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Eagle Materials, Inc. (NYSE:EXP)
Q4 2018 Earnings Conference Call
May 15, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day everyone and welcome to the Eagle Materials conference call for fiscal 2018. This call is being recorded. At this time, I would like to turn the call over to Eagle's president and CEO, Mr. Dave Powers. Mr. Powers, please go ahead sir.

Dave Powers -- President and Chief Executive Officer

Thank you, Brian. Good morning and welcome to Eagle Materials conference call for our fiscal year and fourth fiscal quarter of 2018. We're glad that you could be with us today. Joining me today are Craig Kessler, our Chief Financial Officer, and Bob Stewart, Executive Vice President of Strategy, Corporate Development, and Communications. There will be a slide presentation made in connection with this call. To access it, please go to eaglematerials.com and click on the link to the webcast. While you're accessing the slides, please note that the first slide covers our cautionary disclosure regarding forward-looking statements made during this call. These statements are subject to risk 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 saying this has been a good year for Eagle Materials. As we reported earnings per share of 29%, up 29% on record revenues and extended our track record of the industry-leading margin performance. Our fourth quarter was adversely affected by weather, which has been widely chronicled and we had a few one-time items as well. But in my view, it was a respectable quarter all in all. The fundamentals of our business are strong and getting stronger. Our sales volumes in April compared to ay ear ago encourage us and rather the gates and off to a fast start. We strongly believe the best is yet to come. Cement is largely a regional business in the U.S. We have some of our regions that have become very tight while others have been sequentially later in the recovery. We are seeing some things in the market that tell us we are approaching a point of transition when the entire U.S. heartland cement system could become tight. If this does occur, our cement business will get even more interesting as U.S. manufacturing supply response is more limited than in any other cycle. I'm not gonna try and forecast the timing of the system tensioning but we do see indications of tight conditions and we are increasingly challenged to take care of our customers' growing needs in several markets.

In gypsum wallboard, we have implemented our price increase announced for January. We've been partially successful with 8% additional being realized in our fourth quarter compared to the prior quarter. We expect for demand for gypsum wallboard to increase driven primarily by increased housing and repair and remodel activity.

Most of you are familiar with our track record of superior margin performance in this business, which continues to remain unrivaled due to our long-standing commitment to improving our low-cost producer positions. We have accomplished this through sound strategic investment over many years in our talent, our processes, and our operations. Our secret to getting consistently superior margin returns is our long-standing commitment to using less raw materials, less energy, less water, less unnecessary human capital, less of everything to produce the same commodity products as others and to provide the highest quality products that meet specifications more consistently and more reliably than others.

This is the key to our competitive margin performance. And I might add, for us, it definitely also represents the very essence of sustainability.

Turning to profits, our installation of drying capability at our flagship mine in Utica, Illinois is on time and on budget and we expect to be shipping product from there this summer. Our investments to create the system we envisioned upon entering the business with low-cost reach to all shale plays will largely be complete with this installation except for what we do for continuous improvement and growth over time at these mine locations.

Most of our product from this start-up has already been spoken for except for the limited amounts we are reserving for spot market participation. The market for high quality frack sand is strong and is growing. We have a specific and defined strategic focus with this adjacent heavy side business, and to be clear, we will not be among the speculators in brown sand mines. Stepping to the company level, we've invested over $1.5 billion so far this cycle to profitably grow our businesses and to create shareholder value.

As we look ahead, our strong balance sheet and sustainable cash flows afford us substantial financial flexibility in executing on value creation opportunities. Our priorities going forward remain the same. To continue to grow our business in ways that meet our strict strategic and tight end return requirements and to continue to improve our low-cost, competitive position. We have never lowered our standard nor loosened our criteria at times when we've had more money in our pocket. We operate in cyclic industries and we understand cycle management. We recognize that over the course of cycle, our cash flow generation can, at times, exceed our ability to invest for growth and improvement and still remain true to our strict criteria. In these cases, we would point to another track record of ours, and that is one of returning cash to shareholders. In fact, it is worth noting that our share count today is more than 25% less than it was 20 years ago. We did purchase 350,000 shares of stock in the fourth quarter and nearly 300,000 shares of stock so far in April and May. I would not at all be surprised to see this become an even more important use of our cash in the upcoming fiscal year. With that, let me turn it over to Craig to comment on the financial specifics of the quarter and fiscal year.

