Good day, everyone. And welcome to Eagle Materials Third 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.

Thank you, Lauren. Good morning to all, and welcome to Eagle Materials conference call for our fiscal third 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 the first slide covers our cautionary disclosure regarding forward-looking statements made during the call. These statements are subject to risks, 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. I would like to begin by saying that all in all it was a fairly straightforward quarter notwithstanding the year-over-year comparisons that are complicated by non-reoccurring items of a year ago. There are three observations about what the quarter's results represent, more broadly about our markets and market conditions that I would like to touch on before we go into the details of the quarter. The first is about demand resiliency in our markets. The overall market backdrop of our building materials even with the much discussed volatility in the housing market has remained in positive territory, with growth rate trends in the low single-digits. Cement prices and volumes were both up modestly this quarter and Wallboard prices were up 5%. Volume comparisons for this segment were also affected by pre-buying activity that occurred the same quarter a year ago. I appreciate that it's always difficult to distinguish between weather and macro related demand weakness. What I can say is that…

Thank you, Dave. Eagle's third quarter revenue declined 7% to $333 million, reflecting the unusual weather, timing of pre-buy activity in wallboard and further weakness in the oil and gas business, partially offset by improved pricing at our two major businesses. Eagle's quarterly earnings per share declined 40% to $1.24. However, excluding the non-recurring items highlighted in the press release, earnings per share declined 11%. This next slide highlights the results of our heavy materials sector, which includes our cement, concrete and aggregate segments. Revenue was down 3% versus the prior year with improved pricing offset by lower sales volume in concrete and aggregates. Operating earnings declined 14%. Maintenance costs are the primary factors for the earnings decline in cement. Moving to the light materials sector. Lower sales volume associated with the shift in timing of our wallboard price increase and related buying activity drove the 5% decline in our quarterly comparatives of wallboard and paperboard revenue. In contrast, quarterly operating earnings were up slightly to $51 million, primarily reflecting lower raw material costs. Eagle's oil and gas profits revenue declined 47% to $14 million, reflecting lower sales prices and sales volume. The quarterly operating loss increased primarily associated with lower sales prices. Sales volumes and prices were negatively affected by weakness in completions activity, which was greater than anticipated and the typical seasonal slowdown. Operating cash flow for the first nine months of the year improved 7% to $294 million. Capital spending increased to $124 million. This amount included investments to improve and replace existing equipment, complete our frac sand drying capacity, enhance our distribution capabilities and to continue to improve our low-cost operations. For the first nine months of the year, Eagle has returned over $200 million or 105% of our net earnings to shareholders through a combination of share repurchases and dividends. This last slide reflects the cash flow generation results of our highly competitive low cost position. Our debt to cap ratio was 31% at December 31st. Thank you for attending today's call. We will now move to the question-and-answer session. Lauren?

[Operator Instructions] And the first question comes from Trey Grooms with Stephens Inc. Your line is now open.

So first question is really around the wallboard volume, and just from the best you can tell at least. How much of the year-over-year decline in wallboard was due to the timing of the pre-buy being down 7% or 8% in the quarter? And I think you said demand up a little bit for the year. But just if you can help us sort out how much of it was pre-buy in the quarter specifically?

Trey, the majority of it was pre-buy. We estimate $50 million foot was purchased pre-buy December a year ago that affected this year's results for us.

So looking into the first quarter now given the timing of the wallboard increase this year for February. Are you guys seeing any or expecting any pre-buy activity in your fiscal 4Q?

Actually, we are experiencing it spring seeing it right now. The last couple of weeks our order intake has been really pretty good and our backlog is good at this time. So the answer of that question would be yes.

And just for our benefit on just trying to estimate that. Should we assume similar levels to what we saw prior December as far as pre-buy activity?

It will be in that same area. I would estimate its being that same area.

And then on cements, the maintenance outages it was two facility. Can you quantify, Craig, maybe how much of an impact that had to operating profit in that segment? And then also, Dave, I think you mentioned something that it was something unique about these outages, it wasn't costs related. Could you give us little bit more color on what was behind those outages there?

Trey, there wasn’t anything extraordinary or unique about the outages just the timing. It was about $3.5 billion for the quarter, just making sure keeping the kilns at top level. And as utilization rates are at this high of a level, you are having to plan ahead and we are taking some incremental outages to make sure we can get through the winter season.

