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Edited Transcript of EXP earnings conference call or presentation 15-May-18 12:30pm GMT

Q4 2018 Eagle Materials Inc Earnings Call

Dallas Jun 14, 2018 (Thomson StreetEvents) -- Edited Transcript of Eagle Materials Inc earnings conference call or presentation Tuesday, May 15, 2018 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* D. Craig Kesler

Eagle Materials Inc. - Executive VP of Finance & Administration and CFO

* David B. Powers

Eagle Materials Inc. - CEO, President & Director

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Conference Call Participants

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* Adam Robert Thalhimer

Thompson, Davis & Company, Inc., Research Division - Director of Research

* Blake Anthony Hirschman

Stephens Inc., Research Division - Research Associate

* Brent Edward Thielman

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Jerry David Revich

Goldman Sachs Group Inc., Research Division - VP

* Joshua Wilson

Raymond James - Analyst

* Scott Evan Schrier

Citigroup Inc, Research Division - Senior Associate

* Colin Devine

Jefferies & Co. - Analyst

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Presentation

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Operator [1]

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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.

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David B. Powers, Eagle Materials Inc. - CEO, President & Director [2]

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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 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 this call. These statements are subject to risks 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 onetime 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 a year ago, encourage us. And we're out of 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're 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 going to 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 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 investments 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 definitionally 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 startup has already been spoken for, except for the limited amounts we are reserving for spot market participation. The market for high-quality frac 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 financial 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 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 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.

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D. Craig Kesler, Eagle Materials Inc. - Executive VP of Finance & Administration and CFO [3]

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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 pretax 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 of personnel-related expenses, including an increased 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 Aggregates 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% to 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 abated 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 -- fourth quarter 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 Proppants operating earnings improved from the prior year, and the near-term prospects for our proppants business continue to improve from this time last year, which is reflected in a 170% increase in our annual frac sand sales volume. This improvement in sales volume helped generate EBITDA of $19 million during the year.

During the fourth quarter, our frac sand business was impacted by logistical challenges and harsh winter weather, which delayed railcar 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 frac sand drying capacity to 5 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 2% to $338 million. Total capital spending increased to $132 million. This included investments to improve and replace existing equipment, expand our frac 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 a combination of share repurchases and dividends. We continue to project an effective tax rate in the 22% to 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% at March 31, 2018.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Brent Thielman from D. A. Davidson.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [2]

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Great. 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? 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?

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David B. Powers, Eagle Materials Inc. - CEO, President & Director [3]

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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 in 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%.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [4]

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

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David B. Powers, Eagle Materials Inc. - CEO, President & Director [5]

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No. Our plant is sold out at this time, and we're importing a little bit of product up to our max. So our volumes are -- we're tight in Texas. We're real tight.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [6]

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Okay, okay. And then maybe on the freight side for Wallboard, I think last call you talked about kind of around a $2 headwind at mill net. Is that roughly what played out this quarter? And is that kind of still the expectation going forward?

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David B. Powers, Eagle Materials Inc. - CEO, President & Director [7]

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Actually, Brent, freight is going to be a little higher for us. We're in the middle of negotiating with carriers. We're probably 70% done. And right now, we're anticipating about a 10% to 12% increase in our outbound freight numbers as we look at it today.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [8]

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Okay, 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?

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D. Craig Kesler, Eagle Materials Inc. - Executive VP of Finance & Administration and CFO [9]

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$102 a share.

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Operator [10]

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And our next question comes from the line of Scott Schrier from Citi.

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Scott Evan Schrier, Citigroup Inc, Research Division - Senior Associate [11]

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I wanted to first ask about the Wallboard. Obviously, the 8% sequential pricing is very strong. Volumes came 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.

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David B. Powers, Eagle Materials Inc. - CEO, President & Director [12]

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No. We always try and maximize the volume-price relationship to generate the most gross profit dollars. And the way we looked at it, let's lean on price in the first quarter as we felt very strongly the volume was going to come to us. And it has.

