Eagle Materials Inc

Good day, everyone, and welcome to Eagles Materials' second quarter of fiscal 2021 earnings conference call. This call is being recorded. At this time, I would like to turn the call over to Eagles President and Chief Executive Officer, Mr. Michael Heck. Mr. Heck, please go ahead, sir.

All right, thank you. Good morning. Welcome to Eagle Materials' conference call for our second fiscal quarter of 2021. This is Michael Hack. Joining me today are Craig Kessler, our Chief Financial Officer, and Bob Stewart, Executive Vice President of Strategy, Corporate Development, and Communications. We are glad you could be with us today. There will be a slide presentation made in connection with the call. To access it, please go to www.eaglematerials.com and click on the link to the webcast. While you're accessing the slides, Please note that the first slide covers our cautionary disclosure regarding forward-looking statements made during the call. These statements are subject to risks 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. I'm pleased to be able to report another consecutive quarter of record revenue and net earnings growth, along with further strengthening of our balance sheet. Let me begin with four important facts. First, our EPS was up 20%, which I'm sure you appreciate is no small feat in this pandemic environment. Second, we shipped an all-time record 2.2 million tons of cement during the quarter. we shipped the second quarter record 720 million square feet of wallboard. And fourth, and most importantly, we achieved these results safely. Now let's turn to the outlook for each of our businesses. Let me start with cement. Cement volumes were up 23% for the quarter and up 28% for the fiscal year, reflecting the overall strength across all of our land markets. Some on the call may not realize that state and local budgets account for the lion's share of infrastructure funds, not the federal government. State and local budgets have been stretched during this pandemic, but state DOT budgets have remained resilient to date. A significant portion of local government funds is property taxes. It is worth noting that property values actually have been rising considerably through this pandemic. Sales taxes represent another significant portion of the pie and as you know, retail sales have rebounded and retail sales are now in fact above pre-pandemic levels. Gasoline taxes have rebounded as well with the increase in miles driven. The states will be under undeniable pressure since expenditures have been rising as well as revenues. Each state will face different challenges and different urgencies their infrastructure's priorities. The states with the largest negative funding variances from their five-year averages are states largely outside our footprint, such as Washington, Oregon, and some northeastern and southeastern states. Many of our heartland geographies are faring better. We anticipate that demand over the longer term should be positive. especially with the added potential contribution from the federal government for infrastructure funding at some point. I do not want to discount that there is also the potential for slower trend growth over the near term, especially with the current significant uncertainties about the overall economy. The reality is that we at EGLE are operating at very high levels of capacity utilization today, We are working hard to squeeze out every last bit of cement capacity to meet the customer's existing demand. If demand were to continue at the pace we have seen, frankly, our production would not be able to grow with it. Now let me turn to wallboard. The south leads the nation in the housing starts, and it is more important than the northeast, west, and midwest combined in terms of construction activity. We have long believed that the Sunbelt, meaning for us the lower half of the U.S., but not California, is the right place to be in wallboard through cycles. We have strategically positioned ourselves here due to long-term construction activity, growth, and demographic migration trends. Recent developments around out-migration from the Northeast, Chicagoland, and California, and the prospects of even higher taxation in some states reinforcing our optimism that this is a good long-term strategic decision. Our wallboard shipments were up 6% this quarter and were up 6% for the fiscal year, a consistent trend. Latest industry data showed industry shipments up 1% for the quarter. We fared better through the pandemic dip simply due to our geographic positioning. Continued strong housing starts and the latest single-family permits would suggest these trends should remain intact for the foreseeable future. The relationship between single-family starts and wallboard demand is a close one. Single-family construction utilizes more wallboard than multifamily on a per-unit basis. Against this backdrop, we have announced a wallboard price increase to be implemented next week. Finally, let me comment on the status of the planned separation of these two businesses, cement and wallboard. The industrial logic for the separation remains intact, as does our intention to complete the separation, but the timing remains uncertain. Timing is a factor we must watch closely and carefully evaluate. While the economy's 2020 trough seems to be in the rearview mirror, the path to normalcy remains exceptionally uncertain. and remarkably uncertain. Because of this uncertainty, we have not determined the timing for the split. We will continue to evaluate and watch the market. It should be noted that although it is not a driver for the decision timing, a distinct benefit of the business remaining together beyond the obvious ability to weather uncertainty as a larger enterprise is the speed of company deleveraging that is occurring. This deleveraging is highly supportive of a successful separation launch and a benefit that should not be underestimated as we formulate the capital structures and policies around return of cash to shareholders for each business. Now let me turn it over to Craig to discuss the financials.

