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spk08: Good day, everyone, and welcome to Eagle Materials' second quarter of fiscal 2023 earnings conference call. This call is being recorded. At this time, I'd like to turn the call over to Eagle's President and Chief Executive Officer, Mr. Michael Hack. Mr. Hack, please go ahead, sir.
spk07: Thank you, Jason.
spk08: Good morning.
spk07: Welcome to Eagle Materials' conference call for our second quarter for fiscal 2023. 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 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. This morning, I'd like to offer a few perspectives about our quarter, the outlook for our business, and our ESG agenda. First, let me talk about the quarter. The demand for our products continues to be strong. I'm pleased to report record revenues of 19% and record earnings per share of 51%. Our earnings results are driven by robust price improvement across our businesses and across our entire geographic system. Price realizations more than mitigated the cost of inflation pressures. We also returned $110 million to shareholders through dividends and the repurchase of roughly 840,000 shares. This quarter's performance reflects our strategic and operational disciplines, disciplines which serve us well at all points in the economic cycle. We have been growing and improving our businesses systematically in keeping with a strong strategic focus and clear strategic boundaries. This quarter's actions included the acquisition of a distribution terminal in Nashville, which extends our profitable operational reach in this high-growth southeastern region, and the purchase of an aggregates quarry in northern Nevada, increasing our access to aggregate reserves and our ability to serve this rapidly growing market. The decisions we have made over the years are providing significant advantages today, and the decisions we are making today will provide significant advantages to us in the future as we make our operations increasingly sustainable and resilient. The successful and well-demonstrated pursuit of our low-cost producer strategy positions us well for any eventualities that might be ahead this cycle. We will continue to grow the heavy side of our business as we have been doing in two ways. First is through asset acquisitions that meet our strategic and financial returns criteria, and the second is through growth investments that expand our system capabilities. We will also continue to invest in improving the profitability and the sustainability of our existing assets. Now let me turn to the outlook for our businesses, starting with the heavy side. For cement, as well as aggregates, we have perhaps the best multi-year visibility into demand and into the opportunities for pricing power than perhaps ever before. We have announced a cement price increase across our network of plants effective January 1st, 2023. The die is pretty well cast for public construction and infrastructure over the next three to five year timeframe. It is not a stretch to think we could see public construction spending substantially higher. Some facts supporting demand optimism for EGLE are state DOT budgets are running well above prior decade averages, the infrastructure portion of state DOT budgets are receiving high fund allocations, and the magnitude of state DOT budget dollars skews favorably for EGLE cement system footprint. Infrastructure contract award values are trending above national averages in the states in which we operate. At the same time, U.S. cement manufacturing supply response is highly constrained, and we see no material builder expansion in markets that will fundamentally change this picture. Bottom line, we have excellent visibility on US cement demand for the next three years. We have excellent visibility on cement manufacturing capacity expansion in our markets, or the lack thereof, for the same time frame. And we know how expensive imports are on a delivered basis to our US heartland markets. These facts should provide a relatively healthy formula for cement pricing power. Now turning to the light side, first as to demand, Given the rapid rise in interest rates, it is reasonable to expect some softening in the wallboard demand ahead. I want to emphasize that we have not seen softening yet as our quarterly results attest. The main reasons for this are there are 1.7 million housing units under construction in the US today. This is an all-time record. Our wallboard business has its production footprint in the US Sun Belt. The South region is the most important in the country, more important than the three other regions in the U.S. combined. We are where the action is. Repair and remodeling is another important driver of wallboard demand, and the near-term outlook implications for wallboard appear favorable. Now turning to the supply side. In many ways, our wallboard business today has its characteristics resembling our cement business. To name three, In wallboard, we operate at high-capacity utilization, and comparatively, our cement plants are sold out. Our demand outlooks would suggest these higher utilization conditions will be persistent through the midterm for both businesses. Both businesses have significant constraints to capacity addition, albeit for different reasons. Both