And then looking into the next quarter or two, are there any outages that are planned that we should be modeling?

No, nothing unusual, the April May timeframe is when we do the typical major annual outages, which is now pretty standard across the system. But we are not anticipating anything before that, or anything significant.

And then last one for me. Dave, you mentioned, again, going back to the wallboard volume. You said demand up a little bit for the year. And I think you mentioned something around growth rate trends in the low single-digits. Is that the outlook for wallboard demand, the wallboard volume in your markets for calendar '19 low single-digits range?

That is our projection. And frankly, Trey, last week we looked at a report where 78 analysts projected housing starts over the next year. The consensus of all those economists were up a little bit this year and up a little bit more next year and that’s what we are planning on. I will tell you that repair and remodel continues to be strong somewhere in the area of mid single-digits by most people that project that. And in our markets, the commercial construction business appears to be very, very good.

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

On the Proppants businesses, the volumes actually weren’t quite as bad as thought they might be for the quarter just given various dynamics going on out there. Is there any indication you're nearing a trough in that business at least from a volume side, or do things potentially get worse before they get better here?

We hope that we’re in the trough. Our customers have very little visibility in the business. They do expect not dramatic volume improvement in the first quarter. They expect a little bit more volume improvement in the second quarter.

Maybe on the cement side, just given volumes have been I guess stagnate for several quarters now. I guess what do you think the appetite in the market is for cement price increases right now? And is there anything different around what maybe some of your competitors are doing this year that could either help or hurt your ability to realize these announcements you have out there?

I’m not going to comment on any competitor activity. But I will tell you our plans are running at near capacity. Prices always determined in the marketplace and I'll have a lot better feel of it couple of weeks after the effective increase date.

And I guess within the cement business, I mean it sounds like utilization rates are high everywhere. But are there material differences in demand across the various assets you have?

The majority of ours are up, but some markers are little bit stronger than others. But we feel pretty good that most of our markets are trending up.

Our next question comes from Scott Schrier from Citigroup. Your line is now open.

Just a follow up on that last question on the capacity utilization. I know in the past I think about a year ago, you had said in order to really start to get that cement price and meet that strain across the whole network. It seems like you’re getting better capacity utilization but we’re not ready to call the network or characterize it as strain. Is that a fair assessment?

Scott, maybe another way to also talk about that is you look at some of our markets and this has been well chronicled across many different platforms. But the 2018 in many markets is not the wettest year on record. You’re certainly approaching a top two or top three. And so you have had a lot of -- you look at flat cement volumes and I think a lot of that is associated with weather. And so they're across many of the facilities there it's not over sold near full utilization. I wouldn’t say every market is strained to this point yet. But if you were to get normal weather patterns, I think you will see utilization rates are higher than what we saw in 2018.

And seems like you have constructive comments on some of the headwinds that you've had from some of the cost buckets transportation and such alleviating a little bit. I know in the past, you've called out some rail cost eating into your cement mill mass and similarly eating in cement mill on the wallboard side. Is that something that you’re seeing that normalize and you’re not really seeing much in terms of those transportation costs eating into your prices in those segments?

Scott, the second half of the year, we did see and I think Dave commented last quarter that freight costs have kind of leveled out here versus what we have seen earlier in the year. Certainly, they're going in the calendar '19 the railroads and truckers are pushing for some freight increases, and then we will do our best to offset that. But we haven’t seen anything significant like we saw this time last year. And that still did impact the cement mill net this quarter versus the prior year about at the same level as we saw is about $1 a ton, but those comps seem to level out here more recently.

And one last one on frac sand, I just want to reconcile some of the comments that you just made and maybe in what was seen in the press release of how you are potentially taking steps to right size the business. If you could talk about maybe what are the potential avenues you are looking at? And how do you look at in terms of that you said maybe you're at a trough, so you think about just weighting it out and seeing if demand really starts to pick up. Or you go ahead and make adjustments in the business now?

We are looking at everything. We are looking at equipment. Maybe we have got two extra railcars and mobile equipment that we don’t need. We are looking at staffing. We are looking at how we are running our operations, should I run all of them. We are going to go slow, because we are also going to plan for the upside. So we are not going to go too quickly. But we are looking at everything from a cost structure point of view.

Our next question comes from Jerry Revich with Goldman Sachs. Your line is now open.