Thank you, Michael. Second quarter revenue was a record $448 million, an increase of 12% from the prior year. This increase primarily reflects contribution from the Cosmo cement business we acquired in March, and organic revenue improved 2%, reflecting increased cement and wallboard sales volume. Second quarter earnings per share from continuing operations were $2.16, an improvement of 20%. As we highlighted in the press release, the second quarter results included a one-time 14 cents per share tax benefit. This benefit related to regulations issued during the quarter that clarified the calculation of certain interest deduction limitations. Before we turn to the segment performance, I note that having completed the sale of our oil and gas profits business during September, the current and prior period financial results of that business have been presented separately as discontinued operations on the income statement and balance sheet. Let's look at our heavy materials results for the quarter, highlighted on the next slide. The heavy materials sector includes our cement, concrete, and aggregate segments. Revenue in the sector increased 15%, driven primarily by the addition of the recently acquired Cosmo cement business. Organic cement sales volume and prices 1% and 4% respectively. Operating earnings also increased 15%, again reflecting the addition of the Cosmos cement business. As we discussed last quarter, because of COVID-19, we delayed certain planned cement plant maintenance outages until our second quarter, which resulted in approximately $5 million of higher maintenance costs this quarter compared with the prior year period. Moving to the light materials sector on the next slide, second quarter revenue in our wallboard and paper business was up 1% as improved sales volume was partially offset by lower wallboard prices. Quarterly operating earnings in the sector declined 1% to $48 million, again reflecting lower wallboard sales prices, partially offset by increased volume. Looking now at our cash flow, which remains strong, During the first six months of the year, operating cash flow increased 94%, reflecting earnings growth, disciplined working capital management, and the receipt of the majority of our IRS refund. Capital spending declined to $41 million, and we continue to expect capital spending in the range of $60 to $70 million for fiscal 2021. Finally, a look at our capital structure. We continue to prioritize debt reduction as a primary use of cash at this time, and the preservation of financial flexibility in line with pandemic-related uncertainties. At September 30, 2020, our net debt-to-cap ratio was 48%, and our net debt-to-ebitda leverage ratio was two times. Total liquidity at the end of the quarter was over $700 million, and we have no near-term debt maturities. Thank you for attending today's call. We'll now move to the question and answer session. Lisa?

At this time, I would like to remind everyone, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your first question comes from the line of Zane Karimi with VA Davidson.

Dave, are you there? Hello, can you guys hear me? Yep. Oh, okay. Sorry about that. We'll wrap up the quarter again. My first question would be along the heavy material side of things. Can you talk a little bit about how the quarter developed and particularly and specifically touching on the improved pricing dynamics and demand changes.

I think, Zane, were you asking about cement pricing? We had a hard time hearing you.

So was it cement pricing and demand across the markets? Again, I had a hard time hearing you. Okay. Yeah, so what I would basically say about that is all of our markets contributed over this last quarter. We feel very comfortable with how our network is performing on the heavy side of the business. There's not one location that I'd spike out over any other location with it. Each location contributed, and they contributed equally, both with the pricing improvements and on the demand side of the picture.

Okay, gotcha. And then I know you mentioned earlier as well about DOT funding environment, but I was hoping you'd talk a little bit more on the key states for you and how they're doing, both with regard to second half as well as calendar 2021.

Yeah, so, you know, I'm not going to talk about the – Projections forward, what we see basically is what we've always been saying is low single-digit growth. There's nothing that's changed our thought process on that. What we're seeing here currently, as you can tell by our cement volumes, is demand is very robust in the locations we operate. As you know, we're primarily a heartland company, so the states that are impacted are primarily up that heartland side, along with the Nevada operation out to the west.

Okay, great. I definitely appreciate the call this morning once I'm back in the queue.

Your next question comes from the line of Anthony Casanare with Citi.

