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

Q2 2019 Eagle Materials Inc Earnings Call

Dallas Nov 7, 2018 (Thomson StreetEvents) -- Edited Transcript of Eagle Materials Inc earnings conference call or presentation Tuesday, October 30, 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 & Director

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Conference Call Participants

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* Adam Robert Thalhimer

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

* Benjamin J. Burud

Goldman Sachs Group Inc., Research Division - Research Analyst

* Brent Edward Thielman

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

* Colin Wayne Devine

Jefferies LLC, Research Division - Former Equity Analyst

* Joshua Kenneth Wilson

Raymond James & Associates, Inc., Research Division - Research Analyst

* Kevin William Hocevar

Northcoast Research Partners, LLC - VP & Equity Research Analyst

* Scott Evan Schrier

Citigroup Inc, Research Division - Senior Associate

* Trey Grooms

Stephens Inc., Research Division - MD

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Presentation

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Operator [1]

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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.

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

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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'm 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 were down approximately 3%, reflecting the disruption from Hurricane Florence in our southeastern market. 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 the ripple effect of the period of decreasing demand in the Permian. Our oil pipeline capacity limitations have reduced completion activity. Experts success -- experts suggest that it's probably 9 to 12 months before this 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 a 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 segment's 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 leveraged under 1.5x, 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 position. 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 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 1/3 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 strocks (sic) [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 repurchased approximately 740,000 shares during the second quarter.

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

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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 revenue was a 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 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 sectors, 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 and Gas Proppants 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 and 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 30, 2018.

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

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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 Trey Grooms of Stephens.

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Trey Grooms, Stephens Inc., Research Division - MD [2]

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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?

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

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I can, Trey. We've announced 3 markets: Nevada, Wyoming and Ohio. And we're up $8 in 2 of those markets and $6 in 1 one of them. Those are the announcements we've had on The Street today.

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Trey Grooms, Stephens Inc., Research Division - MD [4]

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

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

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

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Trey Grooms, Stephens Inc., Research Division - MD [6]

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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 as we've kind of progressed through the year? And given the backdrop we have had, demand may be a little less than we initially anticipated. But could you just comment on that competitive dynamic and any expectation there?

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

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

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Trey Grooms, Stephens Inc., Research Division - MD [8]

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Okay, that's helpful. And then lastly, on Wallboard. 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. With that backdrop, and I'm not looking for any specific guidance or anything like that, but maybe directionally, how are you guys thinking about Wallboard demand as we look forward?

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David B. Powers, Eagle Materials Inc. - CEO & Director [9]

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Trey, we're looking at modest growth going forward. When I look at housing starts, the first 9 months of this year, they're up 6% over the prior year. And even the last 3 months, we're up 3% to 4% over the prior year, those same 3 months. So we're planning on modest growth in our Wallboard business going forward.

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Operator [10]

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Our next question comes from Brent Thielman of D.A. Davidson.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [11]

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Dave, on Proppants, it sounds like this tough environment is going to persist here, at least for the near term. Based on where you see things now, pricing, volumes, do you think you can continue to run this business, I guess, at minimum, at a cash breakeven level or better?

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

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Brent, I do, and that's our plan going forward into next year. At least the next 2 quarters, that's -- I believe where we're headed. And we're rightsizing our business as we speak to make that happen.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [13]

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

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

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

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [15]

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

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David B. Powers, Eagle Materials Inc. - CEO & Director [16]

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

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [17]

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Okay. And last one, if I could, just on the Cement side as a whole. As 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?

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David B. Powers, Eagle Materials Inc. - CEO & Director [18]

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

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Operator [19]

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Our next question comes from Scott Schrier of Citi.

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Scott Evan Schrier, Citigroup Inc, Research Division - Senior Associate [20]

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A follow-up on Brent's question on Wallboard and Wallboard pricing. Obviously, it looks like you had a -- you had decent amount stick from the midyear price increase. I'm curious, though, can you talk about the impact from Georgetown had on mill night -- mill net pricing, understanding that's a lower-priced plant, so less volumes from there would be a little bit of a tailwind to that headline price number.

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David B. Powers, Eagle Materials Inc. - CEO & Director [21]

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Let me tell you about Georgetown and the hurricane. We did shut down our operation 7 days from a manufacturing point of view. There were 6 days -- 5.5 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 lost, per se, right? Just delayed into -- to future months. And it had a minimal impact on our mill net.

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Scott Evan Schrier, Citigroup Inc, Research Division - Senior Associate [22]

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Okay. And on Cement -- and Dave, 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 how feedback -- are you starting to get some confidence? You have these price increases in the market for January, you're communicating more for April. There's 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?

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David B. Powers, Eagle Materials Inc. - CEO & Director [23]

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

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Scott Evan Schrier, Citigroup Inc, Research Division - Senior Associate [24]

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Got it. And last one, on the freight impact, and you called 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 would be great.

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David B. Powers, Eagle Materials Inc. - CEO & Director [25]

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

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Operator [26]

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Our next question comes from Jerry Revich of Goldman Sachs.

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Benjamin J. Burud, Goldman Sachs Group Inc., Research Division - Research Analyst [27]

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This is Ben Burud on for Jerry. Besides what you've already mentioned on the call, can you give a high-level view 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?

