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Edited Transcript of CBPX earnings conference call or presentation 1-Aug-19 9:00pm GMT

Q2 2019 Continental Building Products Inc Earnings Call

Reston Aug 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Continental Building Products Inc earnings conference call or presentation Thursday, August 1, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dennis Charles Schemm

Continental Building Products, Inc. - Senior VP & CFO

* James Bachmann

Continental Building Products, Inc. - President, CEO & Director

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Conference Call Participants

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* Christina Chiu

Barclays Bank PLC, Research Division - Research Associate

* Garik Simha Shmois

Longbow Research LLC - Senior Research Analyst

* Joshua Kenneth Wilson

Raymond James & Associates, Inc., Research Division - Senior Research Associate

* Joshua Timothy Large

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Margaret Eileen Grady

Jefferies LLC, Research Division - Equity Associate

* Reuben Garner

Seaport Global Securities LLC, Research Division - Associate Analyst

* Rodny Nacier

ICR, LLC - SVP

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Presentation

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Operator [1]

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Greetings, and welcome to the Continental Building Products Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Rodny Nacier of Investor Relations. Thank you, Mr Nacier. You may begin.

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Rodny Nacier, ICR, LLC - SVP [2]

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Thank you for joining us today for Continental Building Products' Second Quarter 2019 Earnings Conference Call.

I'm joined by Chief Executive Officer, Jay Bachmann; and Chief Financial Officer, Dennis Schemm.

Before we begin, I'd like to remind you management's remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today.

Examples of forward-looking statements include statements regarding our industry, business strategy and expected performance, such as expectations with respect to gross margins, revenue, operating income and cash flow as well as non-GAAP financial measures such as adjusted EBITDA.

These statements, which may occur during our prepared remarks or during the question-and-answer session, may be identified by words such as expects, should, anticipates, intends, estimates, believes or similar expressions that are used in connection with any discussion of future financial and operating performance.

Forward-looking statements represent management's current estimates in light of currently available information, and the company assumes no obligation to update any forward-looking statement in the future.

Forward-looking statements are subject to uncertainty and we encourage you to review the company's past and future filings with the SEC, including, without limitation, the company's Form 10-K and 10-Qs, which identify the specific risk factors that may cause actual results or events to differ in a material way from those described in these forward-looking statements.

In addition, during this call, certain financial performance measures may be discussed that differ from comparable measures contained in our financial statements prepared in accordance with U.S. generally accepted accounting principles, referred to by the Securities and Exchange Commission as non-GAAP financial measures. We believe these non-GAAP financial measures assist management and investors in evaluating our performance and comparing period-to-period results of operations in a more meaningful and consistent manner, as discussed in greater detail in our earnings release.

Our earnings release also includes a reconciliation of these measures.

I will now turn the call over to Jay.

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James Bachmann, Continental Building Products, Inc. - President, CEO & Director [3]

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Thank you, Rodny. Good afternoon, everyone, and thank you for joining us today for our second quarter 2019 earnings call.

Today, I will discuss our strategy, operating highlights and business activity. Dennis will then discuss additional details on our results and outlook. After our prepared remarks, we will open up the call for your questions.

We continue to drive continuous improvement across the company through the Bison Way with a focus on safety, customer experience and operational excellence. This disciplined approach allows us to execute through choppy market environments while continuing to invest in the future and return value to our shareholders.

We demonstrated this in the second quarter, where in a down market, we generated significant cash flow from operations of $31 million, invested $4 million in high-return capital projects and repurchased $15 million of shares, representing approximately 2% of our outstanding shares.

We continue to stay laser-focused on allocating our high cash flow generation, the shareholder accretive opportunities. The $4 million we spent in the quarter on high-return capital projects brings our year-to-date total spending to $9 million for this area.

Savings related to these capital investments are on pace to benefit gross profit by $3 million in 2019.

Each project helps ensure that we are well positioned to provide exceptional value to our customers through our low-cost, highly efficient and safe operations over the long term.

