morning, everyone.
Sure.
I I'm wondering if you could talk about how you're thinking about your heavy side and that work I'm.
Assuming you are the transaction that you pilot earlier closes how do you view or other white space within the U.S. geography, just qualitatively what markets would you view as a as attractive any parameters would be helpful.
Yeah, So ER, so I'm not going to speculate on you know what becomes available or what markets come open, but if you see our historical performance of of where we've invested our money or you can see this one does still a white space in our network and you know that's that's kind of how we look at.
Our network as a whole how we bring those plants together and that's what are we use our strategy when those white spaces. So.
Okay and in the past the you folks have spoken about really focusing on landlocked parts of the network. Obviously, we've got some a barge exposure on on the propose assets can you just talk about how.
Your thought process, there has evolved and the opportunity in terms of why this particular parts are das. It is it's interesting to you folks.
Got it really resolved the again around the location in a in the or how it fits with our other facility. So you know when you look at that asset and how it ties together like you know I said, a little bit earlier with you know we have Illinois and then we have fairborn, we have sugar Creek.
Completes a nice Ah thanks area and the extended reach a while we haven't then you know participating in that market in the past. This does have any extended reach that fills all those markets a with it. So it's it's a it's you know.
How we determined a barge is one mode of transportation, where where we've done you know rail and.
Truck in the past with it and that's just complete that network in that area and ties everything together. So that's why this was a very attractive opportunity for us to participate in.
Okay. Thanks.
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Thank you and our next question is from Adam Thalhimer with Thompson Davis Your line is open.
Hey, Good morning, guys first question on Kosmos is the pricing similar in that region to the rest your wholly owned regions.
Yeah, it'll be pretty close to the Africa.
And then how much volume should we bake and actually we use that 1.7 million dollar figure.
You know similar to the lot of U.S. industry utilization rates are pretty hot we don't own it today, but ah, but certainly utilization rates pretty high that marketplace.
Okay, just getting ready for when it closes.
And then.
On the paperboard side pricing down 11% you said there were some pricing provisions in our long term sales agreements that brought that down.
What's going on there how does that play out.
So like we've said in the past or most of our volumes contractually sold a those contracts out inflators in deflators based on price of inputs.
<unk> as the price and the major one big ULCC recycled fibers and is that prices come down the price we charge a the customers comes down with it. So that's it's been pretty consistent.
Okay, and then paper board volumes would you bake in the full 20% increase in Q2 of 20 or does it just kinda layer in.
Okay, I know I think as Michael alluded to the I've said this will be youre, a ramp over a period of time and Ah you know it'll come up in the March April time frame. It takes a little while the wine out the machine.
And then over the next several months, we'll begin to move it into the market, but yeah, it'll it'll be low it'll ramp over a broader period of time to that.
Okay perfect. Thanks, guys.
Thank you and our next question comes from filling with Jefferies. Your line is open.
Hey, guys and your cement business, assuming demand holds up okay in the fourth quarter. It looks like you're running north of your reported clinker capacity. This year. So is there more you can do to unlock more supply and does this causal acquisition free up some that capacity as well for you.
Yeah. So.
You know if you look I, we always look at it is a 12 month rolling too. So you know we do have Ah. So let's do the times a year that we are able to produce more clean front store that clinker Ah. We also a on the last call talking about some of the additional Brian you got unmatched in some of our facilities where were you.
Well to pay back quicker storage and grind it and so the market. So we still.
Feel comfortable with that side of running these plants full year and storing that clinker bird of is your times a year to meet some of the increased demand.
Got it when we think about calendar 2020, you know using your outlook on low single digit growth does it feel like you have no supply to meet that demand and are you kind of running to the situation you run full out in a imagine you're pretty close to with that backdrop, what kind of conversations are you having fewer customers on pricing in arty.
Broaching those conversations only differently just wanting to make sure they have supply secure.
Yeah. So you know we've been able to satisfy our customers' needs. A we think we're gonna be able satisfy those needs. A you know a through this next calendar year also we as Craig stated you know we were out with a.
He dollar number across that market and we're having those conversations currently with the customers to see where that settles out.
So.
Yeah.
Got it and I guess switching gears to wallboard, we'd look at your volumes pretty solid any choppy housing environment <unk> lagged the region Bradley curious whats driving that and if you saw any increased competition in the quarter with U.S.P. slipping a little debt.
Yes, I would tell you, we're very active wear or markets are performing or regions or as they have done recently, though for the national average and we're excited and what the latest print on home building was pretty positive.
Within calendar 2020 will be another good year for volume.
And just one last one for me on Wallboard did you see any pre buying the court I know that gets kinda noisy and how should we think about that indeed in the upcoming quarter normalizing all that stuff out. Thanks.
Yeah, Phil I don't see if there was a significant pre buy activity and as you said, it's a little noise your as as demand is improving.
Prebuy was easier to spot for five years ago with its a little less meaningful today than what it was you know, we just see homebuilding starting to improve.