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David B. Powers, Eagle Materials Inc. - CEO & Director [28]

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Just a little bit of volume, I think, modest growth. The scenario that we're all in, I think, will allow us to implement some price improvement.

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Benjamin J. Burud, Goldman Sachs Group Inc., Research Division - Research Analyst [29]

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

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

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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 all the markets that we plan going forward.

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Operator [31]

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Our next question comes from Adam Thalhimer of Thomas -- Thompson, Davis.

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Adam Robert Thalhimer, Thompson, Davis & Company, Inc., Research Division - Director of Research [32]

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First on frac sand. The DNA in the quarter, is that the go-forward rate as well? Or was that unusually high?

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D. Craig Kesler, Eagle Materials Inc. - Executive VP of Finance & Administration and CFO [33]

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Yes, Adam, that generally peaks in this quarter, and then we'll start to trail off in the December and March quarter as the -- especially in Wisconsin (technical difficulty) shut down over the winter. I'd look to the cadence from last year, might be a little bit higher this year, given the new plant. But the cadence will be very similar quarter-to-quarter.

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Adam Robert Thalhimer, Thompson, Davis & Company, Inc., Research Division - Director of Research [34]

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

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D. Craig Kesler, Eagle Materials Inc. - Executive VP of Finance & Administration and CFO [35]

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Adam, it's probably a 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 phases. The first phase being disruption, and then what's -- what we saw in the market this quarter. And then you go through the 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, we hope there in Phase III, you'll see the Carolinas moving into that Phase III in the near term. But to try to estimate that, it would be pretty tough.

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Adam Robert Thalhimer, Thompson, Davis & Company, Inc., Research Division - Director of Research [36]

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

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D. Craig Kesler, Eagle Materials Inc. - Executive VP of Finance & Administration and CFO [37]

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So Adam, I think, stepping back, what we look at it in the Cement market is, continue to have higher utilization rates across many parts of the U.S. 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's reasons to be optimistic around Cement prices for next year.

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Adam Robert Thalhimer, Thompson, Davis & Company, Inc., Research Division - Director of Research [38]

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Last one from me, Craig, just your thoughts on tax rate going forward.

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D. Craig Kesler, Eagle Materials Inc. - Executive VP of Finance & Administration and CFO [39]

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Yes. So we -- obviously, we're a beneficiary of Tax Reform about a year ago, and tax rate's 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 6 months. It could be in that same range, maybe 22%, somewhere in that neighborhood.

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Operator [40]

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Our next question comes from Phil Ng of Jefferies.

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Colin Wayne Devine, Jefferies LLC, Research Division - Former Equity Analyst [41]

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

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

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

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Colin Wayne Devine, Jefferies LLC, Research Division - Former Equity Analyst [43]

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Okay. And then you talked about the competitive pricing alleviating the Cement businesses as well. Have you seen any of your competitors announce similar price increases that you were discussing for the calendar year 2019?

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

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

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Colin Wayne Devine, Jefferies LLC, Research Division - Former Equity Analyst [45]

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Okay. And then, I guess, just last question from me. You called out both the prebuy and wet -- and the Hurricane Florence impacting your Wallboard volumes. Could you parse out just what demand would've been excluding these headwinds? Or what the drivers were from each of those?

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David B. Powers, Eagle Materials Inc. - CEO & Director [46]

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On the -- I mentioned earlier that we felt we were negatively impacted by the hurricane to the tune of about 20 million foot out of Georgetown. The prebuy, 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 foot. So if you added 40 million to our numbers, you'd get a -- an apples-to-apples comparison.

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Operator [47]

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(Operator Instructions) Our next question comes from Kevin Hocevar of Northcoast Research.

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Kevin William Hocevar, Northcoast Research Partners, LLC - VP & Equity Research Analyst [48]

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

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David B. Powers, Eagle Materials Inc. - CEO & Director [49]

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

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Kevin William Hocevar, Northcoast Research Partners, LLC - VP & Equity Research Analyst [50]

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Got you, okay. And obviously, there were some moving parts in the Wallboard business in terms of some destocking after a prebuy and with Hurricane Florence and -- maybe impacting September. Wondering if you could just give us some color on how the Wallboard volume trended through the quarter, and maybe how it's doing here in October.

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David B. Powers, Eagle Materials Inc. - CEO & Director [51]

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

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Kevin William Hocevar, Northcoast Research Partners, LLC - VP & Equity Research Analyst [52]

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

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David B. Powers, Eagle Materials Inc. - CEO & Director [53]

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It was sequentially.

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Operator [54]

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

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Joshua Kenneth Wilson, Raymond James & Associates, Inc., Research Division - Research Analyst [55]

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You talked about impacts from Hurricane Florence. Were there any impacts from Michael?

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

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

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Joshua Kenneth Wilson, Raymond James & Associates, Inc., Research Division - Research Analyst [57]

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

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D. Craig Kesler, Eagle Materials Inc. - Executive VP of Finance & Administration and CFO [58]

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

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Operator [59]

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

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David B. Powers, Eagle Materials Inc. - CEO & Director [60]

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

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Operator [61]

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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.