I'm wondering if you folks can talk about which markets you are most confident in terms of driving growth for your business in the heavy materials in '17, '19 versus '18? And by the same token, which markets are you monitoring that you expect flat to maybe as such weaker. And if you can comment on what you're hearing DOT projects in particular that would be helpful, because we're sharing ankhs from DOTs with high federal mix about potential reemergence of the shutdown. So I'm wondering if that's translating into cadence of activity base in your discussions.

Jerry, as we highlighted in the press release at the end of the day, the basic underlying fundamentals of sustained job creation, low interest rates, higher wages. Those things over time translate into improving demand for our basic construction products. Region-to-region, quarter-to-quarter things might be slightly different. But on the average, we are expecting to see continued improvement in demand across our products. Again, the low single-digits, we try not -- you look at state lettings, they are improving but as long as you have those basic underlying fundamentals where they are today, our businesses shape up to have a good calendar 2019.

But can you give us a bit more context on that, and I appreciate the importance of looking at the picture as a whole. But can you share with us any markets that span out that you folks feel very good about based on booking trends or project cadence. Can you just give us a bit more regional flavor?

Clearly, you have some regions -- I mean, for example, Texas continues to be a very strong economy. Again, if you look at the last four months of the calendar year '18, you had more rain in those four months than you had all the first eight months of the year. So that’s going to cause some trends a little bit unique, but when the sun shines cement is moving. So you have some regions like that that are very strong. But I would tell you again across the board, we are continuing to see improvement, again, albeit it's all growing in that low single-digit type of improvement.

And in terms of any of your discussions point of potential for slower ramp up for the construction season. Is that factoring into project timing cadence as being communicated to you by your customers, because of the government shutdown?

Yes, that’s a little too early to tell if there is any impact from that. This is obviously at the winter season especially in the northern part of the country, they have been demobilized for a while now and they will start up in the spring.

And then what really stands out cycle over cycle is the margin performance in your wallboard business where you folks have a really strong cost structure. And I am looking at the cement business now and the margins there are in the mid-20s when you folks were at similar level of capacity utilization in the 2000s margins were closer to 30%. And I know you've increased planed efficiency overtime. Can you just talk about what needs to happen to margins to get back to the 30% range that you folks were able to get to a decade ago?

Jerry, the way I look at margins for the cement business and is on an EBITDA basis, so adding back the depreciation and amortization. As you know, we have made a number of acquisitions more than double our cement capacity the last five or six years. So when I actually go back and look at it on that level, margins are running much higher as the facilities that we have added are low cost facilities. And so they fit very nicely into our network. But we think even with the network with where utilization rates are, we can continue to potentially get incremental pricing and that should move margins as well.

Our next question comes from Stanley Elliott with Stifel. Your line is now open.

Quick question, could you remind us again the pricing discussions around the cement side? And then I'm curious to think if or get your perspective if the lower input costs that we are seeing on the natural gas and some of the other inputs, if that has any meaningful ability in your ability to realize pricing in the coming year?

We have announced increases for $6 to $8 in most all of our markets for the April 1st time frame. We are negotiating with our customers now. I feel pretty good about the market realization there.

And how do we think about the cadence of repurchases going forward? Should we think about it as more of an opportunistic or any color there would be great?

The program we put in place three or four years ago, we are continuing to put that into place. And as Dave mentioned in his earlier comments, sometimes the start market gives you unique opportunities. And as you can see, we've been buying more as the price has gone down. We continued to see value in the shares and I'll leave it at that.

And then last for me, you talked about the Proppants business troughing out and apologize if you've mentioned earlier. Does business get back to a breakeven cash flow by the end of this fiscal year, or is that something we are looking at more for next year and hopefully some earnings growth out of that business?

So in terms of the cash flow of that business, the nice thing is that business is at a point where there is no more incremental capital being spent on the business. We have completed the network that we wanted to, so from that perspective no more incremental capital. At an operating level, we were slightly below breakeven on an EBITDA basis this quarter but just slightly. And with some of the actions and discussions we have had, we intend to continue to take cost out of that business and like where we were four years ago or so, keeping that business at a cash breakeven level.

Our next question comes from Adam Thalhimer with Thompson Davis. Your line is now open.

I want to follow up on that last question. Do you have a number in mind for what you want to get the operating losses and frac sand down to?

