Eagle Materials Inc

Good day, everyone, and welcome to Eagle Materials' fourth quarter of fiscal 2021 earnings conference call. This call is being recorded. At this time, I would like to turn the call over to Eagle's president and chief executive officer, Mr. Michael Hack. Mr. Hack, please go ahead, sir.

Good morning. Welcome to Eagle Materials' conference call for our fiscal year and fourth 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. In addition, joining us today is Mike Nicholas, Eagles Chairman of the Board, who is here to comment on two noteworthy developments that were included in our earnings release, one related to the Board's decision to remain a combined company and the other to the reinstatement of our quarterly cash dividend. We are glad you could be with us today. There will be a slide presentation made in connection with this 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 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. I'll begin today with some perspectives on the quarter, the fiscal year, and our outlook. Our latest results represent a culmination of a decade of sustained top-line growth for the company, while our bottom line has grown by more than 20-fold. In every respect, fiscal 2021 was an extraordinary year for Eagle Materials. Our resilient business model and our team's commitment to Eagle's vision and strategic priorities have enabled us to achieve record financial results, integrate the largest acquisition in the company's history, operate all facilities safely during COVID, and quickly rebound from a historic winter storm. These results would not be possible without the extraordinary, talented, and dedicated employees of Eagle Materials. My personal thanks goes out to all of them for navigating these challenging times safely. We have long emphasized the favorable cash flow characteristics of Eagle Materials, and this was never more clearly illustrated than during this year. In effect, we were able to repay the entire $665 million purchase price of the Cosmos acquisition during the fiscal year, providing us with significant balance sheet firepower and financial flexibility going forward. A few additional strategic items that I would like to highlight are around our completion of the expansion of our vertically integrated paper mill and some portfolio shaping. The paper mill expansion added 20 percent additional capacity, allowing EGLE to set a monthly production record for wallboard paper in March. The expansion will also provide cost and value benefits that we expect to realize longer term. The business portfolio shaping involved the divestiture of Eagle's profit business and other non-core assets in Northern California. We found buyers where alternative ownership value exceeded operating value for us. With regards to operations, I'm especially pleased with our safety performance in this disruptive pandemic year. Progress on our relentless focus on safety was confirmed by our leading and lagging safety indicators. Our safety culture has never been stronger, with leading indicators of safety observations increasing by 114%, resulting in all of EGLE's businesses outperforming industry metrics yet again, and this gap is widening. Another important topic that we are very excited about is our progress on our environmental and social agenda. We will post an updated environmental and social disclosure report to our website this quarter, and it will give a more comprehensive and granular expression of our ESG agenda and to our progress, both of which were a source of pride for us. ESG is well integrated into our strategic planning and investment decision-making process at EGLE. Let me now turn to some specifics around our demand outlook and why we believe the underlying demand fundamentals in our markets will continue to be strong see strong volume and pricing strength like we saw during the second half of our fiscal year. Residential construction and repair and remodeling are very closely related and are important demand drivers for EGLE materials. These two items drive approximately 80% of the demand for gypsum wallboard and about 30% of the demand for cement. In this regard, the outlook for housing starts, especially single-family starts, which are particularly important for wallboard demand, is strong. We have been underbuilding against underlying demand in the U.S. for over a decade. This underbuilding has led to a record shortage of homes at the same time that household formations are expanding. As long as mortgage interest rates stay in the lower quartile by historic standards, this demand growth should be largely sustainable through the midterm. Now turning to cement. Approximately half of cement demand is from investments in infrastructure. There has been a lot of discussion about President Biden's intentions around federal funding for infrastructure, and this is needed and it is welcome. Implementation will further challenge U.S. cement supply in many parts of the U.S., which is already straining to meet current demand. It is also important to remember that the lion's share of funding for infrastructure comes from states, not the federal government. There was quite a bit of concern about state budgets being impacted by the pandemic, but as we shared in our prior earnings calls, our analysis of sources of state funding suggested the impact would likely not be as great as some feared, especially in the U.S. heartland states in which we operate. In fact, remarkably, state and local tax revenue grew by 1.8% in 2020. This is largely because state and local personal income tax receipts rose 3.4%, and state and local property tax receipts were up 3.9%. On top of the tax revenues, states were provided federal grants as part of President Biden's American Rescue Plan. Finally, non-residential demand is the smallest demand driver for EGLE. We have seen strong demand in distribution centers, warehousing, and data centers, But overall, this area has been less certain. As America continues to reopen after COVID, we expect this demand driver to continue to strengthen. The point of this is that the demand picture is robust for both of our businesses. The factors driving the strength should be sustainable, at least through the midterm. Moving from the demand side to the supply side, we have been talking for some years about the diminishing supply of synthetic gypsum in the eastern half of the U.S., This is due to less burning of coal as power plants change fuel sources from coal to natural gas and from outright closure of coal-fired power plants. With a diminishing supply of synthetic gypsum, existing synthetic wallboard plants will be limited in their ability to fully utilize current capacity, increase current capacity, or build new capacity. Conversely, almost all of Eagle's plants have many decades of raw material supply, which are primarily owned natural gypsum deposits. We are largely insulated from the direct effects of this diminishing synthetic gypsum trend, while our plants are also in a position to indirectly benefit from the supply dynamics that this trend creates. In this way, It is notable that the gypsum wallboard industry is increasingly looking more and more like the cement industry. With respect to our cement business, there are significant regulatory and capital barriers to the U.S. cement capacity expansion, whether it be at existing facilities or through the construction of new ones. In face of the increasing demand and with industry capacity now nearing full utilization, clinker capacity and the number of cement kilns has not only not expanded since 2010, but clinker capacity and the number of cement kilns has actually been reduced in the U.S. This trend is why imported cement will increasingly be required, but is increasingly expensive with rising Baltic Freight Index rates. Imported cement also carries a much larger carbon footprint than locally produced cement because of the ocean freight and logistics required to get it to the point of use. Eagle is well positioned in the heartland of the U.S., away from the seaboards, and here, too, the company will be affected largely indirectly in a positive way by these trends. In short, favorable demand outlooks, constrained U.S. manufacturing supply capability, and limited practical substitutes for both businesses add up to a very bright future for Eagle Materials. With this backdrop, I would be remiss if I did not spend a little time on our pricing initiatives. With regards to wallboard, subsequent to the quarter, we implemented a price increase effective in April and have announced a further price increase for June. For cement, we have implemented a price increase in April across our network and announced a second price increase in Texas for mid-summer. We are continuing to see growing demand in our other markets and will update you on future calls on any further price increases we implement later in the year. Now, before I pass the baton over to Mike, I'd like to take just a moment here to again formally thank our dedicated employees for their extraordinary efforts and focus over this unprecedented year. Thank you. Mike, thanks for joining us today. Let me turn it over to you.

