Q1 2020 Earnings Call
Good day, everyone and welcome to Eagle materials first quarter and fiscal 2020 earnings conference call.
This call is being recorded.
At this time I would like to turn the call over to Eagle's, President and Chief Executive Officer Mr. Michael.
Mr. Haq. Please go ahead Sir.
Thank you.
Good afternoon, welcome to Eagle materials conference call for our first fiscal quarter or 2020, we're glad you could be with us today.
Joining me today are Craig Kesler, our Chief Financial Officer, and Bob Stewart Executive Vice President strategy corporate development and communications.
There will be a slide presentation made in connection with this call to access. It. Please go to www dot Eagle materials Dot 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 risks and uncertainties and 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.
Let me begin by addressing the news at the top of mind with many of our shareholders this quarter, namely our announced plans to separate the heavy and light sides of our business into two independent publicly traded companies.
This separation is expected to be complete in the first half of calendar 2020.
We feel that both businesses are well positioned for future growth our best in class in their respective industries will be resilient during tough times through their low cost producer position and have achieved sufficient size to stand on their own.
Separation of these two businesses will give each business the opportunity to.
Focus on its distinct strategic priorities priority that best position the business for profitability and growth.
Implement a capital structure that is tailored to the needs of the business.
Okay resources and deploying capital in a manner consistent with the strategic priorities.
And finally, it will allow new and existing investors to value that you companies based on their pure play operational and financial results.
After the separation the company's heavy material U.S. only heartland cement plant system will operate as a distinct pure play.
The business will possess excellent future prospects as the largest stress on cement producer owning its raw material reserves that will supply its operations over the long term.
Tivo Lite materials business comprised of gypsum wallboard and recycled paper Board has a long track record of superior margin performance.
These financial results are driven by sustainable low cost producer positions in U.S. sunbelt markets and its long lived raw material reserves.
This business has uniquely distinguished itself financially through the industry business cycles, as well as achieving industry leading levels of customer satisfaction.
As we announced creating two distinct benchmark businesses is the path we are pursuing.
I think our announcements and actions show our commitment to shareholder value creation.
On a related note. It's also worth commenting that we repurchased nearly $200 million of our shares during the quarter illustrating our confidence in these businesses and their prospects.
We didnt as repurchase without jeopardizing, our financial flexibility.
That is all prepared to comment on today regarding the separation and share repurchases. We will not answer further questions at the end of the call today about our separation process or progress.
Now, let me turn to our business results for the quarter.
It was a mixed quarter in a number of respects, while we're approaching high levels of capacity utilization in both major businesses. This quarter only translated into modest price improvement and cement and in fact, some price slippage in wallboard.
This month, we announced a price increase in wallboard effective in early August as backlogs are good but the marketplace will determine our level of success and where we report on that in the next earnings call.
Heavy materials revenues were up 3%.
Due to progression on both price and volume.
Operating earnings were up 5% due to increased freight costs, and unusually wet weather, which hampered thick and contributions from our concrete and aggregates in particular.
We have discussed on many occasions, how the cement business and is indeed very regional.
This was never more clearly exemplified in this quarter.
I was quite pleased with the price increases in our cement business attained in each of our regions, except to and lack of progress in those two regions affected the overall price progression that we posted.
In both cases, it was an illustration of having to meet competitive situations.
Freight and logistics of course also played a role.
Light material revenues were up 10% and operating earnings were down 21% on lower volumes and sales prices.
We still see low single digit volume growth for the full fiscal year, recognizing the mix start to this fiscal year.
I might add that we are pleased with our wallboard volumes in July which have remained strong.
Finally, I'd point out that although our oil and gas profit segment has been under pressure.
We remain cash flow positive this quarter and testament to the talented management team, making quick decisions in response to market developments.
As part of our heavy light business separation announcement, we have indicated that we are exploring strategic alternatives for this segment and that process is underway.
Now, let me turn it over to Craig to go through the financial specifics for the quarter.
Thank you Michael.