cement and wallboard are products with very limited substitutes. and each are essential to U.S. construction and the growth and rebuilding of America. Now let me turn to operations. I am delighted with the results we reported across our network of plants as a whole, but I would be remiss in not talking about one plant that has recently struggled with equipment failure issues. This plant is our Texas Lehigh Cement Plant Joint Venture. As you know, one of our hallmarks is keeping our plants in like new condition. This plant has had a few one-off failures that are not commonly seen. With each of these failures, we want to ensure that we fix the root cause of the issue. This usually takes a little additional time in understanding the failure and doing the engineering work to fix it properly, but will serve us well over the long term. Supply chain issues have resulted in some extended downtime with these equipment repairs and replacements, which are reflected in this quarter's numbers. Some of this downtime will extend into the coming quarter, but we feel confident that the plant will be more reliable when these investments to fix the root cause of the issue. Let me close today with some comments on our ESG agenda, starting with environmental. I have mentioned before that our biggest opportunity for moving the needle on our path to a net zero future is through the introduction, marketing, and acceptance of Portland limestone cement. It is the best and quickest way for us to make our clinker go further. Adoption requires approvals from state DOTs as well as some capital investment in our manufacturing plants. Implementing PLC at all locations will not be completed overnight as we face supply chain issues on the equipment side and approval timelines with state DOTs, but I'm happy to report we continue to make significant progress. Last quarter, I commented that almost 15% of our system-wide cement sales were Portland limestone cement. This quarter, that proportion grew to 25%, with two plants shipping PLC in the 60% to 70% range. We have set an internal goal to move all of our operations construction-grade cement to 100% limestone cement production by 2025. Meeting this goal will enable us to produce more cementitious product, which is of critical importance given we are in sold-out conditions, but also very importantly, it will improve our carbon footprint at the cementitious level. Shortly after the first of the year, we will be more formally updating our progress, and we intend to make these goals and their implications more explicit. As part of a broader disclosure on the E as well as the S of ESG. With that, let me turn it over to Craig for the financial review of our quarter.
spk09: Thank you, Michael. Second quarter revenue was a record $605 million, an increase of 19% from the prior year. Excluding the recently acquired business in northern Colorado, revenue increased 16%. The increase reflects higher cement and wallboard sales prices, as well as increased wallboard sales volume. Second quarter diluted earnings per share were $3.72, a 51% increase. Excluding the impact of our refinancing actions in the prior year, the EPS increase was 36%. The increase was driven by improved earnings and reduced share count due to our buyback program. Fully diluted shares are down 10% from the prior year. Turning now to our 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 was up 14% driven by higher cement sales prices. Operating earnings increased 10%, reflecting higher cement prices, which were partially offset by increased energy and maintenance costs. Given the strong demand backdrop, we implemented a second round of cement price increases in early July across the majority of our markets. Moving to the light materials on the next slide. Revenue in our light materials sector increased 26%, reflecting higher wallboard prices and sales volume. Operating earnings in the sector increased 42% to $95 million, reflecting higher net sales prices, which helped offset higher input costs, namely freight, energy, and paper. However, recycled fiber costs have come down significantly in September and again in October. Looking now at our cash flow, which remains strong, during the first six months of our fiscal year, operating cash flow improved 15% to $300 million, and capital spending increased to $43 million. As Michael mentioned, during the quarter, we completed the acquisition of a cement distribution terminal in Nashville, Tennessee, with a purchase price of approximately $39 million. We also repurchased 840,000 shares of our common stock for $101 million and paid our quarterly dividend. Year to date, we have repurchased approximately 1.7 million shares, or 4.5% of our outstanding shares. We also have 9.1 million shares remaining under our current repurchase authorization. Finally, a look at our capital structure. At September 30, 2022, our net debt to cap ratio was 48%, and our net debt to EBITDA leverage ratio was 1.5 times. We ended the quarter with $84 million of cash on hand. Total committed liquidity at the end of the quarter was approximately $628 million, and we have no meaningful near-term debt maturities, giving us substantial financial flexibility. Thank you for attending today's call. Jason will now move to the question and answer session.