Craig Kessler -- Chief Financial Officer

Thank you, Dave. Eagle's fiscal year 2018 revenue was a record $1.4 billion, an increase of 14% from the prior year reflecting improved sales volumes and prices across most of our businesses. Eagle's annual earnings per share improved 29% to a record $5.28. As we mentioned in the press release, Eagle's fourth quarter financial results include a $6 million pre-tax charge related to the settlement of an antitrust lawsuit brought by a group of homebuilders against American gypsum. We continue to deny all wrongdoing, but we made a business decision to avoid the further expense, distraction, and litigation risk. Our fourth quarter results also include $4 million personnel-related expenses, including an increase contribution made to the Eagle profit sharing plan and a pension settlement charge. We have nearly fully funded our pension liabilities and the charge reflects the results of lump sum payments taken by inactive employees, which reduced the pension participants by approximately 15%. This next slide highlights the results of our heavy materials sector, which includes our cement, concrete, and aggregate segments. A 10% improvement in cement sales volume and improved pricing were the primary drivers of the 12% increase in Eagle's annual comparative of heavy materials revenue. Operating earnings from our heavy material business improved 15%, a record $197 million reflecting the addition of the Fairborn business and improved pricing.

Moving to the light materials sector, which includes our wallboard and paperboard segments, improved sales volumes and net sales prices drove a 4% improvement in our annual comparative of light materials revenue. Annual operating earnings in our light materials business declined 3% to $191 million, reflecting higher OCC costs offset slightly by higher net sales prices. It's worth noting OCC costs have dramatically evaded through the second half of the year and have remained lower here in April and May. As we mentioned in the press release, the fourth quarter's wallboard sales volume was impacted by a shift in the timing of our wallboard price increase this quarter versus the timing last year. Eagle's oil and gas propense operating earnings improved from the prior year and the near term prospects for our propense business continue to improve from this time last year, which is reflected in a 170% increase in our annual frack sand sales volume. This improvement in sales volume helped generate EPA-Dow $19 million during the year. During the fourth quarter, our frack sand business was impacted by logistical challenges and harsh winter weather, which delayed rail car movements. We expect these delays to ease over the remainder of the year. As Dave mentioned, the addition of our drying facility in Illinois is on track to be completed this summer, which will bring our annual frack sand drying capacity to five million tons. This capacity, coupled with our distribution points in all the major oil and gas basins in the U.S., provide us with a nearly complete system to serve our customer needs. We expect this business to continue to improve and become an even more meaningful contributor to Eagle's cash flow generation capabilities. Moving to cash flow, operating cash flow during fiscal 2018 increased two percent to $338 million. Total capital spending increased to $132 million. This included investments to improve and replace existing equipment, expand our frack sand drying capacity, enhance Eagle's distribution capabilities, and to continue to improve our low-cost operations. We also completed the Wildcat Minerals acquisition during the year. Also during the year, Eagle returned over $80 million to shareholders through accommodation of share repurchases and dividends. We continue to project an effective tax rate in the 22-24% range for fiscal 2019. And finally, this last slide reflects the cash flow generation results of our highly competitive, low-cost position. Our debt to cap ratio was 30% on March 31st, 2018.

Thank you for attending today's call, we'll now move to the question and answer session. Brian?

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you have a question at this time, please press * followed by the 1 key on your touchtone telephone. If your question has been answered and you want to be removed from the queue, press #. Once again, if you have a question, *1. One moment for questions, please.

And our first question comes from the line of Brent Thielman from D. A. Davidson. Your line's now open.

Brent Thielman -- D.A. Davidson -- Analyst

Great, thank you. Good morning. Dave, on the cement side was hoping maybe you could elaborate a little more on your comments or at least what you're seeing in terms of some of the tension developing in the heartland and are you seeing any more momentum in some of the public sector work that's been kind of late to form? Some things that maybe get you a little more optimistic about the volumes on that side of the business?

Dave Powers -- President and Chief Executive Officer

We are seeing an increase in public sector work. Our backlog of bits has been substantially increased versus prior year at this time and it's really affecting our volume. When I look at our April shipments on a per day basis versus last April on a per day basis we're up well over 10%.

Brent Thielman -- D.A. Davidson -- Analyst

Okay. And is that the same for the JV as well? I know volume's been under pressure there for a few quarters now.