Thanks, Michael, and thanks for the invitation to join the call today. The first key announcement is that EGLE's Board of Directors has decided to remain a combined company, as you've read in our press release. And I'm here because I'd like to share some perspectives around this decision. Much has transpired since the separation announcement that has caused the Board to reevaluate the separation's merits. First, the size and financial strength of the combined company with its diversified asset base, geographic diversity, and robust balance sheet have provided great comfort, stability, and value to our shareholders, employees, customers, and suppliers during an unprecedented and uncertain time. Second, given the continued consolidation of the industries in which we participate, and the company's rigorous examination of a number of strategic alternatives since the announcement of the proposed separation, it has become clear that a combined company with greater financial scale and flexibility will be better positioned to pursue key strategic growth options and enhance shareholder value. Third, since the announcement of the proposed separation, the company has streamlined its business portfolio, including the divestiture of its oil and gas profits business, and other non-core assets. There is no question that the company is exceedingly well positioned and is performing as well as at any time in its history. Both major business segments continue to post industry-leading metrics on just about every measure. As a shareholder, I could not be more pleased with the position of the company. While the Board will continue to evaluate the merits of a separation on a periodic basis, as we have in the past, It is concluded in consultation with external advisors that the combined company is in the best position to create long-term shareholder value. This was an important decision for EGLE and for the Board, and one that was very carefully considered. A second decision that the Board has made relates to our quarterly cash dividend. This decision is an important one in the context of our capital allocation priorities, which I might add remain unchanged. We have three capital allocation priorities. The first are growth investments that meet our strict financial returns criteria and which fall squarely within our strategic focus boundaries. The second investment priority is organic improvement investments. These are investments to maintain our facilities in like-new condition, strengthen the low-cost producer positions, and to ensure the long-term sustainability of our operations. The third priority is the return of cash to shareholders, and this has been primarily through share repurchases. In fact, over the past three years, we have invested just over $625 million in share repurchases and dividends. This compares with nearly $700 million in growth acquisitions and $300 million in organic improvement investments over that same time period. Currently, over 7 million shares remain under the current repurchase authorization. Now, let me turn to the quarterly cash dividend decision. Pandemic uncertainties urged an abundance of caution broadly around capital allocation at Eagle until we could regain confidence around the sustainability of the recovery. As part of that cautiousness, we suspended our quarterly cash dividends. Our confidence in the sustainability of the recovery is now high. while our cash position is very healthy. As such, I'd like to announce that we are reinstating our quarterly cash dividend of 25 cents per share on our common stock. The dividend will be payable on July 16th, 2021 to shareholders of record at the close of business on June 18th, 2021. This amount represents a 150% increase over the quarterly dividends that had been paid preceding the suspension. We're very pleased to be able to make this decision on behalf of our shareholders. The reinstatement of the dividend reflects EGLE's strong operational and financial performance, our confidence about the resilience of the business, and our commitment to reward shareholders. Our strong balance sheet combined with a robust cash flow outlook allows us to pay this dividend while very importantly preserving the financial flexibility to continue to grow and improve EGLE and create long-term shareholder value. With that, now let me pass the baton over to Craig for the regular business of the earnings call with the discussion about the financials.