Right now those are putting losses predominantly depreciation and amortization and depletion, and that will stay in this similar level for a while until you have some volume improvement in that business.

And then remind us what the bull case in frac sand is again, I mean what do you think the next upcycle looks like for you guys?

Adam, we have not got a system that sits on all major class 1 rails. So we have a position in Illinois with northern white sand and we have a position in the Northern Wisconsin also on a major class 1. And so as the basins across U.S. start firing again that’s our opportunity and we have distribution facilities in all of the major basins. So depending upon the price of oil and other factors that are going on, obviously, we talk about in the fall about the Permian really declining completion activity until they get their pipeline installed so they can start moving the oil out. So there is lots of moving parts. But in terms of how we are positioned for the next upside, we can get hit of the major basins in the U.S. with high-quality northern white sand, and we think that's the strong position for that eventual recovery.

How did wallboard prices trend during the quarter?

I think as we talked about last quarter, we exited the quarter so this goes back to September. Our price was lower than the average and prices were pretty much flat during this December quarter.

[Operator Instructions] Our next question comes from Phil Ng with Jefferies. Your line is now open.

Weather hasn’t really been ideal last year as well as stark year, and that puts you in a tough spot with cement pricing. With some of the maintenance you've taken late in the year. How does your inventory stack up just curious to get your thoughts on supply and demand on that front?

Without getting into daily production activities or daily inventory levels, we are comfortable with where our inventory levels are across the cement.

And then maintenance expense obviously was a little higher than expected this quarter, and I think you called out something of the similar magnitude in 1Q. Is this a bigger year in terms of maintenance? And does that sets you up a little more favorably for 2020? And how should we think about maintenance in general going forward from a modeling perspective?

So the maintenance we highlighted in the first quarter was just associated with the new facility that we have acquired in Ohio and the cadence of how those maintenance outages work. So that was just coincidence that the quantified number was just similar, because that was just timing issue. These outages here in the fall were separate and unique. So again, we will get back onto a normal cadence in the June quarter like we had this year.

I know you guys have a relatively small ag business located in some few markets. I was surprised that you priced it down about 10% year-over-year. What's driving that? And then was there any noise in the quarter that stood out?

If you think about where we were located in our concrete and aggregate businesses, Central Texas, Kansas City and then Northern California. And as I mentioned earlier, if you look at the rainfall totals for the first eight months of the year at Austin and you compare those to only the last four months, it was an extraordinarily unique fall for almost all of Texas, but in Austin. And that’s such a concentrated area when you are shipping concrete and aggregates to that type of rainfall could really impact the business. So if you look at the earnings this quarter that is -- you almost lost October in the State of Texas.

And just one last one for me and as you highlighted in the call, multiples across the sector has come in. just how are you thinking about M&A such at this point of the cycle and how is the pipeline looking?

We continue to be opportunistic. There are opportunities out there. But as Dave has highlighted many times, we have a strict financial return criteria and we look at those and compare to other opportunities that we might have. And there is a desire to grow and balance sheet and capital structure is certainly well positioned and they continue to grow, but we are going to be pretty picky.

And is the focus still primarily on the heavy side of things?

Yes.

Our next question comes from Josh Wilson with Raymond James. Your line is now open.

Just a clarification question for me, you said the size of the pre-buy you think now was 50 million square feet?

Yes, for us in this -- well, that would've been the December 2017, correct.

And then regarding trying to get a handle on the underlying tone of demand wallboard. What has the monthly volumes evolved as the quarter progressed?

We wouldn’t try to attract something usable on a monthly basis. This business is best managed on an annual basis, especially as you head into the winter month. So I'm not sure that trend would make a lot of sense.

And any weather impacts to call out in January?

If you live in the northern half of the country, I think this week is going to be pretty cold and snowy. But again, we try not to get too into the month to month type of changes. We are trying to run the business over a much longer period of time.

Our next question is a follow up from Stanley Elliott. Your line is reopened.

The $3.5 million on the cost, that was wholly-owned in Ohio and not JV?

Mostly, there was a little bit in the joint venture but a significant majority of that would be in the wholly owned business.

And this does conclude today's question-and-answer session. I would now like to turn the call back over to Mr. Powers for any closing remarks.

I want to thank all of you for participating in the call. We look forward to talking with you in the spring. Thank you.

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