Capacity utilization for yourself in the industry right now. And then you had a large competitor announce a capacity project during the quarter. I was wondering if you could just talk about supply-demand balance and if maybe you see any opportunities to expand your footprint given, you know, strong demand, I would think.

You know, in terms of, you know, really not appropriate for us to comment on other people's capacity announcements. You know, I think they were pretty clear. In terms of our capacity utilization across our wallboard plant network, As Michael highlighted, we're very fortunate in the regions in which we compete and operate. Those markets, the southern half of the U.S. generally has been very resilient. Our utilization rates have certainly picked up, and with single-family construction being the most significant driver of demand for wallboard, for the foreseeable future, we see good, strong volume in our markets.

Okay, that's helpful. And then on the wallboard price increase, is it possible to give any kind of point on magnitude or timing or just kind of the setup compared to maybe previous price hike attempts, if you look back at your history?

Yeah, look, the price increase will be implemented early next week, early November. And with strong demand behind us, that should be supportive of a price increase. We're certainly having those conversations directly with our customers at this time.

Okay. I'll turn it over. Thanks.

Your next question comes from the line of Jeremy Rebich with Goldman Sachs.

Jatin Khanna on behalf of Jedi Reverage. Can you please talk about which of your cement markets have had more success in putting through price increases?

Yeah, you know, like I said before, you know, when we look at the cement, we really look at our cement now as a network across and Each section of the network is contributing equally. You know, we're very happy with our pricing and our price increases across the entire network. So there's not one that I would spike out compared to the others. It was pretty consistent across the U.S.

I would add to that, if you look at the price realization, our organic realization was an increase of 4%. that is ahead of what we've seen the last two years. So I would just point that out in terms of the strength that we've seen in our markets.

All right. Thank you. And in residuals, we are seeing strong price increases across basic commodities. Are you optimistic about getting more pricing power over the next 12 months compared to challenges in recent years?

Yeah, you know, when you look across, you know, with the high utilization we're having across both of our businesses, you know, I think that's a good assumption to make. You know, we have a very high capacity utilization at our plants and, you know, in my opening comments, you know, I did discuss, you know, on the cement side that production, you know, cannot keep up with the demand growth that keeps growing at this pace with it. So utilization is going to be a key factor, which will result in discussions on pricing with our customers.

Thanks a lot.

Your next question comes from the line of Kevin Holzenberg with North Coast Research.

I was wondering if you could comment on – In the wallboard business, how would you say the residentially focused half of the wallboard is doing versus the more commercially focused 580?

Yeah, Kevin, wallboard demand is around 85% driven by residential construction, a large piece of that being new within a follow-on repair and remodel, the other piece of it. Commercial or private non-residential is by far and away the smallest portion of the demand. effort for wallboard. And I think Michael commented at the beginning, but when we talk about new residential construction, we really focus on the single-family side of that. Multi-family is good. We appreciate it. But single-family consumes two times more than multi-family unit does. So that's what really drives wallboard demand here in the U.S.,

Okay, gotcha. And then kind of talk about how demand around the border and here into October. Have trends been pretty steady, or have you seen any acceleration in demand trends as time's gone on?

Yeah, you know, to put it into perspective, wallboard consumption into a home or building is 60 to 90 days after the start. So we're just starting to see this pick up and starts flowing through into the business. And so, you know, we have seen, as you saw for the quarter, strong volumes there. October has continued to be strong as well. So, you know, which is very natural to follow housing starts in that way.

Okay, great. Thank you very much.

Your next question comes from the line of Adam Bell. I'm with Thompson Davis. Ms.

Carlson, hopefully this is clear. All right, so I want to start with Cosmos. The volumes for Cosmos were like 25% above what we were modeling. And I'm just curious if that's a good run rate to use, you know, obviously to grab normal seasonality, but were there any puts and takes in the quarter for Cosmos?

Yeah, really, when you look at Cosmos, you know, Cosmos was in line with our expectations on the volumetric side this month, and there will be seasonality, as you noted, so you should take into account it's a little bit more northern of a market, so there will be some seasonality. But it was in line with what our expectations are in, you know, the non-seasonal months.

Okay, helpful. And then... On wallboard, what was the quarter end wallboard price?

It was right around the average, maybe a dollar below the average for the quarter.

