EXP
#Thank you.
Good morning to all and welcome to Eagle Materials' conference call for the second quarter of fiscal year 2017.
We are glad that you could be with us bright and early this morning.
Joining me today are <UNK> <UNK>, our Chief Financial Officer and Michael Haack, our Chief Operating Officer.
There will be a short slide presentation made in connection with this call.
To access it, please go to Eagle Materials and click on the link to the webcast.
While you are accessing the slides, please note that the first slide covers our cautionary disclosures regarding forward-looking statements made during the call.
These statements are subject to risk and uncertainties that could cause results to differ from those discussed during the call.
For further information, please refer to the disclosure, which is also included at the end of our press release.
I would like to begin today with some perspectives on our gypsum wallboard, our cement and our proppants businesses and then <UNK> will walk us through our second-quarter financial results.
Gypsum wallboard demand continues to grow.
Industry shipments were up nearly 7% versus prior year.
Household formations are increasing and we believe housing has room to run.
Accordingly, we anticipate demand for wallboard to be up consistent with the outlook for housing starts.
We have announced a January 2017 wallboard price increase and we look forward to sharing the results of that increase with you early next year.
Our cement business performed well, but was affected by weather, especially in Illinois, Missouri and Oklahoma.
We believe that strong underlying demand fundamentals are intact and evident.
We anticipate trend improvement in our cement business consistent with our improved outlook for infrastructure, residential and nonresidential construction spend.
We believe that our oil well cement and our proppants businesses are in the bottoming process.
It is also our expectations that we will experience significant growth in demand for oil well cement and proppants over the next several years.
In short, all of our businesses are positioned to enjoy improved fundamentals and earnings performance going forward.
I also want to take a moment to highlight our announcement last month that we entered into a definitive agreement to acquire Cemex's cement plant in Fairborn, Ohio.
The transaction is expected to close in December.
All of our criteria boxes have been checked with this investment.
It's a low production cost, high margin plant.
It's geographically close to its market and it's complementary with Eagle's existing cement assets and its distance from imports.
This plant will increase our annual cement capacity to nearly 6 million tons and provide an immediate and meaningful contribution to cash flow and earnings.
We are very excited about this opportunity to grow Eagle with some truly outstanding assets, as well as welcome a talented group of new employees to Eagle.
Now, let me turn it over to <UNK> to review our second-quarter results.
Thank you, <UNK>.
Eagle's second-quarter revenues were a record $333 million and improved 1% from the prior year.
Our second-quarter earnings per share increased 112% to $1.25 per diluted share as our cement business reported record second-quarter results.
A 3% increase in our average net cement sales price, along with improved sales volumes in our aggregates business were the primary drivers of the increase in Eagle's quarterly comparative of cement and concrete and aggregates revenues.
Operating earnings from our cement and concrete and aggregates businesses improved 6% to a record $55.5 million, reflecting improved pricing and good cost control.
Increased wallboard and paperboard sales volumes drove a 6% increase in our quarterly comparative wallboard and paperboard revenues.
Operating earnings in our wallboard and paperboard business increased 8% to $51.9 million for the second quarter.
Eagle's oil and gas proppants financial results continue to reflect the difficult business conditions in the oil and gas sector.
The second-quarter operating loss of $4.1 million includes depreciation and amortization of $4.3 million.
While business conditions in the frac sand business remain at low levels, as <UNK> mentioned, we believe we have bottomed out and volumes are anticipated to improve.
Cash flow generation during the quarter was exceptional and cash flow from operations increased 22% to $106.1 million.
Excess cash flow was used to pay dividends, repurchase shares and reduce outstanding borrowings.
Second-quarter capital spending of $9.3 million was down from the prior year reflecting sustaining capital levels.
Also during the second quarter, nearly $26 million of cash flow was returned to shareholders in the form of share buybacks and dividends.
We have repurchased nearly 2.7 million shares of our stock since the buyback authorization was increased in 2015.
As this last slide reflects, the cash flow generation results of our highly-competitive, low-cost position, our net debt-to-cap ratio was 27% at September 30, 2016.
In August, we successfully completed Eagle's inaugural public debt offering, which consisted of 10- year, $350 million senior unsecured notes with an interest rate of 4.5%.
Proceeds from the offering were used to pay down outstanding borrowings under our $500 million unsecured revolver providing us with ample liquidity to fund the acquisition of the Fairborn cement plant from Cemex.
Thank you for attending today's call.
We will now move to the question-and-answer session.
Well, our cement volumes were really affected by just two operations in Oklahoma and Missouri and that makes the entire extent of it.
The other markets performed just well.
First of all, it's a very good market and the projections going forward are to be up at least as much as the national average.
We like the market because all the customers and volumes are nearby the plant and the pricing is very favorable in the market, at least at this point.
Well, there's a few synergies.
We currently sell slag in the market and I think having a product offering of slag cement and regular cement is going to help us.
They also have a very good packaging facility there that's a good little business and we think we can grow that a little bit over time.
Sure, <UNK>.
So we probably saw the majority of our volumes associated with the oil and gas sector fall off in calendar 2015, so here in calendar 2016, we have some pretty good comparables year-over-year.
And where we are positioned in Texas, the weather was pretty well normal.
Yes.
It was basically Northern California and Austin.
Both markets report very, very strong sales.
We are always looking for opportunities and we don't really comment on any future MMA activities, but we are looking at a few things.
There was a slight geographic mix.
Southeast at this point has a little lower mill net than some of our other regions, but I would attribute some of it to that and a little bit of price movement over the quarter, very small, however.
Thanks, <UNK>.
That plant continues to remain sold out and in fact the Texas market continues to remain sold out.
And so as we talked about over the last several quarters, as we shifted towards more construction-grade cement, we've backed off a little bit on the purchased product that was necessary in calendar 2015.
That's a little lower margin sale product for us.
So going more to more manufactured tons.
But as we also said, as you switch over from producing oil well cement to construction-grade cement, that's a lower-cost manufacturing and so that's why you continue to see a very strong margin profile with that business.
Well, right now, our customers are telling us that they expect increased demand for sand over the next 12 to 18 months and that's based on many of the customers' beliefs that oil prices will be going up modestly over the next several years.
They really don't.
Actually, we are in very strong markets in the Sun Belt, so we think we have a little advantage going forward.
The most recent housing starts that came out this week were actually somewhat pleasing to me.
Even though they were down a little bit, the single-family housing starts were up over 8% and as we all know, single-family housing starts consume 3 to 4 times the amount of wallboard as a multi-family housing start does.
So when you put the math to it, even though the numbers were down a little bit, the housing starts that were reported are going to require more gypsum wallboard.
Then if you look at the permits, the permits were up over 6% to 1.2 million.
So we are actually pretty pleased by the housing start numbers that came out last week.
The numbers that we reported are just plant-level EBITDA.
There will be a process that Cemex will go through for the carveout financial statements, but similar to our existing assets and how we run our Company, we would expect very low overhead structure associated with that plant.
It's already a very robust margin plant adding, as <UNK> mentioned earlier, some outstanding new employees to Eagle and there's not a lot of overhead required there.
Thank you for participating in our call and we look forward to talking with you early next year.