We also deployed $15 million into share repurchases, demonstrating our commitment to return value to shareholders with our high cash flow generation. Our dedication to maintaining low-cost, efficient operations goes hand-in-hand with our focus on ways to improve the customer experience. This was evidenced by our [presentation of Kaizen] as part of our Bison Way continuous improvement initiative, where we focused on process improvements and efficiencies to advance how we serve and interact with our customers. We truly believe that our Bison Way actions, combined with our deep relationships, will drive stronger connections to those we serve.

Turning to our operating metrics. Our volumes were down 6% year-over-year, which was consistent with how the associated market volumes perform. Sluggish new housing growth and some customer pre-buy activity in the previous year were the main drivers for this decline.

That said, we did see low to mid-single-digit volume growth occur in the month of July versus last year, and expect housing starts to improve relative to easier comps from the second half of 2018.

Overall, our customers remain positive on the construction trends in the second half of the year, and we continue to expect low single-digit wallboard volume growth over that same time period.

Pricing was down versus last year, although we have seen prices stabilize in advance of our announced increase set for early August. We look forward to discussing the results of this price increase with you in more detail after the release of our third quarter financial results.

In summary, I am proud of the exceptional efforts and resilience of our associates, who continue to execute the Bison Way across safety, customer service and operational excellence. Through their efforts, we continue to generate exceptionally strong cash flows and reinvest that cash into our business to further extend our low-cost leadership and to provide significant returns to our shareholders through our share repurchase program.

I'll now turn the call over to Dennis to provide additional details on our financial results, balance sheet and outlook.

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Dennis Charles Schemm, Continental Building Products, Inc. - Senior VP & CFO [4]

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Thank you, Jay, and good afternoon to everyone on the line. I will first detail results for the quarter and provide some comments on the balance sheet and liquidity, I will conclude by providing some additional perspective for the full year 2019.

In the second quarter, net sales decreased 10.8% to $124 million on lower volumes and pricing as compared to the prior year and lowered gross margin for the quarter.

In the quarter, as expected, we saw low single-digit inflation as higher fixed costs, freight and gypsum were partially offset by lower OCC costs for paper and lower energy prices.

Looking forward, we expect overall low-cost inflation to continue as higher gypsum and labor costs are partially offset by favorable energy. The high-return capital investments that we are making in our plant network are helping to mitigate some of these inflationary costs and we expect to realize savings of $3 million in 2019.

SG&A as a percent of net sales improved to 7.3% compared to 7.5% in the prior year quarter, benefiting from disciplined control of overhead cost. Interest expense decreased 11.1% to $2.4 million compared to $2.7 million in the prior year quarter, reflecting lower outstanding borrowings during second quarter 2019 compared to second quarter of 2018. Additional interest income and keeping our leverage ratio under 1.1x, giving us a 25 basis point drop in the interest rate spread. The decrease in interest expense in the quarter was partially offset by a rise in LIBOR.

Second quarter 2019 effective tax rate was 22.7% compared to 20.1% for the second quarter of 2018.

Moving to the balance sheet and liquidity metrics. On June 30, 2019, we had cash on hand of $110.6 million, total debt of $267.5 million and $73.5 million of availability on the credit facility.

During the quarter, we generated $30.9 million in cash flow from operations and invested $6 million in capital assets.

During the second quarter, we repurchased approximately 589,000 shares of common stock with an aggregate value of $15 million.

As we move forward, the repurchase program of $300 million provides us with approximately $111 million of remaining availability.

Our leverage ratio at quarter end remained just below 1.1x, the same as in the first quarter 2019. We are very pleased with our solid balance sheet, cash flows and our focus on operational rigor and discipline.

In regards to our Buchanan facility insurance claim, in the second quarter, we received $2.9 million, all of which related to lost operating profits.

Year-to-date, we have received $7.2 million, net of our $250,000 deductible on our full claim of between $9 million and $10 million. As we move forward, we fully expect to collect $600,000 related to direct costs associated with the business interruption and an additional $1 million to $2 million associated with lost operating profits or a total reimbursement of between $9 million and $10 million.

I will now provide some select insight regarding expectations for the full year 2019.

We expect our volumes to be in line with industry wallboard volume growth in the low single digits for the full year 2019, including the estimated 45 million square feet loss during the Buchanan plant outage in the first quarter.