Dave Powers -- President and Chief Executive Officer

Our plant is sold out at this time and we're importing a little bit of product -- up to our max. Our volumes are -- we're tight in Texas, we're real tight.

Brent Thielman -- D.A. Davidson -- Analyst

Maybe on the freight side for wallboard. I think last call you talked about kind of around a $2 headwind that mill met. Is that roughly what played out this quarter and is that kind of still the expectation going forward?

Dave Powers -- President and Chief Executive Officer

Actually, freight's gonna be a little higher for us. We're in the middle of negotiating with carriers, we're probably 70% done. Right now we're anticipating about a 10-12% increase in our outbound freight numbers as we look at it today.

Brent Thielman -- D.A. Davidson -- Analyst

Okay and then last one if I could just Craig -- do you have the average price for that 350,000 shares you acquired in the quarter?

Craig Kessler -- Chief Financial Officer

$102 a share.

Brent Thielman -- D.A. Davidson -- Analyst

Okay, great. I'll turn it over.

Operator

Our next question comes from the line of Scott Schrier from Citi. Your line's now open.

Scott Schrier -- Citi -- Analyst

Hi, good morning. I wanted to first ask about the wallboard. Obviously the 8% sequential pricing is very strong. Volumes come in and I understand the timing of the pre-buy but just looking at the national data volumes came in a little light so I just want to see how you're thinking about the balance between price versus volume and how to think about that going forward?

Dave Powers -- President and Chief Executive Officer

We always try and maximize the volume-price relationship to generate the most gross profit dollars. The way we looked at it let's lean on price in the first quarter because we felt very strongly the volume was gonna come to us -- and it has.

Scott Schrier -- Citi -- Analyst

Got it. And in that pricing number, was there any role that geographic mix might've played in the quarter due to all the weather that we've seen?

Dave Powers -- President and Chief Executive Officer

No. We didn't see any at all.

Scott Schrier -- Citi -- Analyst

Got it. And then following up on the last question on the cost inflation but just thinking about it more in the cement side. Can you help us think about are there buckets that we should be considering that you're gonna see some increases in cement price or cement costs?

Craig Kessler -- Chief Financial Officer

Scott, this makes business predominantly energy-focused between fuel and electricity and we aren't seeing any significant movements very unusual movements. There are always some inflationary pressures. Really the point that Dave made on the wallboard outbound freight, it does impact some of the inbound raw materials if you're railing or truck those materials into your facility so it'll be more on the freight side than the underlying commodities.

Scott Schrier -- Citi -- Analyst

And on the rail side, I know you called out some rail congestion and logistics issues in frack sand -- did we see any of that in cement? And should we expect to see any of that in cement?

Craig Kessler -- Chief Financial Officer

You know, Scott, I'll just tell you: we are seeing very tight shipping utilization across the country and almost across all the products. Whether you're talking about wallboard, cement, or frack sand, the rails are extremely congested, which is causing delays for turns of railcars, which is really causing each individual region to become very tight. Dave mentioned it around the cement. It's just getting harder to ship things further and that's just raising utilization rates. You're trying to ship as much as you can underneath the umbrella of your facility. So I won't just speak to that on one business line, that's what we're doing across all the business lines at this point -- making those decisions to meet customer needs to the best of our abilities.

Dave Powers -- President and Chief Executive Officer

In addition to rail, truck is also very tight, and that's why you're seeing the rates come up and we struggled to get carriers to put a truck under our load from time to time.

Scott Schrier -- Citi -- Analyst

Got it, great, that's helpful. Thank you, gentlemen.

Operator

Our next question comes from the line of Jerry Revech from Goldman Sachs. Your line is now open.

Jerry Revech -- Goldman Sachs -- Analyst

Hi, good morning everyone. I'm wondering if you folks can talk about the cadence of cement pricing actions this year, how that compares to last year's? So your sequential price increase in cement was lighter this quarter than the March quarter over the past couple of years so is it the timing of increases? Can you just help us get a feel for how pricing actions are stacking up this year versus last year?

Dave Powers -- President and Chief Executive Officer

We did announce price increases this year very similar to last year and it's a little too early to measure that but we were partially successful on these increases. We did have a couple of competitor's situations that we chose to meet in February. We did have several jobs that, as you know, didn't ship in the December-ending quarter because of weather and hurricanes and other things. We honor those prices and we're now shipping those jobs. Those two things did affect our mill net a little bit.

