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Eagle Materials Inc  (NYSE:EXP)
Q2 2019 Earnings Conference Call
Oct. 30, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day everyone and welcome to Eagle Materials Second Quarter of Fiscal 2019 Earnings Conference Call. This call is being recorded. At this time, I would like to turn the call over to Eagle's Chief Executive Officer, Mr. Dave Powers. Mr. Powers, please go ahead, sir.

Dave Powers -- Chief Executive Officer

Thank you, Haley. Good morning to all. Welcome to Eagle Materials conference call for our second fiscal quarter of 2019. We're glad that you could be with us today. Joining me today are Craig Kesler, 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 our first slide covers our cautionary disclosure regarding forward-looking statements made during this call. These statements are subject to risks and uncertainties that 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 that anytime we post quarterly earnings per share up 17% on record revenues, it's a good quarter. Having said that, weather did not help us at all, quite the contrary, it gave us a 1-2 punch, one in the gut on the Heavy side, with wet weather in the Midwest and Texas in particular. And the other with an uppercut on the light side with Hurricane Florence in the Carolinas. The weather has limited our short-term sales opportunities in many markets, this has been well chronicled, and I'm probably about as tired of talking about it as you are about hearing about it. The only thing that I am really happy about is that our employees and our facilities are unharmed.

Let me offer some commentary on each of our businesses. First, the Heavy side, notably cement. We are operating at high levels of utilization at most of our cement facilities, hence weather interruption can have a very visible short-term impact on results. Heavy materials revenues were off 1% and operating earnings decreased by 4%, primarily because of lower profits at our Texas cement facility. And by extension Concrete and Aggregates, all of which were affected by unusual wet weather during the quarter. As you are probably aware, Texas experienced one of the wettest Septembers on record. Our backlogs in this business are good, however, and we've announced price increases in several of our markets for January.

Turning to the Light side, Wallboard and Paperboard operating earnings were up 18%, reflecting lower operating costs and improved wallboard net sales prices more than offsetting our increases in freight. Quarterly Wallboard sales volumes were affected by unusual weather, and we're down approximately 3%, reflecting the disruption from Hurricane Florence in our Southeastern markets. I should add that we're well positioned and fully committed to supporting the rebuilding efforts in this hard-hit region.

Now to the frac sand segment. Our completion of the Utica frac sand drying plant was coincident with a ripple effect of the period of decreasing demand in the Permian, where oil pipeline capacity limitations have reduced completion activity. Experts suggest there is probably 9 to 12 months before the situation is remedied. Volume and pricing in this business did come under pressure during the quarter, with increased availability of local sand in the Permian. We have built a low-cost system where we can flow high-quality Northern White sands across our portfolio of oil basins, and as oil prices rise in these basins and become more active, we would expect volumes to improve. I should add that $9.4 million of depreciation, depletion and amortization was charged against the business, affecting the earnings level, which of course is not reflective of the segments cash generation.

As a company, we continue to generate cash flow -- significant cash flow, and I firmly believe we will continue to do so. That, combined with a strong capital structure and leverage under 1.5 times, further strengthens our financial flexibility. Our priorities going forward remain the same, to continue to grow our businesses in ways that meet our strict strategic and financial return criteria and to continue to improve our low-cost competitive positions. As I've said in the past, we have never lowered our standards nor loosened our criteria at times when we've had more money in our pocket. We operate in cyclical industries and we understand cycle management. We've recognize that over the course of cycles, 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's worth noting that our share count today is one-third less than it was 25 years ago, which brings me to my final comment about the quarter. Perhaps for many, one of the most notable developments has been the retreat of construction stocks this year. They've been hammered ours included, we continue to implement our share repurchase program and we see good value in our shares. It's worth mentioning that we've repurchased approximately 740,000 shares during the second quarter.

Now, let me turn it over to Craig to go through the financial results.

Craig Kesler -- Chief Financial Officer

Thank you, Dave. Eagle's revenue was the second quarter record $381 million, an increase of 1% from the prior year, reflecting improved pricing across most of our businesses and the addition of the Wildcat Minerals business. Eagle's quarterly earnings per share also improved to 17% to $1.53.