SG&A is expected to be in the range of $38 million to $40 million, down from the previous range of $39 million to $41 million.

Cost of goods sold inflation per unit compared to the prior year is expected to be in the range of 2% to 3%.

We expect to partly offset this inflation by approximately $3 million of savings from high-return capital projects.

Total capital expenditures, including capital associated with the Buchanan outage, are expected to be in the range of $26 million to $30 million, down from the previous range of $30 million to $34 million. This change is entirely from lower maintenance capital spending which is now anticipated to be in the range of $10 million to $12 million.

Our return on capital expenditures are expected to be in the range of $14 million to $16 million. Approximately $1.8 million incurred as a result of Buchanan outage.

Depreciation and amortization is expected to be in the range of $43 million to $45 million. The effective tax rate is expected to be in the range of 22% to 23%.

In summary, we continue to execute our strategy to grow our business and combat inflation through strict, controllable cost discipline. This continues to allow us to deliver high returns to investors and strengthen our balance sheet.

We look forward to the remainder of the year as we continue to drive outstanding shareholder return.

Thank you again for joining us today.

Operator, we are now ready to take any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Phil Ng of Jefferies.

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Margaret Eileen Grady, Jefferies LLC, Research Division - Equity Associate [2]

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This is actually Maggie on for Phil. I was wondering, where does your prices settle out in July and have you started to see the competitive activity stabilized? And then maybe if you could just touch on some of the moving pieces driving the price leakage and outlook for the balance of the year?

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Dennis Charles Schemm, Continental Building Products, Inc. - Senior VP & CFO [3]

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Sure. So I can give you some details more on a historical basis. We're not going to give guidance for pricing for the year. If you look at what happened in the quarter, a lot of it is with the volumes being down. Not surprisingly, that created a little bit more of a competitive environment on the pricing side. The good thing is that things have steadied out. When we look at the exit price at the end of July, it is right around the $143 mark. So just slightly below where we ended up with the average for the quarter of $143.77 per MSF. And things have stabilized going into the price increase that we've announced for the second full week of August. So I think that's kind of a good summary of where we stand right now.

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Margaret Eileen Grady, Jefferies LLC, Research Division - Equity Associate [4]

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Okay. And just to clarify, is the August price increase just specialty board? Or is it across your portfolio?

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Dennis Charles Schemm, Continental Building Products, Inc. - Senior VP & CFO [5]

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So the one that we're doing in that second week of August is across the portfolio. We do have a very -- a small one that we've done. It reflects some of our specialty board that uses some additives from overseas, where we've been impacted by tariffs. So we've gone ahead and put that in place starting August 1st. But it's -- I'd say relative to our portfolio as a whole, it's a small amount.

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Margaret Eileen Grady, Jefferies LLC, Research Division - Equity Associate [6]

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Okay. And then last one for me. You mentioned low single digits -- or low-to-mid-single-digit volume growth in July. I guess, if you could talk more about your outlook for demand in the second half. What kind of feedback you've been hearing for your customers? Just kind of spice up how you're thinking about volumes in the second half?

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Dennis Charles Schemm, Continental Building Products, Inc. - Senior VP & CFO [7]

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Sure. When we look at the second half, we're predicting a low single-digit growth as we look at the second half of 2019 versus second half of 2018.

What's nice as you've started to see a little bit of a pickup again in some of the housing starts versus last year and the comps get a little bit easier there when you get into the second half of the year.

The conversations I've been having with our customers is that the backlog is there. Part of the weather issues that a lot of us faced in the first half of the year have started to ease a little bit. So I'm feeling that the low single-digit growth for the second half is a pretty good number.

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Operator [8]

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(Operator Instructions) Our next question comes from the line of Matthew Bouley of Barclays.

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Christina Chiu, Barclays Bank PLC, Research Division - Research Associate [9]

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This is actually Christina Chiu on for Matt. I wanted to ask in regard to the price increases, and I know you won't be giving further detail until the third quarter call. Just given that housing sentiment has gotten a little better but volumes still remain choppy, how does that all balance out when thinking about a price increase? And what are you hearing from customers about the ability for them to accept it and pass it through?

