Eagle Materials Inc

Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter 2020 Eagles Materials Earnings Conference call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, press star 0. I would now like to hand the conference over to your speaker today, Mr. Michael Heck, President and CEO of You may begin, sir.

Thank you. Good morning. Welcome to Eagle Materials conference call for our full year and fourth fiscal quarter of 2020. We are glad you could be with us today. Joining me today are Craig Kessler, 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 the call To access it, please go to www.egomaterial.com and click on the link to the webcast. While you're accessing the slides, please note that the first slide covers our cautionary disclosure regarding forward-looking statements made during the call. These statements are subject to risks 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. This morning, let me start by remarking on two matters that are even more important than the earnings we are reporting on today. First is the health, safety, and well-being of our employees. The second is being responsible citizens and good neighbors in the communities in which we do business. As it relates to COVID-19, These two cannot be more closely related. Regarding our safety response to COVID-19, we have been proactive in establishing protocols and processes that protect the safety and health of our employees, customers, and business partners. This early action has enabled us, as an essential business, to remain open safely in all locations. We are fortunate in that we operate and serve the U.S. Heartland and Sunbelt states, own and control our local raw material inputs, and have a fully domestic supply chain. And most importantly, in this situation, virtually everywhere we operate, construction has been deemed essential, allowing us to make and sell our products. Which brings me to our earnings this quarter. We entered the quarter with a strong momentum in terms of demand across our markets. We did not experience much business interruption for our fourth fiscal quarter in our markets. Hosting record quarterly revenue should be no surprise for this reason. In the case of COVID-19, geography matters. In these unprecedented times, rather than trying to predict the unpredictable, our emphasis is on deployment of rapid feedback loops. This involves being in intimate contact with our local operations as they navigate in this environment. We are a local business in many ways and can react quickly to any market changes as they occur. We have successfully navigated severe cycles before and some would say we have an unrivaled track record in this regard. We navigated through the longest and deepest construction recession in U.S. history and made money every year, which very few in our space can claim. We are well prepared to respond quickly as issues arise. Right now, part of our preparedness strategy is to conserve cash and strengthen our already strong balance sheet. Out of an abundance of caution, we announced during the quarter that we suspended our dividend I want to emphasize and be very clear that suspending the dividend was part of a comprehensive plan of managing cash through this environment. This plan also entails curtailing non-essential capital expenditures, share repurchases, controlling inventory levels, and a host of other prudent measures. It is timely and coincidental from a cash strategy standpoint that we have made some progress in our program of portfolio shaping. We announced this quarter the sale of a non-core ready mix and aggregates assets in California. The sale of these assets is the result of a long-term effort that emerged where alternative ownership value exceeded operating value for us. We also were able to sell our frac sand distribution business during the quarter, and we continue to explore alternatives for the remaining frac sand business. We fully expect that the uncertainties around COVID-19 and its effects on the economy will be relieved over time. We are well prepared to capitalize on opportunities in construction materials that will arise in the wake of these uncertain times. We are three times larger on the cement side of the business than we were a decade ago. We have built a strategic network of plants and terminals in the U.S. heartland. The latest addition was the recently acquired Cosmos cement plant that we began operating as an Eagle plant in March. Our wallboard business has attained unrivaled prominence for low-cost production and customer satisfaction. In March, we completed the equipment installation to expand the capacity of Republic Paper. We will finalize all aspects of the installation over the summer when travel reopens, but we are already seeing the benefits of this new equipment through added capacity. We are healthy, our balance sheet is strong, and we are poised to emerge from this uncertain time with the winds at our back. In this regard, I think it is important that we not underestimate the power that already announced monetary and fiscal government stimulus will create for our businesses. Construction has led the way to recovery in so many prior cycles and may well lead the way again. Our U.S. infrastructure needs are well chronicled in one way or another Roads and bridges will be built and repaired. Low interest rates make homes more affordable, and we are not building at the pace that matches household formation and replacement needs. There are many reasons to remain constructive about the long term. We still look forward to the separation of the two businesses, but currently have no updates on timing for that transaction. That's all for me as far as introductory remarks. Now let me turn it over to Craig to go through the financial results for the quarter.

Thank you, Michael. Fiscal year 2020 revenue was a record $1.5 billion, up 4% from the prior year, reflecting increased cement sales volume and pricing, improved wallboard and paperboard sales volume, and the addition of two businesses acquired during the year. Required businesses contributed approximately $32 million of revenue during the year. Revenue for the fourth quarter improved 11% to $315 million, reflecting a very strong end to our fiscal year. Annual diluted earnings per share improved 14% to $1.68. As we highlighted in the press release, both years include the impact of several non-routine items. most notably an asset impairment charge related to the oil and gas profits business. For fiscal 2020, diluted earnings per share includes the effect of a significant tax benefit related to the CARES Act, business development-related expenses, and the effect of an outage linked to the expansion of our paper mill. Excluding these non-routine items, annual earnings per share improved 10%. The CARES Act enables us to use the tax assets generated primarily by the COSMOS acquisition and carry it back to recover taxes paid in prior years at higher tax rates than we pay today. The fourth quarter earnings per share comparison is also affected by many of these same non-routine items. Adjusting for them consistently each year, Q4 earnings per share would have increased by 45%. Turning now to our segment performance, This next slide shows the results in our heavy materials sector, which includes our cement, concrete, and aggregate segments. Annual revenue in the sector increased 17%, driven primarily by an 11% improvement in cement sales volume, improved pricing in both cement and concrete, and the results of the concrete and aggregate business we acquired in August of 2019. Operating earnings increased 12%, again, reflecting the improvement in sales volume and pricing. Moving to the light materials sector on the next slide. Annual revenue in our light materials sector declined 4% as improved wallboard and paperboard sales volume was offset by an 8% decline in wallboard sales prices. Annual operating earnings declined 12% to $190 million. reflecting lower net sales prices partially offset by higher sales volume. The light materials annual results also reflect the impact of two extended outages at our paper mill to tie in new equipment. The impact of the outage on the annual results was approximately $4.5 million. In the oil and gas profit sector, annual revenue was down 44% and we had an operating loss of $15 million. This business has come under increasing pressure in recent months, as lower oil prices further reduce drilling and hydraulic fracturing activity, and we continue to adjust our operations to minimize operating costs. In late March, we sold the distribution business of the profit sector, and we continue to explore alternatives for the remaining mining business. Operating cash flow during fiscal 2020 increased 14% to $399 million. Total capital spending declined to $132 million. In early March, we completed the acquisition of the Cosmos cement business, funding the purchase through a term loan syndicated through our existing bank group. Very fiscal 2020, Eagle returned approximately $330 million to shareholders through share repurchases and dividends. In fiscal 2021, we expect capital spending to decline nearly 50% to a range of $60 to $70 million. And as we previously announced and Michael highlighted, we have suspended share repurchases and future dividends. Finally, a look at our capital structure. At March 31, 2020, our net debt-to-cap ratio was 60%, and we had $119 million of cash on hand. Our net debt to EBITDA leverage ratio was 2.9 times. Total liquidity at the end of the quarter was nearly $300 million, and we have no near-term debt maturities. In April, we announced the sale of our concrete and aggregates business in Northern California for $93.5 million. These proceeds, combined with the tax refunds stemming from our NOL carryback and operating cash flow, further improves our liquidity position going forward. Thank you for attending today's call. We'll now move to the question and answer session. Catherine?