spk08: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Trey Grooms from Stevens. Please go ahead.
spk06: Hey, good morning, everyone. Congrats on the quarter. Thanks. First question is on the cement business. You mentioned that you remain virtually sold out. And as you look at your footprint geographically and kind of the relative health of those markets, can you talk about your expectations for the different end markets you're in there? Clearly, we've seen what's going on with res, but maybe how your markets are holding up there, and maybe also just generally private construction, as well as any outlook for the infrastructure demand in those markets as we look kind of into next year. And the question really is around if we see softening, do you think also that we should remain in this kind of sold-out condition as we progress into, I guess, calendar 23?
spk07: Yeah, Trey, I'll take that question with it. So, you know, when we look across, we run our system a little bit differently than we did years ago in that we have a network of cement plants now, and that's why you see some of the acquisitions we did, you know, with extending that network and making sure that network is reliable and resilient during good times and bad times with it. So, you know, this Nashville purchase was a was a hallmark of that, too, that we extend our profitable distribution footprint down into the southeast region for some of our plants. And we could hit that through multiple areas. We feel very comfortable, as my earnings comment said, on where the infrastructure side of the business is. The state DOT budgets look very favorable. Where we participate in our markets you know, they're pretty shielded from imports getting into those markets, and overall, you know, there's nothing in my mind that doesn't think that, you know, that public construction spending will be higher over the near and mid-term of this with this infrastructure spending. You know, your question on, you know, individual markets itself and that, you know, we really look at it as a network. We think that the Cement overall is in a great position. It's in a sold-out position today. You know, with some softening in one sub-market or another market, it's going to be more than consumed in another sub-market with it. We just think that cement's sitting in a very good position right now.
spk06: Perfect. Great. Thank you for that, Michael. And on kind of sticking with cement on the cost front, I know you guys are locked in on energy largely for the cement business for the year, for I guess the rest of the fiscal year. And I guess when those reset, I guess it would be in March, from where we stand today and any color on maybe early conversations you're having with folks there on the energy front and any color on maybe what you're expecting, there for next year with that next 12-month lock-in.
spk09: Yeah, thanks, Trey. On the cost side, you've got it right. Energy has been upward inflation in fiscal 23. I would tell you sequentially, we didn't see a lot of change there. You locked in those energy prices largely at the beginning of the year. But as we're getting into the negotiations for next year, We are continuing to see a similar type of inflation there as we go into FY24. Look, natural gas is down a little bit here recently, so that's been favorable. And you can change your fuel mix a little bit. But for more of the solid fuels, we will continue to see upward pressure.
spk06: And just as a follow-on to that, the price increase you have announced for January across your footprint there, Is the thought there that that's going to be enough to kind of cover that step up that you're expecting or any color around that side of things with the margin outlook given the cost increase and the pricing?
spk07: Yeah, you know, we've been – that's definitely the intent on that side, Trey, with it. You know, we haven't finalized on the numbers with any. We've announced the price increase, and we're going to be working with our customers on what – That materializes on, but yes, we're going to recover any cost increases.
spk06: Okay. Well, thanks. I'll pass it on, and good luck for the rest of the year. Thank you.
spk08: The next question comes from Brent Thielman from DA Davidson. Please go ahead.
spk00: Hey, great. Thank you. Good morning. My first question was just more of a near-term question, the issues on the Mississippi River and whether that's having any direct or indirect sort of impacts in your business, thinking specifically cement.
spk09: Yeah. No, we're not on the Mississippi River, so that wouldn't impact us.