This next slide highlights the results for our Heavy Materials sector, which includes our Cement Concrete and Aggregate segments. The revenue was down 1% with improved pricing offset by lower sales volume, while operating earnings declined 4% primarily because of the unusually wet weather during the quarter and higher freight costs.

Moving to the Light Materials sector, which includes our Wallboard and Paperboard segments, improved wallboard net sales prices drove a 3% improvement in our quarterly comparative of Light Materials revenue. Quarterly operating earnings in our Light Materials businesses improved 18% to $54 million, reflecting higher wallboard net sales prices and lower recycled fiber costs.

Eagle's Oil & Gas profits revenue declined 13% to $19 million reflecting lower sales prices, partially offset by a 2% improvement in sales volume. The quarterly operating loss increased primarily associated with lower sales prices and increased depreciation associated with the new facility in Illinois. During the quarter, pricing for our frac sand came under pressure as the demand for frac sand was impacted by a slowdown in completion activity in the Permian Basin. We expect these conditions to persist into calendar 2019.

Operating cash flow during the second quarter declined 6% from the prior year, reflecting improved net earnings offset by the timing of certain working capital items, excluding the payment of the direct purchaser settlement claim, operating cash flow improved 30% from the prior year. Capital spending increased to $40 million this amount included investments to improve and replace existing equipment, complete our frac sand drying capacity, enhance Eagle's distribution capabilities and to continue to improve our low-cost operations. During the quarter, Eagle returned over 100% of our net earnings to shareholders through a combination of share repurchases and dividends.

And finally this last slide reflects the cash flow generation results of our highly competitive low-cost position, our debt to cap ratio was 31% at September 30th 2018.

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

Questions and Answers:

Operator

(Operator instructions) And our first question comes from Trey Grooms of Stephens. Your line is now open.

Trey Grooms -- Stephens -- Analyst

Hey, good morning.

Craig Kesler -- Chief Financial Officer

Good morning.

Trey Grooms -- Stephens -- Analyst

I guess first on, you mentioned, I believe on the Cement pricing announcements for January. Could you quantify that at all, kind of what you guys have out in the market and in the different markets you serve?

Dave Powers -- Chief Executive Officer

I can Trey, we've announced three markets Nevada, Wyoming and Ohio, and were up $8 in two of those markets and $6 in one of them. Those were the announcements we've had on the street today.

Trey Grooms -- Stephens -- Analyst

And expectation for any additional announcements in some of these -- in some of the other markets, or just too early to know?

Dave Powers -- Chief Executive Officer

Actually we're communicating with customers as we speak about what our intentions are going forward.

Trey Grooms -- Stephens -- Analyst

Okay, and then I know you guys have mentioned, some more competitive type of behavior, on the Cement pricing front, maybe more competitive than you would have expected given the demand levels. Has that changed at all? You know, as we've kind of progressed through the year and given the backdrop, we have had demand maybe be a little less than we initially anticipated, but could you just comment on the competitive dynamic and any expectation there?

Dave Powers -- Chief Executive Officer

We did experienced a little bit of competitive situations in the March, April, May time frame, I haven't experienced any since then.

Trey Grooms -- Stephens -- Analyst

Okay, that's helpful. And then lastly Wallboard, you know, clearly, people are a little more concerned as you mentioned, I mean the stocks have all been under pressure. And clearly, people are more concerned about the housing environment as we look out with a bit of a pause, maybe that we're experiencing here. Would that backdrop, and I'm not looking for any specific guidance or anything like that, but maybe directionally, how are you guys thinking about the Wallboard demand as we look forward?

Dave Powers -- Chief Executive Officer

Trey, we're looking at modest growth going forward. When I look at housing starts, the first nine months of this year, they're up 6% over the prior year and even the last three months, were up 3% to 4% over the prior year, those same three months. So we're planning on modest growth in our Wallboard business going forward.

Trey Grooms -- Stephens -- Analyst

All right, thanks for taking my questions. I'll jump back in queue and good work, given the backdrop of the tough and weather environment.