Jerry Revech -- Goldman Sachs -- Analyst

And Dave, how does that cadence play out over the next couple quarters or are those jobs done? So as those jobs finish shipping and hopefully the competitor environment becomes less competitive over the course of the construction season, are you expecting sequential cement price increases from a realized standpoint as we go through the year because of those two factors?

Dave Powers -- President and Chief Executive Officer

We expect that those jobs roll off and they'll roll off mid-summer to get a little bit of margin improvement, yes.

Jerry Revech -- Goldman Sachs -- Analyst

Okay, thank you. And then in terms of the cement year-over-year operating profit performance, obviously seasonally we quarter overall on top of the weather issues but I'm wondering if you could just step us through what were the biggest headwinds be beyond volumes that offset the contribution of the new cement asset in driving the year-over-year decline? Is it maintenance timing? Can you just maybe give us the broad strokes, Craig?

Craig Kessler -- Chief Financial Officer

Sure, I'll point to the volume and the impact the weather had on the volume. On the coff side our performance was pretty good and we did have six or seven percent improvement in net cement sales prices. But when you have a January and February and for many of our markets even into March, you're talking about in places like Missouri average rainfall more than 700% from where we were the prior year. Illinois, same type of increase. Parts of Texas set records in January and February for the amount of rain that fell. Those are -- when you're impacting sales volumes to that degree, your fixed costs absorption is gonna be overcome by any price improvements. As volumes start to pick up here in the in construction season that will solve a lot of those issues.

Jerry Revech -- Goldman Sachs -- Analyst

Thank you.

Operator

And our next question comes from the line of [00:21:25] Adam Thalhimer from Thompson Davis. Your line is now open.

Adam Thalhimer -- Thompson Davis & Co. -- Analyst

Hey, good morning guys. The 10% volume growth you saw in April, that was in cement, correct?

Craig Kessler -- Chief Financial Officer

Yes, so that stays set. The production season has gotten off to a very good start here in April and volumes have been strong in cement as well as even in the light side the business is started up the construction season on a good foot.

Dave Powers -- President and Chief Executive Officer

I might add in the light side, the gypsum business -- our growth April over April on a per day shipping basis is up in the high single digits.

Adam Thalhimer -- Thompson Davis & Co. -- Analyst

Okay, perfect, that was the next question. And I'm a little confused just on the cement pricing commentary because we started the call and we said conditions are very tight, maybe the tightest we've seen in years, but then in the Q&A we've talked about some weakness in some markets. Can you just give a little more color on how you think of the wholly on cement price?

Dave Powers -- President and Chief Executive Officer

We do understand the supply demand dynamics and the impact it can have on price. We continue to value these dynamics. We've made no decisions at this point going forward and if and when we do our customers will be the first to know.

Adam Thalhimer -- Thompson Davis & Co. -- Analyst

But just in general, I guess that tightness you talked about in your opening comments just over -- just some high level thoughts on what that could make the pricing?

Craig Kessler -- Chief Financial Officer

I understand your question. I think the point we're trying to make is it's not an exact timing as far as when the prices will increase and how much of the recent increases have been realized. I think what the communication is around tightness across the hold system and over a period of time as utilization rates rise, and again, back to this freight cost going up and shipping radiuses shrinking, that should be supportive of this business for the next several years rather than trying to figure out which individual quarter or how much. We're looking at the next two to three years or more of a very good environment to be running this business.

Adam Thalhimer -- Thompson Davis & Co. -- Analyst

Okay, perfect. Thank you.

Operator

Our next question comes from the line of Phil Ng from Jefferies. Your line's now open.

Phil Ng -- Jefferies -- Analyst

Hi Guys, this is actually Colin on for Phil. Just going back to cement side on pricing. You guys talked about this market being tight in places like Texas. In those specific markets, is there an opportunity for a second price increase ahead of where you stand in your other markets?

Dave Powers -- President and Chief Executive Officer

I can tell you we're looking at that now but we've made no decisions. And there are several strong markets. Texas is one, Colorado is one, and Nevada is another one. We continue to evaluate the supply demand dynamics on a daily basis.