Last one for me. I think a couple people have tried on this. I just want to try one more time. How would you characterize the overall cement volume environment as we head into the fall and the winter?

In Yeah, like I said before, you know, we're consistent across all of our locations. You know, we've had a good consistent run rate. And like Craig said on the wellboard side, cement's no different. We went into October with a very consistent run rate. You know, cement, where cement gets more impacted in the fall is we are weather dependent. So, you know. we're going to have more weather dependency than anything else. You know, as I said, October has held up very consistently with what the last months were, and we don't see it changing unless weather hits us.

Okay, perfect. Thanks, guys. I'll turn it over.

Your next question comes from the line of Philip Ng with Jefferies.

Is that mostly mix or you did see some price compression? And then going forward, you know, appreciating that non-res might be a little weaker. Will that have an impact on your ASP and margins going forward?

Hey, Phil, you're actually the first 10 seconds of your question cut out. There's some issue with the muting that's going on. If you could just kind of reintroduce the question.

Sure, no problem, Craig. On your wallboard pricing in the quarter, it looked like it slipped a little bit sequentially. How much of that was mix-related versus like-for-like pricing? And when we think about going forward, appreciating that non-res might be weaker than new resi, does that have an impact on your ASPs or margins?

Yeah, so it was not a lot of them. product mix impacted the price for the quarter. It's pretty like for like. And in terms of, you know, margins, you know, five-eighths versus half-inch, they're pretty consistent, you know, a little higher priced on the commercial product because of the incremental cost for it. So any change in non-res wouldn't really impact the overall margin profile of the business.

Got it. Yeah, I mean, your organic volumes in cement was really impressive, holding up, you know, far better than your heavy material peers. You know, any thoughts on, you know, what's driving some of the resiliency? And have you seen a slowdown in some of your big states from a lighting standpoint or bidding at this juncture? It sounds like October is holding up really well.

Yeah, October's been holding up well. We haven't seen anything that is a major distraction from any of our markets right now on the heavy side. The biggest thing that we'll experience, as I said before, is we're more weather dependent on that side of the business. So depending on if we have a winter or not, if you recall last year, we did not have much of a winter. So we were very busy throughout the whole time frame, and this year we'll be more dependent on if we have that winter or not.

Okay, great. And then we're seeing some signs that freight and logistics spot prices are starting to tick up a bit and maybe supplies getting a little tight. more constricted. Curious what you're seeing and what kind of impact it's having in your business.

Yeah, Phil, you know, we see the same things on the margin, you know, here as the economy is starting to pick up and we're getting out of the shutdown area. So, but we haven't seen an impact as materially at this point, but certainly as economic activity in the residential side, certainly that's something that we're monitoring very closely.

Okay. Thanks a lot. Really appreciate it, guys.

Your next question comes from the line of Trey Grump with Stevens.

Hey, good morning. Thanks for taking my questions. I dropped off here for a little bit, so forgive me if you've asked or if these questions have been asked, but on the wallboard side, The OCC that was spiked earlier in the year, did that have any impact in the third quarter? And how are we thinking about wall board margins just going forward here in the next quarter or two?

Yeah, that's a good question, Trey. You saw sequentially the paper mill profitability improve significantly. And part of that was associated with the ramp up of the new equipment that we installed in the spring. But certainly the other piece of that is the pricing mechanism that we pass through the higher OCC prices from the spring. They get passed through a quarter later. So that really contributed there. Conversely, on the old board side, certainly they did have a higher paper cost. Now that ends up reversing itself because OCC prices then fell again during the summertime, the early summer. They've been fairly flat now for three or four months. On the balance of the year, they'll equalize out in terms of the OCC price impact for the wallboard business. Longer term, we think about our business. We've got a long-term supply of natural gypsum. We've got a unique synthetic gypsum supply agreement. We have a Good low-cost structure. We don't see any significant headwinds to that. And so we think we sit in a pretty unique position that we can drive margins higher from here given the strength of single-family residential construction.

Okay, good. Thanks for that, Craig. It's helpful. And then you kind of touched on my next question was on the SINGIP side. I know there was some noise around Santee Cooper building and maybe some of the shutdowns or something along the lines of one of their plants there. But my understanding is that it's not going to be impactful to you guys and you're supplied by the plant that's going to continue to be up and running. Is that correct?