First quarter revenue was $371 million declined 6% from the prior year, reflecting lower wallboard sales volume and sales prices, partially offset by improved cement sales volumes sales prices.
First quarter earnings per share were 94 cents.
As we highlighted in the press release, the first quarter included 19 cents of non routine expenses, primarily associated with the planned separation of our heavy and light materials businesses.
Turning now to the segment performance.
This next slide highlights the results of our heavy materials sector, which includes our summit concrete and aggregates segments.
Revenue in the sector increased 3% driven primarily by a 3% improvement in sales volume.
Improved pricing in both cement and concrete.
Operating earnings declined, 5%, reflecting higher fixed and freight costs, coupled with wet weather throughout the quarter, which limited our concrete and aggregate sales volume.
Moving to the light materials sector on the next slide.
Local wallboard sales volumes and prices drove a 10% decline in light materials revenue.
Quarterly operating earnings in our wallboard and paperboard business declined 41% 48 million.
Reflecting lower wallboard sales volume and net sales prices, partially offset by lower recycled fiber costs.
In the oil and gas profit sector revenue was down 45% and we had an operating loss of $4 million.
So our sales volume improved 11%, reflecting the results of our new facility in Illinois.
During the quarter operating cash flow declined to $51 billion consistent with the net earnings decline in capital spending declined to $22 million.
As Michael mentioned, we returned over $200 million to shareholders through a combination of share repurchases and dividends during the quarter.
And finally at June Thirtyth 2019, our debt our debt to cap ratio was 46%.
Thank you for attending today's call, we will now move to the question and answer session Andrew.
Thank you.
Ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
And our first question comes from the line of Trey Grooms with Stephens, Inc. Your line is now open.
Hey, good afternoon.
I guess first one is on.
On wallboard.
So.
The pricing down some they are 6% year over year and I know last quarter, you guys mentioned that.
You had ended the quarter at.
A lower level than kind of the average on the wallboard pricing.
For for the last quarter, you just reported.
If you.
If you look at it. This this most recent quarter.
How did that trend.
You know as we were kind of going through the quarter.
And maybe how did wallboard pricing and.
You know this June quarter versus the average.
Yes, so I get your question trace so yet we averaged will serve $51. We were a couple of dollars below that in the month of June but reality, we have not seen a whole lot of price movement over the last month or two.
Seems to have stabilized here.
Okay.
Good to hear and then secondly.
Kind of along those lines.
With the with the price increase that you guys have announced for early August are you guys seeing any pre buy activity at all as you kind of moved through the through the July timeframe or maybe even late June .
No trade, we haven't seen much of a pickup that we contribute the pre buy activity generally we are seeing in the market is.
Getting back to normal and the volumes are move and we're happy with our July volumes, but we don't think it's tied to the pre buy.
Okay.
Fair enough and I'm guessing it out with.
The tougher comps from the year ago period, the pre buy timing last year.
And the just the weather is starting to maybe cooperate a little bit better is it fair to say that we're kind of tracking a little bit closer to maybe the.
It was low single digits, you guys had pointed to for the full year.
Yeah, Trey as we factor out the pre buy from the prior year keep in mind. The prior year volumes were up eight or 9% and so that was the unusual when you factor that out volumes as we kind of said orders kind of grow in this low to mid single digit type of improvement.
And we seem to be on that front.
Okay.
Thanks for that and then and then lastly for me is you mentioned.
A competitive situation you know and some man it sounds like Thats kind of continued.
Thank you mentioned that last year as well.
You guys put up 1%.
Ex the freight I guess it was maybe closer to two.
Can you give us any more color I mean, what.
I understand weather and things like that can happen, but.
The underlying demand seems like it's it's strong enough to support some pretty.
Healthy price actions here with things tightening up.
Can you give us an idea of what maybe your opinion on what's going on with the competitive situation is that something that.
Weather may have played a role in and.
Maybe we could see some little bit better behavior may be a little later on.
Yes, Trey you know how to how I look at those.