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James Bachmann, Continental Building Products, Inc. - President, CEO & Director [10]

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Sure. So certainly, it's a conversation we're having with our customers. The fact that our customers are telling us that they're seeing volumes stronger in the second half relative to what was certainly the case that we saw in the second quarter, I think, is a positive. So we're going to go ahead and obviously work with them and be happy to talk more about it in the -- after our third quarter is over as to what the results of that are.

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Christina Chiu, Barclays Bank PLC, Research Division - Research Associate [11]

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Okay, got it. And then the second question that I had was in regards to the cost inflation guide. You had previously guided at 2% to 3%. and obviously, that was maintained this quarter. But last quarter, you had cited that it was reduced due to OCC and energy.

So I was wondering, what kind of incremental benefit that's had during this quarter as well as just freight relief and wastepaper relief in general during the quarter?

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Dennis Charles Schemm, Continental Building Products, Inc. - Senior VP & CFO [12]

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Well, I -- from the inflation perspective here, we're pretty confident in our guide of the 2% to 3%, and it is a reduction from our prior quarter. And that's mainly due to OCC, lower energy costs. We are still dealing with a basket of cost elements, such as freight, labor and gypsum costs as well that we continue to see inflation. So net-net, it has come down for us, which we're really pleased about, but we still are dealing with an inflationary environment and we expect to see that for the remainder of the year.

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Operator [13]

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Our next question comes from the line of Reuben Garner of Seaport Global Securities, LLC.

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Reuben Garner, Seaport Global Securities LLC, Research Division - Associate Analyst [14]

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Maybe -- let's see -- first, a clarification. So you talked about kind of your operating income from the Buchanan plant, can -- and your guidance for low single digits on the volume side for the full year. I think you said was inclusive of lost volumes tied to Buchanan.

Were the volume and pricing data that you reported in Q2, was there any catch-up or any of that lost business from Q1 included in those volume numbers that you reported? Or were those -- was those just what you actually did in Q2?

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James Bachmann, Continental Building Products, Inc. - President, CEO & Director [15]

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So what we did in Q2 is what I would call pure numbers. So the volume that was lost only solely relates to Q1.

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Reuben Garner, Seaport Global Securities LLC, Research Division - Associate Analyst [16]

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Okay. Great. And then maybe on the the cost side, I know you guys provided some new disclosure in the quarter around your gypsum supply and why you're comfortable that you're going to have plenty available for the coming years. Can you -- I think you stated that in the presentation that you put out you're looking at a 3% to 5% CAGR for your gypsum costs over the next decade or so.

Can you talk about what kind of inflation you're seeing now from gypsum alone? And how that kind of plays out? Is it kind of a steady 3% to 5% over the next decade? Or are you seeing a little less now, and you expect it to ramp in the coming years as you have to use different sources?

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Dennis Charles Schemm, Continental Building Products, Inc. - Senior VP & CFO [17]

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Yes, and Reuben, what we tried to do with our inflation guidance is make it really, really simple. It's complex because there's a lot of elements in there. Gypsum is one of them. And I'm not going to go into the details there as to what each element is doing on its own. That's why we created the basket and that's why we're going to stick to that 2% to 3% guide.

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Reuben Garner, Seaport Global Securities LLC, Research Division - Associate Analyst [18]

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Got it. And then if I could sneak one more in. The inventory in the quarter looked to be a little bit higher as a percentage of revenue than it's been. I know in Q1, you had some more inventory because of the Buchanan plant. Can you talk about your inventory position? Why you're comfortable with it? And should we see a trend lower from here as we move through the rest of 19?

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James Bachmann, Continental Building Products, Inc. - President, CEO & Director [19]

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Yes. I think we're real comfortable with it. I think, it's really just a timing issue more than anything. We continue to extract a lot of rigor and discipline on all facets of working capital, inventory being one of them. So really look at this as a timing issue.

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Operator [20]

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Our next question comes from the line of Garik Shmois of Longbow.

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Garik Simha Shmois, Longbow Research LLC - Senior Research Analyst [21]

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Yes. The $3 million of gross profit improvement from high-return projects for this year, can you provide some color on how much you already realized versus how much is still to come?