That's right, Fred. State 2 Cooper has been a wonderful partner with Eagle over many, many years now. They continue to meet the requirements as stated in the contract, and so we don't have any concerns there. They've been a great partner with us.

And then last one for me is maybe a little bit bigger picture but still around SYNGIP. Is there a way – and I know the thought is long-term – that Zingip will continue to be in shorter and shorter supply. But how are you guys thinking about that dynamic in the more maybe medium term over the next year or two? Do you see that contributing to some cost increases for the industry over the maybe medium term?

Yeah, Trey, it's a phenomenon and a trend that has only continued to pick up pace. For those that might not be familiar, synthetic gypsum is a byproduct of a coal-fired power plant. As coal-fired power plant production has come down significantly over the last couple of years, the supply of synthetic gypsum has diminished. We sit in a very unique position with our supply agreement. I can't speak to how others have positioned themselves, but You know, over a long run, synthetic gypsum is becoming harder to find, more expensive to get, and so you would expect to see, for many, the cost curve increase. But, again, I don't know everybody's situation. I just know ours, and we're uniquely positioned with a long-term supply agreement there with our one plant in the southeast.

Great. That's it for me, guys. Thanks a lot. Congrats on the good quarter.

Thanks. Your next question comes from the line of Josh Wilson with Raymond James.

Good morning. Thanks. Just a few one-offs for me here, and I apologize. Did you quantify the headwinds of weather that you mentioned in the press release? Say that last part. Did we quantify what, Josh? You mentioned some adverse weather impacting that. Can you quantify that?

No, look, it was the first couple of weeks of September. We just commented on it, but, you know, it didn't dramatically change the quarter, but it certainly had a couple of weeks fell there for us.

Okay. And then as it relates to cement margins going forward, is there any other change in the timing of maintenance costs, or was there a benefit from fuel that you want to call out as non-recurring that we should continue forward?

The only thing we have is, you know, with this pandemic side, we've We've shifted around some of our outages. We have one more plant we're gonna do an outage at, which is just a, it won't be a significant pull on a quarter or anything with it, but we delayed it from the first part of the year. We staged these out so I wouldn't have more than one or two plants down at any time during the quarter. So we're gonna complete the last plant's outage here in this last quarter, but like I said, it's not gonna be real significant of a value.

Got it. And then last one for me, the ramp up of the paperboard equipment, are we now at the full run rate for that or is there more benefit to come?

Well, we do have the equipment installed now. We were able to get the people over that we needed to to get the equipment installed. We're still working through that equipment. We probably have a couple quarters of getting that equipment up and running. As you can see by our volume side though with it, we're very happy with where where we ended up this last quarter, we were seeing some improvement on a volumetric standpoint. We expect over the next two quarters that you'll see some creeping up on that volumetric side as we get the equipment fully integrated and running. Thanks. Good luck with the next quarter.

Our next question comes from the line of Kevin Hughes with Truist.

Hi, yeah, this is Keith Hughes from Truist. Just a question back on the split. Obviously, external things have delayed this. What type of things will we need to see in the market for you to go ahead and complete the split? Is it around virus cases? Is it around demand patterns? I'm just trying to pick up what would give us a clue what would be coming.

Yeah, what we're really looking for, and in my opening comments, I said some of it is around You know, seeing something that's sustainable and everything. I mean, every time you pick up the paper, you see different things, and it's affecting the economy in different ways. So I'd like to see some normalities and sustainability and a couple quarters of run rate where we feel comfortable with taking these two businesses out on their own. They're both going to be smaller businesses. and I'd like to see them just have a runway in front of them that has some consistency.

Okay. And you talked about pricing and wallboard a little bit earlier. There is at least one competitor has announced an increase for January of next year. There may have been more since I saw the first letter. Is that something you think the industry will participate in or you're going to participate with?

Yeah, Keith, in terms of any future pricing decisions, we'll communicate that to customers first and before we try to speculate on this. Okay. All right. Thank you for the question.

And at this time, there are no further questions.

Okay. I just wanted to say thank you all for attending the call. It was great talking to you, and we look forward to talking to you in the first part of next year.

This concludes today's conference. You may now disconnect.