The comments.
No I'm happy overall, with where our pricing has been going and most of our regions.
This quarter like I said was really specific to a couple different locations. The one all I'll kind of just give you the highlights I'm not going to go into the specific competitive situation, but you know one of the areas that we tend to struggle a little bit more in as you know the Illinois market and you know and we see that is weaker. However, you know we also see some positives coming with that said they implement the gas tax.
We see them starting to do some more investment in their infrastructure and so we do think that that market is a struggling market, but there is some light at the end of the tunnel on that market too that there will be some more increased demand.
Okay, well, thanks for that color and I will turn it over thanks, a lot and good luck.
Thanks drew.
Thank you.
And our next question comes from the line of Brent Thielman with D.A. Davidson. Your line is now open.
Great. Thanks, good afternoon.
Could you guys clarify the price increase for wallboard you announced for August .
Yes, so our price increase was effective August threerd, and we did not give a specific amount of those we're going to be communicated directly to customers.
Okay.
Okay, and then Craig that the overhang of the higher freight costs into.
The second fiscal quarter could we see that as significant as what you saw in the first quarter should we see that and alleviate maybe just some fuel there.
You know Brett its good question.
And we're not the only ones dealing with is the flooding that happened in the Midwest right. It started impact multiple modes of transportation you had barges unable to move because of higher.
River levels.
Bridges washed out the railroads have gotten back up so.
We weren't you know that which then you end up going through alternative modes of transportation, but are more expensive to get into some of the some of the market. So.
We'd like to believe that those will start to improve as we head into the summer and the flooding subsides.
But.
But we haven't seen that yet and so we're.
The flooding is out of the rivers are open more but some of the rail congestion has continued and we have yet to see that improve.
Okay, Okay, and I guess just back on wallboard I.
You guys, obviously aren't across the country, but I'm curious if you could just talk about.
What you're seeing from demand perspective, I'm, a little surprised to see that.
Price slippage just given it sounds like things are pretty healthy year in your end markets could could you just talk about what you've seen in those regions.
Yeah no problem. So you know whenever we have.
This kind of environment with the choppy housing.
Start you know we tend to get price pressure on pricing.
We do see interest rates being low and we're hoping to see an improvement in that area with it but with the housing starts where they are and being stagnant to slightly improving with it that's when we get pricing pressure and that's what we're seeing today across across each of our areas with it. The demand side is is it's been flat to.
Slightly improving as we talked closed single digits.
And just.
Just because housing starts more as what we attribute the pricing pressure too.
Okay.
Last one probably for Craig.
Can we still think about kind of a corporate DNA number in that.
$10 million range I guess without these.
Non routine items going forward.
Yes that would be the that will be the range.
Okay, great. Thanks, guys.
Thank you.
And our next question comes from the line of Scotch rare with Citi. Your line is now open.
Hi, good afternoon gentlemen.
First real quick on wallboard, the pricing is there any regional or product mix or anything we should be considering in that number.
No that did have a significant impact on those numbers got it. Okay. So if I look at the wallboard margins. It looks like they might have dipped just below 30%. We've only seen that I think one other time in the last five years or so obviously, losing $10 of pricing is tough to offset but if I look at the production costs with or without shipping it looks like the roughly up 4%.
Year on year on a unit basis I suspect a lot of that would be due to decrementals on fixed cost absorption, but im wondering if you can help me with the year on year bridge, if what other buckets are there for thinking about energy cost LCC or anything else that could be kind of in that.
In that margin.
Yeah, absolutely Scott and you hit the nail the have you think about what are the major variable cost components of our wallboard business is things like natural gas, which remains very low recycled fiber costs remain low and that are going lower.
We're fortunate that we own all of our.
That's the sort of or just some comes from our own reserves. So the in terms of any cost inflation that was associated with the negative absorption of fixed cost on lower volumes other that cost would have been very very strong.
Got it thanks and.