Dave Powers -- Chief Executive Officer

Thank you, much.

Operator

Thank you. Our next question comes from Brent Thielman of D.A. Davidson. Your line is now open.

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

Great, thanks. Good morning. Dave, on proppants and it sounds like this tough environment is going to persist here, I mean, for the near-term, and based on where you see things now pricing volumes, do you think you can continue to run this business. I guess it's minimum at a cash breakeven level, or better?

Dave Powers -- Chief Executive Officer

Brent, I do, and that's our plan going forward into next year, at least the next two quarters that's I believe where we're headed. And we're rightsizing our business as we speak to make that happen.

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

Okay. And then on Texas, I mean, if the volumes here have been under pressure out of the JV for a few quarters now, I understand pretty tough September. Could you just give us a more context about what you've seen in that market maybe outside of September. What activity levels better? Any thoughts there?

Dave Powers -- Chief Executive Officer

We still think the market is strong, it was flat for us, but strong. Other than the weather, we think it's a good market going forward for us, we really do.

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

Okay. And then on Wallboard maybe some context, just how the price trended during the quarter, we were able to exit the quarter at the average or somewhere above that?

Dave Powers -- Chief Executive Officer

We were down just a hair, I would say in the quarter.

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

Okay. And last one, if I could just on the Cement side as a whole, if you look at all of your markets, are you seeing any sort of renewed momentum in public sector work, notwithstanding the weather issues any more reasons to be optimistic there?

Dave Powers -- Chief Executive Officer

Just slightly, Brent. We're just seeing slight improvement. Very low to modest growth at this point in that sector.

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

Okay, great. Thank you. Appreciate it.

Operator

Thank you. Our next question comes from Scott Schrier of Citi. Your line is now open.

Scott Schrier -- Citi -- Analyst

Hi, good morning. Thanks for taking my questions. I'll follow up on Brent's question on Wallboard in Wallboard pricing obviously, it looks like you had a decent amount of stick from the mid year price increase. I'm curious, so can you talk about the impact from Georgetown had on mill net pricing, understanding that the lower price plan, so less volumes for now would be a little bit of a tailwind to that headline price number?

Dave Powers -- Chief Executive Officer

Let me tell you about Georgetown in the hurricane. We did shutdown our operation seven days from a manufacturing point of view, there were six days, five and a half days that we didn't ship, that probably equated to about $20 million foot that we didn't get out as expected, it wasn't loss per se, probably just delayed into future months, and it had a minimal impact on our mill net.

Scott Schrier -- Citi -- Analyst

Okay. And on Cement, and I know in the past you've stated that in order to really get a lot of pricing in Cement, we need to have tension across the entire network and not just select places. Your commentary suggested a slight pickup in some of the public works demand. You talked about healthy backlog. Are you starting to get some confidence you have these price increases in the market for January, or communicating more for April, there are some competitors with fairly large price increases in the market. I mean are you getting from customers on the ground, some confidence that we're getting to a level where we're getting -- starting to see some tension across the network in Cement?

Dave Powers -- Chief Executive Officer

Prices are always determined in the marketplace and I do have a pretty good feel, but we're early in the process and our conversations with customers, they are expecting some modest improvement, and that's our plans going forward.

Scott Schrier -- Citi -- Analyst

Got it. And last one on the freight impact and you called it out in the press release. Are you still -- are you seeing any moderation in freight increases, whether it's on the Gypsum side or Cement, are you still seeing the rail congestion? Just a little bit of color on the environment from the freight side will be great?

Dave Powers -- Chief Executive Officer

The freight increases have moderated we've actually had a couple go down a little bit. There's a lot of extra truckers and trucks from the Permian that are now available to offer little bit of competition. So for us they've been flat.

Scott Schrier -- Citi -- Analyst

Great, thanks. Appreciate the color.

Operator

Thank you. Our next question comes from Jerry Revich of Goldman Sachs. Your line is now open.

Ben Burud -- Goldman Sachs -- Analyst

Good morning, everyone. This is Ben Burud on for Jerry.

Dave Powers -- Chief Executive Officer

Good morning, Ben.

