Eagle Materials Inc

Good day, everyone, and welcome to Eagle Materials' first quarter of fiscal 2022 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.

Thank you, Josh. Good morning. Welcome to Eagle Materials' conference call for our first quarter for fiscal 2022. 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 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 the first slide covers our cautionary disclosure regarding forward-looking statements made during this call. These statements are subject to risks and uncertainties and could cause the 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 about our business environment, one that is continuing to improve. Residential construction represents the most important single-demand driver for us, driving around 80% of the demand for gypsum wallboard and about 30% of the demand for cement. The outlook for housing starts, especially single-family starts, which are particularly important for wallboard demand, remains strong. As long as mortgage interest rates stay in the lower quartile by historic standards, this should be largely sustainable. as 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 have been increasing. Repair and remodeling is a very important component of residential construction, and it is a healthy component of the underlying demand engine. With a financial boost from recent federal stimulus, and strong house price appreciation, homeowners are continuing to invest in the upkeep and improvement of their homes. Homeowners also seem to be undertaking larger discretionary renovations, ones in many cases were deferred during the pandemic uncertainties. People are buying homes in record numbers, and I should emphasize where availability allows. and the knock-on effect for repair and remodel is significant. Whether it's getting a home in tip-top condition to sell or personalizing the home after purchase, there is a demand relationship between home buying and repair and remodeling. It was notable that President Biden said this month that he planned to make an historic investment in affordable housing by building and rehabilitating more than 2 million homes. The National Association of Realtors said that there is a cumulative demand supply gap of 6.8 million homes. The loss of existing units through demolition, natural disaster, or functional obsolescence has contributed to this shortfall along with the underproduction of new housing units. These intentions, if acted upon, represent upside to our already robust outlook for Jetson Wallboard. Cement demand is driven most heavily by infrastructure. There's also been a lot of discussion about President Biden's intentions around federal funding for infrastructure. And this is needed, and it is, of course, 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 emphasize, as I have in the past, that the lion's share of funding for infrastructure comes from states, not federal government. There was quite a bit of concern about state budgets being impacted by the pandemic, but as we shared in the prior earnings calls, our analysis of sources of state funding suggests the impact would not be as great as some feared, especially in the U.S. heartland states in which we operate. As it turned out, state and local revenues are, in fact, healthy. At Eagle, we remain virtually sold out of our manufactured cement. Our entire U.S. heartland system is now starting to tension more than it has over the last decade. I'd emphasize that our cement volumes this quarter were slightly impacted by wet weather and not by the lessening of demand. The point of this is that the demand picture is robust today for both of our businesses. The factors driving this strength should be sustainable, at least through the midterms. That is the demand side. Now let me spend some time on the supply side. I want to start the supply side discussion with some comments I made in the last earnings call, as I think they are important to reiterate. The first item is around 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 the 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 their 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 like the cement industry. The second point we discussed in the last call was around the significant regulatory and capital barriers to U.S. cement capacity expansion, whether it be existing facilities or through the construction of new ones. This is why, in the face of 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 since the clinker capacity and the number of cement kilns has increased, actually been reduced in the US. Against this backdrop, high-cost imports are increasingly required to serve US coastal markets. EGLE is well positioned in the heartland of the US, away from the coasts, and here too, EGLE will be positively impacted from this trend. These imports also carry with them a much larger carbon footprint than even the most inefficient domestic cement producers. This carbon footprint is not only from their in-country manufacturing processes, but also from the logistics associated with delivering their product to their end-use customer. It is worth a reminder that Eagle operates some of the most modern and efficient plants in the U.S., and all of our plants operate within established stringent U.S. environmental limits. If you'd like to learn more about our ambitious cementitious materials agenda, In our role in creating a net zero carbon future, I'd invite you to review our recently released environmental and social disclosure report featured on our website. At EGLE, we are exceptionally well positioned to take advantage of opportunities that this current business environment provides us. Our balance sheet is strong, giving us substantial financial firepower when growth opportunities arise. We have also restarted our share repurchase program and completed the issuance of 2.5% 10-year senior notes that will further strengthen Eagle's capital structure. In short, as we stated in past quarters, favorable demand outlooks, constrained U.S. manufacturing supply capability, and limited practical substitutes for our products in both of our businesses add up to a very bright future for Eagle Materials. With that, let me turn it over to Craig to discuss the financials.

Thank you, Michael. First quarter revenue was a record $476 million, an increase of 11% from the prior year. The increase reflects higher wallboard and cement sales prices, as well as increased wallboard and paperboard sales volume. First quarter earnings per share was $2.25. That's a 3% decrease from the prior year. However, the prior year included a 93 cents per share gain from the sale of our Northern California businesses. Turning now to segment performance, this next slide shows the results in our heavy materials sector, which includes our cement and concrete and aggregate segments. Revenue in the sector increased 3 percent, driven by the increase in cement sales prices. The price increases ranged from $6 to $8 per ton and were effective in most markets in early April. These price increases were partially offset by lower cement sales volume, which was largely the result of heavy rainfall in Texas and reduced inventory levels across our cement network. Operating earnings increased 3%, again reflecting higher cement prices, which were partially offset by higher maintenance spending in the first quarter of fiscal 2022. As we mentioned in the earnings release, during the initial stages of the pandemic last year, We modified the timing and extent of our annual maintenance outages, and we had lower than normal maintenance expense last year. However, this year, we completed full outages at each facility during the quarter, which increased maintenance spending during the quarter. The impact in the shift in timing and extent of the outages was approximately $10 million. Moving to the light materials sector on the next slide, Revenue in our light materials sector increased 25%, reflecting higher wallboard sales volume and prices. Operating earnings in the sector increased 51% to $67 million, reflecting higher net sales prices and volume, partially offset by higher input costs, namely recycled fiber costs and energy. However, wallboard margins improved to 38% versus 32% in the prior year. Looking now at our cash flow, which remains strong, during the first quarter, operating cash flow increased 17% to $111 million, reflecting strong earnings and disciplined working capital management. Capital spending declined $12 million. And as Michael mentioned, we restarted our share repurchase program during the quarter and returned $62 million to shareholders during the quarter, which equated to approximately 426,000 shares. Finally, a look at our capital structure. Eagle's June 30th capital structure remained about flat with year end. And at June 30th, our net debt to cap ratio was 34%, and our net debt to EBITDA leverage ratio was 1.2 times. We ended the quarter with $307 million of cash on hand. Subsequent to the quarter, we completed the refinancing of our capital structure. which included issuing $750 million of 10-year senior notes with an interest rate of 2.5%, extending our bank credit facility five years, paying off the bank term loan, and retiring our 2026 senior notes. The results of these actions provide Eagle with a low-cost, long-dated capital structure with significant liquidity. Thank you for attending today's call. We'll now move to the question and answer session. Josh?