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Dennis Charles Schemm, Continental Building Products, Inc. - Senior VP & CFO [22]

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Yes. Garik, this is Dennis. So we're really excited about the high-return CapEx spend that we've been doing over the last couple of years, and this year trending no differently.

We captured about $1.5 million of savings that we're right on pace with the $3 million guide for the year. And so then, if you look back and you look at this cumulatively, we captured 4 last year, we'll get that 4 again this year and then another 3 here. So we're looking at $11 million here from our high-return CapEx spending. And so we're very excited to continue to return shareholder value in that way.

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Garik Simha Shmois, Longbow Research LLC - Senior Research Analyst [23]

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Okay. That's good to hear. And then secondly, just on volumes. You indicated that July, you saw an increase, low-to-mid single digits. Is it possible to parse out if there's any pre-buy ahead of your price increases in that figure? Or if you think that's a truly organic demand?

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James Bachmann, Continental Building Products, Inc. - President, CEO & Director [24]

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Yes. We're still looking at that. It is hard to parse out right now, just given how the markets have been. We'll have a better feel once I'd say we get into -- once the price increases put in place and we get into the period subsequent for that to get a better understanding of what was prebuying or not.

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Garik Simha Shmois, Longbow Research LLC - Senior Research Analyst [25]

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Okay. And then just -- if I can sneak in just a follow-up to that point. The year-ago period, the industry grew a price increase in the middle of the year.

Can you just remind us if there was anything that we should be considering with respect to the comp in the third quarter? Did that include a pre-buy as well?

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Dennis Charles Schemm, Continental Building Products, Inc. - Senior VP & CFO [26]

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So in the prior year quarter, in Q2 of the prior year, there was a pre-buy. We estimated our pre-buy impact of around 10 million square feet.

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Operator [27]

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Our next question comes from the line of Josh Wilson of Raymond James.

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Joshua Kenneth Wilson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [28]

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Could you quantify what your distribution costs were in the second quarter?

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Dennis Charles Schemm, Continental Building Products, Inc. - Senior VP & CFO [29]

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I can give you that breakout. I know that's one thing that you're always interested in from our total cost perspective here. And so our manufacturing cash cost, they were, roughly speaking, 64% of our cost of goods. Our D&A was 11% and then the remainder or 25% was distribution cost.

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Joshua Kenneth Wilson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [30]

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Got it. And regarding pricing trends for the quarter, did you see any differences in the regions? Or were there any mix impacts on the average price?

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Dennis Charles Schemm, Continental Building Products, Inc. - Senior VP & CFO [31]

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Really no mix impacts. If you take a look at overall as to how that played out, I would say it's not something that would impact the numbers you're looking at.

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Operator [32]

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(Operator Instructions) Our next question comes from the line of Keith Hughes of SunTrust Robinson Humphrey.

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Joshua Timothy Large, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [33]

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This is Josh coming on for Keith. So I was trying to get a sense of channel inventory understanding. Buchanan area has less channel inventory. But what's your sense with regards to the channel?

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James Bachmann, Continental Building Products, Inc. - President, CEO & Director [34]

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So if you take a look -- you're right. Buchanan, in the Northeast, very little can be stored on the ground there. So that -- those are generally full. In terms of the other locations, at this stage, I'd say, they still have some room, but it's hard to give a specific figure. It really depends on the warehousing location that you're buying in.

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Joshua Timothy Large, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [35]

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Okay. And then on the prices. It was kind of weak for 2 quarters. Did you -- have you seen any of that pass-through distribution? Or is that -- is it more just on the manufacturer side?

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Dennis Charles Schemm, Continental Building Products, Inc. - Senior VP & CFO [36]

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So certainly, I think it's a good question to ask the distributors and our public as to what they're seeing. From what I understand, there has been pricing that has been passed through when I talk to them on the distribution side into the end markets.

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Operator [37]

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At this time, there are no further questions over the audio portion of our conference.

I would like to turn the conference back over to Mr. Jay Bachman, Chief Executive Officer.

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James Bachmann, Continental Building Products, Inc. - President, CEO & Director [38]

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Well, thank you for joining us on the call. We look forward to speaking to you next time.

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Operator [39]

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This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful rest of your day.