Ben Burud -- Goldman Sachs -- Analyst

Morning. Besides, we have already mentioned on the call. Can you give a high level view of where we stand in the current cement pricing cycle maybe heading into 2019. What do you guys think it would take for pricing to reaccelerate over the course of the year?

Dave Powers -- Chief Executive Officer

Just a little bit of volume, I think modest growth, the scenario that will in -- I think will allow us to implement some price improvement.

Ben Burud -- Goldman Sachs -- Analyst

Got it. And then can you please give us an idea of how you see Wallboard demand -- the Wallboard demand cadence tracking by region?

Dave Powers -- Chief Executive Officer

No, I won't break it down by region, because it varies from month-to-month and quarter-to-quarter, but I do see modest growth in our Wallboard business as a total across other markets that we play in going forward.

Ben Burud -- Goldman Sachs -- Analyst

Got it. Thank you.

Operator

Thank you. Our next question comes from Adam Thalhimer of Thompson Davis. Your line is now open.

Adam Thalhimer -- Thompson Davis -- Analyst

Hey, Good morning guys. First on frac sand, the DNA in the quarter, is that the go forward rate as well or was that unusually high?

Craig Kesler -- Chief Financial Officer

Yeah. Adam that's generally peaks in this quarter and then we'll start to trail off in the December and March quarter as the -- especially in Wisconsin, those mines shutdown over the winter. I'd look to the cadence from last year, it might be a little bit higher this year given the new plant, but the cadence will be very similar quarter-to-quarter.

Adam Thalhimer -- Thompson Davis -- Analyst

Okay. And then have you done any projections for the Florence reconstruction possibility starting in the next calendar year?

Craig Kesler -- Chief Financial Officer

You know, Adam it's probably little early to be doing that as we've said with other Hurricanes, in the past, and Dave alluded to this you go through a period where a period of disruption kind of Phase 3 phase. The first phase being disruption and then what's -- what we saw in the market this quarter. And then you go through a second phase, that is a very quick response to trying to get people back into homes and buildings. And then that last phase that you're asking about that rebuilding effort that takes years right, whether you're talking about Houston, the Hurricane Harvey they are in Phase 3, you'll see the Carolinas move into that Phase 3 in the near-term. But to try to estimate that it would be pretty tough.

Adam Thalhimer -- Thompson Davis -- Analyst

Okay, and then you mentioned there are some markets on Cement pricing where you're in communication with customers as we speak. Is that for January or for April?

Craig Kesler -- Chief Financial Officer

So Adam, I think stepping back what we look at in Cement market is continue to have high utilization rates across many parts of the US. You have supply that is relatively constrained for new additions and as Dave said any demand improvements continue to push those utilization rates higher. So, we'll certainly communicate to customers, whether it's a January or March or April. But as we look forward, there is reasons to be optimistic around Cement prices for next year.

Adam Thalhimer -- Thompson Davis -- Analyst

And last one from me, Craig, just your thoughts on tax rate going forward?

Craig Kesler -- Chief Financial Officer

Yeah. So we obviously we're a beneficiary of the tax reform, about a year ago and tax rates been in these low '20s. It might tick up a little bit here in the second half of the year, but we were at 21% for the six months, it could be in that same range, maybe 22% somewhere in that neighborhood.

Adam Thalhimer -- Thompson Davis -- Analyst

Great, thanks.

Operator

Thank you. Our next question comes from Philip Ng of Jefferies. Your line is now open.

Colin -- Jefferies -- Analyst

Hi, this is actually Colin on for Phil. I guess just during the Cement business, you called out that wet weather hitting your -- both your Midwestern and your Texas markets for Cement. Can you just give us some color on how demand was tracking in those markets? Excluding weather, it maybe in some other months that didn't have that impact?

Craig Kesler -- Chief Financial Officer

We saw so much rain in most of September, maybe, the best way of answering that question is when the sun shines there, we're moving a lot of product.

Colin -- Jefferies -- Analyst

Okay. And then you talked about the competitive pricing alleviating in the Cement business as well. Have you seen any of your competitors announced similar price increases that you're discussing for the calendar year in 2019?