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Scott Evan Schrier, Citigroup Inc, Research Division - Senior Associate [13]

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

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David B. Powers, Eagle Materials Inc. - CEO, President & Director [14]

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No. We didn't see any at all.

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Scott Evan Schrier, Citigroup Inc, Research Division - Senior Associate [15]

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

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D. Craig Kesler, Eagle Materials Inc. - Executive VP of Finance & Administration and CFO [16]

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No. Scott, this business is predominantly energy-focused, right? Between fuel and electricity. And we weren't seeing any significant movements there, any unusual movements. There's 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 trucking those materials into your facilities. So it'll be more on the freight side than the underlying commodities.

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Scott Evan Schrier, Citigroup Inc, Research Division - Senior Associate [17]

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And on the rail side, I know you called out some rail congestion and logistics issues in frac sand. Did we see any of that in Cement? And should we expect to see any of that in Cement?

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D. Craig Kesler, Eagle Materials Inc. - Executive VP of Finance & Administration and CFO [18]

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Scott, I'll just tell you, we are seeing very tight shipping utilization across the country and almost across all the products. And whether you're talking about Wallboard, Cement or frac sand, the rail is -- 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. And you're trying to ship as much as you can underneath the umbrella of your facility. That -- and I -- 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.

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David B. Powers, Eagle Materials Inc. - CEO, President & Director [19]

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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.

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Operator [20]

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Our next question comes from the line of Jerry Revich from Goldman Sachs.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [21]

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I'm wondering if you folks can talk about the cadence of Cement pricing actions this year, how that compares to last year, 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? Is it mix? Can you just help us get a feel for how pricing actions are stacking up this year versus last year?

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David B. Powers, Eagle Materials Inc. - CEO, President & Director [22]

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Well, 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 competitive situations that we chose to meet. And 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 honored those prices, and we're now shipping those jobs. So those 2 things did affect our mill net a little bit.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [23]

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And Dave, how does that cadence play out over the next couple of quarters? Are those jobs done? So as those jobs finish shipping, and hopefully, the competitive 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 2 factors?

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David B. Powers, Eagle Materials Inc. - CEO, President & Director [24]

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We expect, as those jobs roll off, and they'll roll off midsummer, to get a little bit of margin improvement, yes.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [25]

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

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D. Craig Kesler, Eagle Materials Inc. - Executive VP of Finance & Administration and CFO [26]

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Sure. I'll point to the volume and the impact that weather had on the volume. On the cost side, our performance was pretty good, and we did have 6% or 7% 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 of more than 700% from where we were the prior year. Illinois, same type of increase. Texas, 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 cost absorption is going to be overcome by any price improvements. So as volumes start to pick up here in the construction season, that will solve a lot of those issues.

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Operator [27]

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And our next question comes from the line of Adam Thalhimer from Thompson, Davis.

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Adam Robert Thalhimer, Thompson, Davis & Company, Inc., Research Division - Director of Research [28]

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The 10% volume growth you saw in April, that was in Cement, correct?

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D. Craig Kesler, Eagle Materials Inc. - Executive VP of Finance & Administration and CFO [29]

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Yes. So that -- as Dave said, the construction 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 has started off the construction season on a good foot.

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David B. Powers, Eagle Materials Inc. - CEO, President & Director [30]

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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.

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Adam Robert Thalhimer, Thompson, Davis & Company, Inc., Research Division - Director of Research [31]

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Okay. Perfect. That was the next question. And then, 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're thinking about wholly-owned Cement price?

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David B. Powers, Eagle Materials Inc. - CEO, President & Director [32]

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Well, we do understand the supply-demand dynamics and the impact it can have on price, and we continue to evaluate 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.