I appreciate the comments on the cement network and I understand it's a regional business and of course pricing is is different than some of those markets are there any of these markets, where you notice strength, where you're getting closer to a level, where whether its customers got put on allocation capacity utilization tight ends where you're able to have a little bit more selective NIS in servicing closer.
Customers by truck rather than having to eat some some price in rail shipping and just the general.
<unk> ability to get more pricing out as a tighter environment.
Yes, Scott I think it's you certainly feel that in some of these regions and whatever you have logistics.
Constraints like we saw this past quarter, that's going to put even more stress on the system. So yes. Many of these markets as we've said for a while that we or nearly full utilization.
That gives you some opportunities.
As we move product rail to make sure you're making the rise of volume and price decisions.
Got it and understand on cement, obviously, there was a lot of issues with the weather I'm curious if you're seeing any opportunities for emergency repairs, we heard a little bit of that from an aggregates producer today, either going forward or if any of that solid 3% growth that you had also had a little bit of.
Repair type work from flood damage.
You know in some of the markets. We serve there was that flood damage in those projects will.
There are projects for bridges that were washed out and.
Road repairs and other things and we will be seeing those in the coming quarters.
You know we did help with some of that just it was minor, though I don't think it was a.
A major impact to our volume in this quarter.
Great and if I could ask one more just on wallboard and demand and if I think about it more holistically is.
Our our open floor plans or has affordability.
Driven you know all the homebuilders looking to make more affordable products smaller.
More plans in addition to the open floor plans does that have an impact whether it's less wallboard need it per se per start are you seeing any kind of whether its cyclical or structural considerations.
From that metric.
No we have not seen anything like that.
Great. Thanks, I appreciate you taking my questions and good luck.
Hey, Scott.
Thank you and our next question comes from the line of Jerry Revich with Goldman Sachs. Your line is now open.
Hi, good afternoon, everyone.
Hi, Jared you don't turn.
In terms of the discussion around the transportation of trades.
In prior cycles.
Thanks.
This was the point when we really got strong cement price increases.
Especially <unk>.
Patient advantage that you folks have for a lot of your insulator plan. That's what I'm wondering what's your sense on why the customer conversations are not easier considering the transportation costs for alternatives. There are now higher or what do you think has changed cycle over cycle.
Yes, I think gerrys as Michael pointed out the conversation is different in each region right. In some regions were very pleased with the price improvement that we achieved and those markets do a very strong.
Highlighted one of the markets in the upper Midwest, where what we although Illinois with a slower to recover marketplace and dealing with state issues for the last several years and so that's going to be a very different conversation than you have.
In the southern market for example, so.
No not all the regions are acting that way or at the same point at this time, but we do look at a state like Illinois. The first on 30 years is increasing their state gasoline tax to try to rebuild their infrastructure. So.
They'll they'll get there theyre, just a little bit behind where some of these other markets or.
And.
To get to smart pricing and 1% it sounds like Youre pepper.
States that are up can you just help us understand.
The spread in terms of.
Pricing actions so Illinois.
It sounds like it's probably down mid single digits based on the qualitative comments can you talk about which states are at the higher end of that price increase in what's the spread in terms of pricing performance on streets, where.
Hi versus ones that aren't.
Yeah look I think we will give a pricing region to region, but suffice it to say.
We're seeing good pricing.
And you can get some of these markets, Texas and Colorado some of the markets that have been very strong work is from a demand perspective tight utilization rates.
And they will be we're very happy with or their pricing.
So overall, the cement pricing environment would you characterize it as a mid cycle pause.
The pricing environment or are we at such points, where the variable contribution margins are so attractive in the business that.
It becomes harder to push pricing kind of like what we're talking about in wallboard.
Yes, I think it's very different situation drew I think is the reasons, where you have high utilization rates were able to achieve very good pricing improvement in some other regions that are.
Little behind and.
Eventually they'll be in a similar situation, where a utilization rate of growth that will give you the opportunity for maybe incremental pricing, but I don't see it as of the sort of that mid cycle pause I think each region is acting as you would expect.