Craig Kesler -- Chief Financial Officer

That would be not appropriate for us to have to answer that question.

Colin -- Jefferies -- Analyst

Okay. And then I guess just question from me. You call about the pre-buy and wet and the Hurricane Florence impacting your Wallboard volumes. Can you parse out just what demand would have been excluding these headwinds, or what the drivers were from each of those?

Dave Powers -- Chief Executive Officer

You know, on the -- I mentioned earlier that we felt we were negatively impacted by the Hurricane and to the tune of about $20 million foot out of Georgetown. The pre-buy, I mentioned on the last call, I thought was $10 million to $15 million foot. It was probably a little higher than that, maybe $15 million to $20 million. So if you added $40 million to our numbers, you get an apples-to-apples comparison.

Colin -- Jefferies -- Analyst

Great, thank you very much.

Operator

(Operator Instructions) Our next question comes from Kevin Hocevar of Northcoast Research. Your line is now open.

Kevin Hocevar -- Northcoast Research -- Analyst

Hi, good morning everybody. You mentioned in the frac sand business to an earlier question about actions you're taking to help with the EBITDA of the business. Wondering, if you can give us some color on what those actions are? How long they take to execute? When should the benefit start showing up in the results and you know what type of savings you can generate in the business?

Dave Powers -- Chief Executive Officer

Well, as I mentioned earlier, our plan is to rightsize the business and to become cash breakeven in the next several quarters and we are doing what it takes to get that done.

Kevin Hocevar -- Northcoast Research -- Analyst

Got you. And obviously there is some moving parts in the Wallboard business in terms of some de-stocking after a pre-buy and with Hurricane Florence and you know, maybe impacting September. Wondering, if you could just give us some color on how the Wallboard volume trended through the quarter and maybe how to do in -- here in October?

Dave Powers -- Chief Executive Officer

We have a pretty good backlog in October. I will tell you our shipments in October are at par or a little bit higher than they were last October.

Kevin Hocevar -- Northcoast Research -- Analyst

Got you. Okay, great and then a last question just for clarification on freight to an earlier question, I think you mentioned that you are seeing flat. Does that mean, sequentially, you're seeing it flatten out the September quarter till now or is that -- was that a year-over-year comment?

Dave Powers -- Chief Executive Officer

It was sequentially.

Kevin Hocevar -- Northcoast Research -- Analyst

Okay, great. All right, thank you very much.

Operator

(Operator Instructions) Our next question comes from Josh Wilson of Raymond James. Your line is now open.

Josh Wilson -- Raymond James -- Analyst

Good morning and thanks for taking my questions. You talked about impacts from Hurricane Florence, were there any impacts from Michael?

Dave Powers -- Chief Executive Officer

Very little. We have very little participation in those markets at all. Little bit of Wallboard business in the Panhandle, but it's not significant.

Josh Wilson -- Raymond James -- Analyst

Okay. And then anything to call out on the cost outlook on the Cement side and particularly as it relates to energy?

Craig Kesler -- Chief Financial Officer

No, Josh, you're right. The Cement business is predominantly an energy-related business. So with solid fuels and electricity, we see inflationary changes on those annually. But no major changes in the outlook for those energy prices.

Josh Wilson -- Raymond James -- Analyst

Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes today's question-and-answer session. I would like to turn the call back over to Dave Powers for any closing remarks.

Dave Powers -- Chief Executive Officer

Thank you for your participation in our call and we look forward to speaking with you in January.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may now disconnect. Everyone have a great day.

Duration: 27 minutes

Call participants:

Dave Powers -- Chief Executive Officer

Craig Kesler -- Chief Financial Officer

Trey Grooms -- Stephens -- Analyst

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

Scott Schrier -- Citi -- Analyst

Ben Burud -- Goldman Sachs -- Analyst

Adam Thalhimer -- Thompson Davis -- Analyst

Colin -- Jefferies -- Analyst

Kevin Hocevar -- Northcoast Research -- Analyst

Josh Wilson -- Raymond James -- Analyst

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