Eagle Materials Inc

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

Thank you, Lisa. Good morning. Welcome to EGLE Materials' conference call for our third fiscal quarter of 2021. 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 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. Let me start today by acknowledging that we had another solid quarter of increasing earnings and was shaping up to be an exceptional fiscal year for Eagle Materials. Our results reflect that we are entering into a cyclical phase for our businesses where the demand for all of our products are strong. There are two overreaching reasons for this. One relates to market conditions, which are on an improving trajectory in most respects. The second relates to EGLE's high-performing, low-cost, geographically advantaged operations that can take advantage of these market opportunities. Let me start with some foundational comments about market conditions. Housing construction is an important driver for both sides of our business, and single-family starts are especially important for Gypsum Wallboard. There are positive short-term, mid-term, and long-term dimensions to the robust housing related demand for our materials as for the short term wallboard is installed on walls and ceilings in the later phase of the building construction process after framing has occurred this means that the recent increase in starts and permits will have the greatest impact in the months ahead pandemic has resulted in a surge in home buying and that demand that has been swelling over more than a decade of under building now being realized what is more remarkable is even with the improved rate of home construction we as a nation still do not have a balanced supply and demand picture for housing home inventories on the market remain at all-time lows we believe the annual housing supply demand imbalance is unlikely to be rectified by new construction before 2022. This is in part due to the pace of what is possible for home builders to get into production. This supply-demand pressure will challenge housing affordability, but given the Fed's commitment to keep interest rates low for an extended period, it should translate into a multi-year continuation of favorable mortgage rate environment. Another important end-use segment for us is repair and remodeling. Research shows that purchasers of existing homes spend money on remodeling materials in the wake of their home purchase to make the home their own and to more fully conform to their needs and tastes. Longer-term trends also favor our geographic positioning. The exodus from states such as California, New York, and New Jersey to states in the Sun Belt from the Carolinas to Arizona and in the U.S. Heartland, including Texas and Colorado, is expected to continue. This migration aligns well with our network of facilities within Eagle Materials. We have the in-place capacity to flex with the demand growth for wallboard without additional capital investment. We expect to benefit from higher volumes, higher margins, and restrained costs due to our ownership position in our chips and raw materials and papers. Now let me turn to the market outlook as it relates to the heavy side. Infrastructure spend drives about half the U.S. cement demand, with residential being the most important driver. State budgets have been the lion's share of infrastructure spend for many years. We do not want to minimize the pressure that some state budgets are experiencing, but our analysis of the sources of state revenue, including sales taxes, property taxes, income taxes, and corporate taxes suggest to us that many states and cities would not be as severely affected as some might fear. This is especially relevant for many of the states in which we operate. What our analysis shows is that income and sales tax, which account for more than half of the state and local revenues, fell in counter but surged above pre-COVID levels in Q3. The states still have choices on what to do with this money, but we maintain our expectation that even without federal support to states and cities, trend demand for cement will be sustained in low single digits across much of our footprint. Of course, state DOTs could receive further federal support with the new administration, and this would provide an uplift to infrastructure construction activity. To be clear, that activity that multi-year federal funding bills generate generally takes years to materialize into demand for our products. Non-residential is the smallest end-use segment for heavy, and we continue to see short-term pressures. Non-residential construction continues to be depressed by the potential dangers posed by many indoor activities. The pipeline for office projects has thinned significantly and is also very geographic dependent. Spending on manufacturing buildings is beginning to see some improvement and warehouse construction trends to be strong in many of our geographies. Now let me address the second factor mentioned, which is the high-performing low-cost network of plants we have created to take advantage of the market opportunities that are presenting themselves to us. Opportunities which, in our view, should continue for some time. The only limitations in our ability to capture these opportunities are in cement. We are operating at very high levels of capacity utilization today, and we are facing a tightening cycle that would challenge our resourcefulness to squeeze out every bit of production through optimization of grinding, seasonal storage, and market selection. Whereas in wallboard, we have headroom for earnings expansion through volume and price growth. Going forward, we expect price will be the most important earnings growth lever for us in cement. Against this positive backdrop, uncertainties abound. Most important of these relate to the pandemic and getting it under control. Because of this, I do not have an update today on timing for the spin, and I won't until there is some increased visibility that we are past the potentially more disruptive effects of this pandemic. We are hopeful that vaccines will be a game changer. The optimist in me believes that risks for the business tilt to the upside and that the best is yet to come. With the introduction on context for our results, let me turn it over to Craig to discuss the financials.

Thank you, Michael. EGLE's third quarter revenue was $405 million, an increase of 18% in the prior year. This increase primarily reflects contribution from the Cosmos cement business we acquired in March. Adjusting for the acquisition and the sale of our Northern California concrete and aggregates business, Organic revenue improved 7%, reflecting increased cement and wallboard sales volume and prices. Third quarter earnings per share from continuing operations were $1.94, an improvement of 87%. As we highlighted in the press release, prior year results included a $0.47 per share asset impairment charge. Excluding the non-routine charge, third quarter EPS increased 28%. Turning now to segment performance, let's look at heavy materials results for the quarter, highlighted on the next page. The heavy materials sector includes our cement, concrete, and aggregate segments. Revenue in the sector increased 21%, driven primarily by the contribution from the Cosmos cement business. Organic cement sales prices improved 4%, while organic sales volume was flat, with our facilities continuing to operate at very high utilization rates. Operating earnings increased 31%, again, reflecting the addition of the Cosmos cement business. And organic operating earnings increased 8%, reflecting primarily higher net cement sales prices. Our concrete and agri-rich business continued to benefit from higher organic sales volume and lower diesel fuel costs, with the margins improving significantly from the prior year. Moving to the light materials sector on the next slide, third quarter revenue in our wallboard and paperboard business was up 8%, reflecting record third quarter wallboard sales volume and a 1% increase in wallboard sales prices. As we highlighted in the earnings release, the quarterly average wallboard price doesn't fully reflect the price increase that was implemented mid-quarter. For perspective, The December average price was $152 per thousand square foot versus the quarterly average of 148. Quarterly operating earnings in the sector increased 1% to $48 million, reflecting the increased wallboard sales volume and prices, partially offset by higher input costs, namely recycled fiber costs. Looking now at our cash flow, which remains strong, During the first nine months of the year, operating cash flow increased 69%, reflecting earnings growth, disciplined working capital management, and the receipt of our IRS refund. Capital spending declined to $46 million. Finally, a look at our capital structure. During the quarter, we continued to prioritize debt reduction as a primary use of cash. providing us significant financial flexibility in light of pandemic-related uncertainties and potential opportunities. At December 31, 2020, our net debt-to-cap ratio was 41%, down from 60% at the end of our fiscal year, and our net debt-to-EBITDA leverage ratio was well below two times. We ended the quarter with $143 million of cash on hand, Total liquidity at the end of the quarter was $888 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?