Okay, and lastly on wallboard earlier in the cycle you folks had the annual price increases and we.
Got away from that market structure.
Are you thinking about.
Strategically.
2020, and beyond are you thinking about going back to the.
Genuine price increases.
You seem to be more more effective.
For you folks earlier on in the cycle.
Yeah, Jerry we haven't even started to look at that right now at this time, you know we announced a price increase for August Threerd, and we'll see what the market.
Market.
Our response to that and then we'll address that situation after that time frame.
Okay, all right I appreciate the discussion thank you.
Thank you.
And our next question comes from the line of Adam Thalhimer with Thompson Davis. Your line is now open.
Hey, good afternoon, I wanted to start on the cement volumes.
Plus 3% is probably the best organic you've had in a couple of years.
And it was pretty wet in the quarter can you guys just expand on.
Hi, how you kind of overcame the weather.
Yeah, Adam I think you spoke to.
One of the first was talked about weather for many many quarters in a row and.
And so there's no doubt that.
So may as a part of June we're we're extremely wet.
But I think it kind of a testament, a little bit to the underlying demand fundamentals that we see in that business and that.
We're reasons are a little little unique but.
We just saw good improvement in the with the southern did Sean.
That has continued into July and I think just once more to the underlying.
Demand environment that any anything I think hopefully we could lose some of these weather concerns and issues, but there are businesses are doing well.
So I'm just curious the 3% growth you saw in the quarters any reason that couldn't accelerate in the back half the year.
It will try not to speculate too much but look the environment for our businesses are good right now and.
Right now it's been striving to southern has been shutting a lot of July and businesses grow.
And then lastly, how much debt are you willing to take on for share repurchases I saw the leverage tick up to a little over two times, which is unusual for you guys.
Yes look I think we continue to see value of the shares.
We're fortunate that we do sit in a situation, where we have very low leverage.
Two times for a company like this is not unusual and look it's always a balance between opportunities to continue to grow the company and when the market presents value opportunities to return cash to shareholders. I think our history has been to be pretty financially conservative when it comes to managing the balance sheet.
We understand that we operate in a cyclical business and at but we also understand there are opportunities in front of us and we want to make sure that we have the balance sheet to continue to grow and maintenance cycles. So there's no bright line that we put in place, but just managing it appropriately given given opportunities given where we are in the cycle.
Okay. Thanks, Greg.
Thank you and our next question comes from the line of fill in GI with Jefferies. Your line is now open.
Hey, guys. The two markets you called out from increased competition in some men.
Half pricing in those markets stabilize and I thought your commentary on cement pricing sound pretty constructive on the last call.
My question is did the wet spring and maybe some of the flooding lead to more challenging pricing conversations late in the quarter.
Yes.
So.
I think you would be right on the assumption that stabilized in those two markets with it.
And.
The second part of your question was say they get out your commentary on cement pricing sounded pretty constructive on the last call. So did the conversations get a little more challenging late in the quarter due to the wet spring and that's assumed that flooding in pack as well.
You know weather had some impact on that.
You know and frankly you know.
You know that was a driver for for some of the conversation. We have however, as Craig stated and you know as I continue to state.
So the demand seems to be out there over this last part of the quarter, we were very happy with our 3% up on.
The volume side and we.
So dependent on weather and other factors, we see it as being a row.
Hey, Hey.
Getting back to a good good volume shipments over these next couple of months as long as the weather stays good.
Got it.
And then on your wallboard business Theres, a price increase in the marketplace and you commented a driver for increase you have out there.
Due to improved backlog and it's been pretty good can you provide any color how extended your backlogs are for wallboard and help compared to where it was this time last year and perhaps just struck year. Thanks a lot.
Yeah, you know Phil or backlog is going to be a bit of potion of single family construction activity and as interest rates, we don't necessarily keep a backlog like you would think traditionally.
But as we look to where interest rates have dropped to the last couple of months.
Look at our order levels, we feel good as we're heading into <unk>.