Thanks, I appreciate Phil.
Thank you and our next question comes from Josh Wilson with Raymond James Your line is open.
Good morning, Thanks for taking my questions.
Thanks, Josh.
First off just a housekeeping question can you give us a sense of where are your wallboard price was exiting the quarter. So we know where to start the January.
It was pretty consistent with the quarterly average.
Okay, and what was the revenue impact of the outage and the paperboard plant.
Isn't as much of a revenue impact as it is a cost efficiency impact.
So then in terms of the margin or benefit year on year adjusting that out what were the drivers there.
Locos easy prices as we've been saying are very pretty low even and energy prices remain low but I was he is a major driver there on the margin.
Got it and and just to re ask the prior question. Then you feel like your market share is okay in wallboard and that there was nothing or timing related or something like that.
Our merger hasn't changed more than 40 basis points in five years.
Okay.
And then last one from me your inventory days and payable days were down a fair amount year on year was that timing as well or is there a shift or some activity there.
I think as Michael said you know this bedside, we've made some investments on grinding a this allowed us to eat through some of the claim for inventory and Ah you were always managing working capital to the best possibilities and then to maximize cash flow, but at a lot of it is a seasonal timing as well.
Got it thanks.
Thank you and our next question comes from Paul Roger with BNP Paribas. Your line is open.
Hi, This is Robert Watson for pool, Roger I wanted to stockpile skiing or can you comment on the outlook for cost inflation and sort of remind us of your hedging policies, especially for who gas. Thank you.
Yeah, we sit here with the majority of our cost inputs are no significant inflation I think about things like those you see natural gas or though was born the whiteside you on the heavy side. It is energy oriented with electricity and fuels and and you're seeing some inflationary pressures.
But but nothing unusual there.
Across the business platform in terms of hedging yeah with gas you are well below $2 now, we're making a we are putting some hedges in place for certainly the next 12 months and and looking out you know to Oh to fix those costs into these very low levels.
Great. Thank you and just a just one follow up obviously you you'll be closing the and the costs must still short. The are you would you would you look at making more investments.
Into cement, but she despite the upcoming separation is not something that you would look huh.
You know.
Hi.
No right now or a ball if that you know we are.
Always look at any opportunities that come available you know I don't want to really discussed on a you know if we'd be open to investing more into the thing you know what we're concentrating on right now it's as you know a the separation of these two companies that will happen in the summer summer months. So that's where that management team is focused right now.
Fair enough. Thank you.
Thank you. Our next question comes from age ran personnel with JP Morgan Your line is open.
Thank you and thank you for taking my question do very specific question one on on some in trade cost you stated in prior quarter that no cost were stabilizing could you tell us how the close was this water in the second question isn't the a separation cost a that he was the new lives and 3 million notice.
In the previous quarter, what was the amount or in this quarter. Thank you.
Yeah I'll answer your first question or your last question first so we were $3.4 million as we highlighted in the press release for got what I'll call business development cost that certainly included the separation. It also included a fees around and costs associated with Kosmos acquisitions.
Oh that were that we incurred or just prior to the announcement.
And then in terms of cement freight and I'd say freight in general.
Yeah.
Sure. It we're not seeing major changes there are the trend has been pretty pretty flat benign for the last 12 months and you know again, there's there's always a little bit of cost pressure, there, but but nothing like what we saw two years ago.
Thank you.
Thank you and we have a follow up from.
Brent Thielman with D.A. Davidson your line is open.
Hey, Thanks, just one quick one on the Kosmos transaction you and you had originally lease you guys talked about this 120 million in tax benefits any more color to that and kind of how you would.
We could think about you recognizing that once this is done.
Yes, it but you know that's that's a great question is very important part of the investment so with tax reform, we are able to immediately expensed sorted adopt a significant amount of the purchase price, we're going through that process right now, but using the fairborn.
Allocation as they as a barometer there'll be a pretty significant depreciation deduction here is your one as a REIT upon closing of the transaction.
That will very likely move us into in a well positioned from a tax perspective or and a that we'll be able to be carried for with both of the companies or even post separation. So we'll be in the enviable position of of minimal taxes being paid so again all about free cash.
Hello, and notably improved as a result, this but that that's where that under 20 million comes from is that immediate production or for a a big chunk of the purchase price.
Okay, that's great I actually one more quick one on the paper now do you expect any more outages or downtime here is this expansion gets wrapped up that that might have some impact on the cost basis.
Yes that will we will as Mike said, we'll wrap it up here the spring so very likely in March will be a pretty extended outage, even more so than this past quarter and we'll certainly quantify that for everybody on the call, but that will that will impact our march quarter to tie into new total equipment package.
Yes, Okay alright, thank you.
Thank you and I'm showing no further questions at this time I'd like to turn the call back to Mr., Michael Heck for closing remarks.
Hi, Thank you everybody for attending the call today, and we'll look forward to speaking with you again in the summer.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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