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Adam Robert Thalhimer, Thompson, Davis & Company, Inc., Research Division - Director of Research [33]

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

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D. Craig Kesler, Eagle Materials Inc. - Executive VP of Finance & Administration and CFO [34]

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Yes. I understand your question. I think the point we're trying to make is it's not an exact timing as far as -- which -- when the prices will increase and how much of the recent increases have been realized I think with the communications around tightness across the whole 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 2 to 3 years or more of a very good environment to be running this business.

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Operator [35]

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Our next question comes from the line of Phil Ng from Jefferies.

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Colin Devine, Jefferies & Co. - Analyst [36]

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This is actually Colin on for Phil. Just going back to the Cement side and pricing, I was just wondering, you guys talked about the markets being tight in places like Texas. In those specific markets, is there an opportunity for a second price increase ahead of where you're seeing your other markets?

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David B. Powers, Eagle Materials Inc. - CEO, President & Director [37]

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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. Nevada is another one. We continue to evaluate the supply-demand dynamics on a daily basis.

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Colin Devine, Jefferies & Co. - Analyst [38]

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Okay. And then just in terms of the Wallboards, some of your competitors have announced a second price increase. Just given where demand trends and raw material inflation are, can you give any color around the opportunity to realize a second price increase in that market?

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David B. Powers, Eagle Materials Inc. - CEO, President & Director [39]

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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 its customers. And when we do, our customers will be the first to know.

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Operator [40]

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(Operator Instructions) Our next question comes from the line of Josh Wilson from Raymond James.

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Joshua Wilson, Raymond James - Analyst [41]

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A clarification question first. The $4 million in personnel expenses that you called out, is all of that onetime in nature? Or is some of that part of a new normal?

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D. Craig Kesler, Eagle Materials Inc. - Executive VP of Finance & Administration and CFO [42]

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Most of that's nonrecurring. Certainly, the pension piece and the profit sharing was a onetime adjustment that we made this year. So yes, most of it's nonrecurring.

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Joshua Wilson, Raymond James - Analyst [43]

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

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D. Craig Kesler, Eagle Materials Inc. - Executive VP of Finance & Administration and CFO [44]

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

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Joshua Wilson, Raymond James - Analyst [45]

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

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D. Craig Kesler, Eagle Materials Inc. - Executive VP of Finance & Administration and CFO [46]

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Yes. 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 have been almost virtually flat without Fairborn.

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Joshua Wilson, Raymond James - Analyst [47]

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Thanks. Good luck with the next quarter.

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Operator [48]

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And our next question comes from the line of Blake Hirschman from Stephens.

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Blake Anthony Hirschman, Stephens Inc., Research Division - Research Associate [49]

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My first one is I think I heard you mention that net Cement 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.

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D. Craig Kesler, Eagle Materials Inc. - Executive VP of Finance & Administration and CFO [50]

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Yes. So that's in the press release. If you look at Cement, prices per ton were up 6%.

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Blake Anthony Hirschman, Stephens Inc., Research Division - Research Associate [51]

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Got it. On a per-ton basis. 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.

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D. Craig Kesler, Eagle Materials Inc. - Executive VP of Finance & Administration and CFO [52]

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Yes. So OCC prices are down almost 50% from where we were a year ago, and that -- it 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 a benefit in the Wallboard business but not all of it. But as you could see, a pretty dramatic improvement in the profitability at the paper mill. We're 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.

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Blake Anthony Hirschman, Stephens Inc., Research Division - Research Associate [53]

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Got it. And then last one for me. It's a smaller piece of the business for you guys, but I saw that concrete pricing was down year-over-year, I believe. Just curious if that might have been due to mix or kind of what was driving that?

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D. Craig Kesler, Eagle Materials Inc. - Executive VP of Finance & Administration and CFO [54]

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Yes. Just regional mix there. We've got 3 small divisions spread across in the country and no real mix there.

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Operator [55]

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

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David B. Powers, Eagle Materials Inc. - CEO, President & Director [56]

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

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Operator [57]

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