Exiting July and into the into the rest of the summer.
Got it and with rates coming in I mean, I appreciate theres always a lag before it has an impact on consumers have you seen that.
Well down to some of your demand that's exposed to new construction.
Yes, Phil obviously, we sell through distributors into a home builder. So we don't necessarily sell direct we sell across whether its repair remodel nonres construction residential. So we can look at our order patterns and then they've they've been good.
Got it thanks, a lot guys.
Thank you and our next question comes from the line of Stanley Elliott with Stifel. Your line is now open.
Hey, guys. Thank you all for fitting me in.
Quick question, how much is left on the current share repurchase authorization.
Yeah. We've got you know 8 million plus shares if you recall at the in late May or sometime in May we made an announcement that we increased the share buyback to buy 10 million shares which took it to 10.7 million shares we bought back 2.2 million shares. So we've got a fairly large remaining authorization.
And.
In some of the markets I guess, we're talking about the Illinois market being a little challenge in terms of Smith.
It sounds like that.
Yes, the funding environment, certainly picked up there.
Is it possible to see a cement price increase later in the year I know that's not historically are typically what you would think to happen or should we put more.
Faith in something like that on the pricing side, improving more into into next year.
Its daily will try to speculate on future price increases.
And our customers will certainly be the first to though.
But but in term, but in terms of the seasonally we should still think of it as kind of more of a.
And April 1st market or early spring market in terms of the price even if.
Yeah, it looks like that the the funding environment is picking up.
Yeah, I think it's a little too early to call any definitive date.
No I understand thanks, guys appreciate it.
Thank you and our next question comes from the line of Josh Wilson with Raymond James Your line is now open.
Good evening, Thanks for taking my questions.
I have a couple housekeeping items on my end first could you update us on the Capex guidance and discuss whether the plans to separate the business has an impact on the timing of the investments and the benefits resulting from that.
Yeah, Josh Good question no updates on the Capex guidance and.
In terms of the planned separation.
We are continuing to operate business as usual and making investments as appropriate.
It's amazing the assets and grow up to the extent.
Presents itself.
So no change to the paperboard expansion plans.
Correct their own if you look at the quarter Capex was at almost $22 billion I'd say about half of that was related to the paper mill expansion that is on time and under budget and.
And should be ready to enter this break.
Very good and your inventory days jumped during the quarter was that driven by weather or something else.
A little bit of weather also our paper inventory, we have kept at a higher level. Because you will go through some outages as you go through the paper mill expansion and you want to enter those outages with ample of the finished paper product.
That was the biggest component.
Got it good luck with an export.
Thanks, Jeff.
Thank you.
And our next question comes from the line of Keith Hughes with Suntrust. Your line is now open.
Hi, This is Josh large on for Keith.
So you've touched on you know the price increase in wallboard that's out there what about on the cost side I know those Ccs trended down Nat gas definitely hasn't gone up another is hedged for for a bit of time, how should we think about the variable cost side. They are trending through the rest of the year.
Yeah look I think you pointed them out and as I mentioned earlier the other component. So those are the two major components gas and paper those are all trending very.
Good for us as Tailwinds.
Again, our gypsum sources are virtually locked in so.
From a cost headwind that labor is not a big component of the overall cost structure. So.
We're we're in pretty good shape.
Okay, and usually paperboard I think you've historically said as one two quarter lag kind of where that the contract structure is for a when you see kind of flows through to your paperboard pricing.
That's right that's right.
Okay.
And then.
Oh last question I know you guys don't have kind of decision yet but is there any timeframe you guys have had out there on like the split structure like when you kind of come to that decision.
Yeah, No we don't have any any timeline on that right now.
Okay, great. Thank you.
Thank you.
And that concludes today's question and answer session. So with that I will turn the call back over to President and CEO , Michael had for closing remarks.
I just want to say thank you for participating in the call and we look forward to seeing you at our next earnings call in the fall.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect everyone have a wonderful day.