Eagle Materials Inc

Good day, everyone, and welcome to EGLE Materials' third quarter of fiscal 2022 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, Josh. Good morning. Welcome to EGLE Materials' conference call for our third 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 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. Let me start off by saying this was another good quarter for EGLE. Our achievement of record earnings per share highlights the fact that people and prudent investments make a huge difference. First and foremost, I am proud of our Eagle team. At our plants, the Eagle team relentlessly worked to deliver our quality products to our customers timely and consistently. I want to personally thank each and every one of our employees that made not only this quarter a success, but for the work performed during these previous two years against the COVID backdrop. Secondarily, this quarter has shown the benefits from a culmination of many years of prudent investments, investments that in some ways uniquely position us to take advantage of the opportunities that are presenting themselves to us today and that we believe will continue to present themselves to us in the quarters ahead. Our performance in light of the notable headwinds such as Omicron disruption, supply chain disruption, and inflation is a testament to the resilience of our business model, the soundness of our strategic choices, and to our proven operational capabilities. Let me elaborate on some of the reasons for this performance. Let me start with Omnicron. We are fortunate to have a long-standing safety culture. We will not do a job unless we can do it safely. This foundation has served us well as we have managed the waves of the pandemic. Those that follow us know that we enjoy an exceptional health and safety track record. I am proud to say that we achieved the best safety performance in company history these last nine months. This underscores our deep commitment to our people and their well-being. Our health, safety, and environmental processes which we view as actually quite closely related, our robust and our well-established safety-first operating philosophies have been applied to meet the challenges of the pandemic. Now let me turn to the other two headline concerns, the supply chain and inflation. It is worth noting that we have several significant advantages here. We own or control our primary raw material inputs and our reserves are decades deep. Arguably, these resources have already been paid for and are not subject to supply chain disruption or inflation in the way that many other construction materials are. Nor do we rely on key inputs that come from overseas. Moreover, our operations are not particularly labor intensive as we have invested in process controls and reliable methods of production to relieve manual labor and improve safety. These advantages have served us well this quarter, and this was reflected in our operating results. Now let me turn to why we believe we have not achieved peak earnings, margins, or returns for our businesses this cycle. First, let me talk about the light side of our business. The underlying demand for our products is strengthening. Our volumes in gypsum wallboard could have been even stronger this quarter if homes that were started could have been completed. Supply chain issues for other products slowed the completion of these homes and admittedly slowed some of our product distribution. This pertains well for the quarters ahead as this backlog is worked through. There's a lot of evidence that the next 12 months at a minimum will be especially strong for demand on the residential front. Although home affordability is a growing concern, we are still a long way from impeding demand in our markets. We focus in the south and the Sun Belt and have no operations in the northeast or west coast where the market affordability is most challenged. Our key southern tier markets are impacting unprecedented migration from affordability-challenged areas. The outlook for repair and remodel is also robust. The combination of new housing construction and repair and remodeling accounts for the lion's share of wallboard demand. Although commercial and non-residential is a relatively small application area, it is also strengthening in our southern tier markets. Strong wallboard demand provides pricing opportunities. Wallboard prices for us were up 29% year on year. We do not believe the positive pricing trajectory is over, and this is evidenced with our January price increase. In addition, we have the capability to flex existing production to meet short- to mid-term demand swings. Now let me turn to the heavy side of our business, where we are a well-positioned Heartland U.S. producer of cement. Here, all of our plants are virtually sold out. and so we expect pricing will be our greatest profit lever for cement in the most immediate quarters ahead. Infrastructure spend is on an upswing, aided by federal initiatives and state and local budgets in our markets are generally strong. Infrastructure and residential construction together are the most important end-use demand segments for cement and will be important multi-year drivers. On the last call, I spotlighted our intentions with respect to one of our five strategic thrusts highlighted in our environmental and social disclosure report on our website. This product is one that will help us manage our carbon footprint in cement and is called limestone cement or PLC. Let me bring you up to date on the latest developments here. This is a very important initiative at EGLE due to the benefits of reducing our overall carbon footprint per ton of cement produced and in making our scarce clinker go further, in effect, unlocking incremental cement production capacity. Some aspects of achieving our objectives here are fully under our control, and some are not. Those that are operational considerations Those that are not include gaining DOT approvals for product use in key applications. Every one of our cement plants have now completed production trials and product performance testing. As a result of these trials, all of our cement plants have evaluated capital investment requirements to reach what we have calculated to be the target limestone substitution levels. These capital investments are a varying degree of complexity and will be completed over the coming months or years, depending on the location. Regarding our customer acceptance, we have field trials underway with our customer base and are working with DOTs in all of our relevant market areas. So far, in FY22, we have produced and sold over 100,000 tons of this eco-friendly product out of four of our facilities. We expect increased sales of this product in FY23. We are making progress on testing and introduction of this product at an unprecedented pace at EGLE. Progress on this and our other ESG initiatives is a personal priority of mine and is reported to our full board quarterly. I mentioned at the beginning of my remarks that we see good opportunity for expanded earnings, margins, and returns. I commented on the first two, now let me say a few words about returns. We are generating a lot of cash. Our priority for that cash is to grow the company, recognizing we have strict financial and strategic criteria that we will always follow. During intervals where such growth investments are not feasible, we know what to do with the cash. Our actions this quarter speak to our convictions here fairly convincingly. We repurchased 1.2 million shares of our common stock for a total cash return to our shareholders of nearly $200 million during this quarter. Now let me turn it over to Craig for the financial results.

Thank you, Michael. Third quarter revenue was a record $463 million, an increase of 14% from the prior year. The increase reflects higher sales prices across each business unit and higher cement sales volume. The strong fundamentals in both cement and wallboard contributed to record EPS during the quarter. Diluted earnings per share from continuing operations was $2.53, a 30% increase from the prior year. This increase also reflects the reduced share count resulting from our share repurchases. 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 9% driven by the increase in cement sales prices and sales volume. Cement prices increased 6% while sales volume was up 7%. Our aggregate sales volume, however, was down 42% in the quarter as several large jobs were delayed. Operating earnings increased 11% reflecting higher cement prices and sales volumes, partially offset by higher energy and maintenance costs. Moving to the light materials sector on the next page, revenue in our light materials sector increased 21%, reflecting higher wallboard and paperboard sales prices, as well as increased paperboard sales volume. Operating earnings in the sector increased 32% to $63 million, reflecting higher net sales prices, which helped offset higher input costs, namely recycled fiber and energy. Looking now at our cash flow, which remains strong. During the quarter, operating cash flow was $167 million. The 9% year-on-year decrease reflects the timing of working capital shifts in the prior year, primarily associated with the receipt of our IRS refund. Capital spending increased to $28 million. And as Michael mentioned, we repurchased approximately 1.2 million shares of our common stock for $188 million and paid our quarterly cash dividend. Combined, we returned nearly $200 million to shareholders. Year-to-date, we've repurchased approximately 2.9 million shares, or 7% of our outstanding. Finally, a look at our capital structure. At December 31st, 2021, Our net debt to cap ratio was 41% and our net debt to EBITDA leverage ratio was 1.3 times. The refinancing we completed last quarter resulted in this favorable capital structure with significant liquidity to continue pursuing our strategic priorities. Thank you for attending today's call. Josh will now move to the question and answer session.