Phil Ng -- Jefferies -- Analyst

Okay. And then, just in terms of the wallboard; some of your competitors have announced the second price increase just given how more demand trend in raw material inflation are, can you give any color around the opportunity to realize a second price increase in that market?

Dave Powers -- President and Chief Executive Officer

Again, we continue to look at the supply demand dynamics on a daily basis and we'll do what's right for American gypsum and it's customers. And when we do, our customers will be the first to know.

Phil Ng -- Jefferies -- Analyst

Okay, thank you very much.

Operator

And once again, ladies and gentlemen, if you have a question at this time, please press * followed by the 1 key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the # key. Once again, the * and 1 for questions. Our next question comes from the line of Josh Wilson from Raymond James. Your line's now open.

Josh Wilson -- Raymond James -- Analyst

Morning, thanks for fitting me in. Clarification question first. The $4 million in personnel expenses that you called out -- is all of that one time in nature or is some of that part of a new normal?

Craig Kessler -- Chief Financial Officer

Most of that's non-recurring. Certainly the pension piece, the profit sharing was a one-time adjustment that we made this year. Most of it's non-recurring.

Josh Wilson -- Raymond James -- Analyst

And then regarding freight, you talked about the outbound freight inflation for wallboard. Can you address that as it relates to the other segments?

Craig Kessler -- Chief Financial Officer

Fortunately, most of the other businesses for the vast majority of them, they are either customer pickup or priced FOB the mine or FOB a basin so freight is not a component in those businesses like it is in wallboard.

Josh Wilson -- Raymond James -- Analyst

Got it. And then, can you give a sense of what the Fairborn volume or sales were in the quarter?

Craig Kessler -- Chief Financial Officer

Yeah. So if you look at our sales volume -- and we'll just talk about it on an annual basis -- our total cement shipments were up 10%, they would've been almost virtually flat without Fairborn.

Josh Wilson -- Raymond James -- Analyst

Thanks, good luck with the next quarter.

Operator

Our next question comes from the line of Blake Hirschman from Stevens. Your line is now open.

Blake Hirschman -- Stevens -- Analyst

Good morning, guys, thanks for taking my question here. My first one, I think I heard you mention that net set prices were up 6% or 7% I just wanted to get a little bit of clarity as to what exactly that number was referring to?

Craig Kessler -- Chief Financial Officer

So that's in the press release if you look at cement prices per ton we're up 6%.

Blake Hirschman -- Stevens -- Analyst

Got it, per ton basis, OK. And then, second, apologies if I missed it but I was looking to see what the impact of OCC prices were on a year-over-year basis? I think last year in the first quarter it was about a $3.5 million headwind so I was just curious to get an update there.

Craig Kessler -- Chief Financial Officer

So OCC prices are down almost 50% from where we were a year ago and that certainly runs through the paper business but it also impacts the wallboard business but the way we price is on a quarterly lag so you've seen a little bit of the benefit in the wallboard business but not all of it. But as you can see, a pretty dramatic improvement in the profitability of the paper mill going from the $6.7 million of earnings to a little over $10 million with a big significant piece of that being the drop in OCC prices.

Blake Hirschman -- Stevens -- Analyst

Got it. And then last one for me, the smaller piece of the business for you guys, but I saw that concrete pricing was down year-over-year just curious if that due to mix or kind of what was driving that? Thanks.

Craig Kessler -- Chief Financial Officer

Just regional mix there. We've got three small divisions spread across the country and no real mix there.

Operator

And that concludes our Q&A session. I would like to turn the call back to Mr. Dave Powers for closing remarks.

Dave Powers -- President and Chief Executive Officer

I do want to thank you all for your participation. We look forward to seeing you later this summer.

Operator

Ladies and gentlemen, thank you for your participation in today's conference call. This concludes the program. Everyone have a great day.

Duration: 30 minutes

Call participants:

Dave Powers -- President and Chief Executive Officer

Craig Kessler -- Chief Financial Officer

Brent Thielman -- D.A. Davidson -- Analyst

Scott Schrier -- Citi -- Analyst

Jerry Revech -- Goldman Sachs -- Analyst

Adam Thalhimer -- Thompson Davis & Co. -- Analyst

Josh Wilson -- Raymond James -- Analyst

Blake Hirschman -- Stevens -- Analyst

More EXP analysis

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