spk00: Okay. Yeah, just didn't know if there was any indirect effects. Okay, and then the dive in OCC prices,
spk09: recently just wondering you should that have an effect on wallboard prices eventually is there just that much more behind the strength and pricing here to consider no look i think the the pricing strength we've seen in wallboard has been largely around demand and supply um you know dynamics that uh that have been going in our favor and some of the raw material issues that we've talked about for others in the eastern part of the country. But OCC prices being down, as I talked about in my comments in September and then again in October, that will be a nice tailwind for the paper mill as well as the wallboard business. It takes a little bit of time for that to flow through to the wallboard business, a couple of quarters, but we will see some lower costs there as we get into the winter.
spk00: Okay. And then your comments on, um, you know, all your facilities effectively being able to, you know, sell PLC by 2025, is the governor on that, whether or not all the DOTs you serve, you know, effectively will take in PLC. I'm just wondering if you're seeing that already, whether already accepting PLC for all the DOTs you already serve or, you know, whether factors kind of play into that.
spk07: Yeah, it really is a mixture of two things. You know, with the DOTs, we're pretty far along with approval status. That's why you see some of the plants in the 60 to 70% range. And, you know, my comments of 100% to it, you know, we expect to keep expanding significantly on that side. We do have some supply chain issues. on some equipment material that we need to order in order to convert some plants to 100% PLC. So some plants will be able to get partially there, but then we've got to wait for the equipment delivery and installation to get to the final, you know, be it 30%, 40% at some of these plants with additional either grinding capacity or different parts that we need for the plant to be 100% compliant.
spk08: Okay, great. Thanks, guys. The next question comes from Anthony Pettinari from Citigroup. Please go ahead.
spk03: Hi, this is Asher Sonan for Anthony. Thanks for taking my question. You know, just on the January hike, you know, that you communicated to customers, understanding that those conversations are ongoing, you know, can you size that roughly? Are we thinking about another double-digit increase maybe? And then, As you communicate a January hike to customers, you know, rather than the historical April, is this sort of implied message that customers should expect another mid-year hike, or is January just sort of a new normal now?
spk07: So we'll continue to have those discussions with our customers, and we'll report out where we ended up the next quarter with it. You know, we expect a similar cadence to what we've had in the past is all I'll leave with. on the dollar amount with it. As for future price increases, I don't want to speculate on those. You know, we will monitor the market, and we'll see where the market stands, and then we'll determine our pricing strategy going forward with that. We did leave open in our notes saying that, you know, we will continue to evaluate the market, and we will see what happens in the second half of the year.
spk03: Great. And then, you know, switching to Walboard, you talked about, you know, pricing remaining strong, you know, in the medium term, but Some of the home builders we covered have talked about, you know, working with material producers to reduce their costs as, you know, their home prices come down. So I'm just wondering if you've started to see any sort of that pressure from builders on the wallboard side or having any sort of conversations to that effect.
spk09: Yeah, you know, we had a mid-quarter price increase in wallboard. It was in August. As you can see, our prices were up sequentially. Understand that there are – questions about the 12, 18 months from now, but in the meantime, we were largely able to achieve a price increase across our footprint.
spk03: Great, thanks. I'll turn it over.
spk08: The next question comes from Jerry Arevich from Goldman Sachs. Please go ahead.
spk01: Yes, hi. Good morning, everyone.
spk09: Good morning, Jerry.
spk01: Craig, I'm wondering if you could just talk about, in the cement business, the cadence of inflation over the course of the quarter, any meaningful changes? Obviously, a lot of the commodities we see, but what about things like contracted labor or any services that come up, et cetera? Can you just talk about whether inflation is at least stabilizing for some of those miscellaneous repair and similar items?
spk09: The two things that I pointed out were energy and maintenance, energy being the larger component of the year-over-year cost increase. As I mentioned earlier, the sequential change in energy prices wasn't significant. As we said, we locked in those costs. generally for the year. We will see some inflation into FY24, but sequentially not a lot of major changes. Again, the labor component within these businesses is generally not significant. We do see inflation on some of the parts that we consume and things like that, but that's kind of been ongoing as a part of that maintenance bucket as well.
spk01: Sorry, please go ahead.
spk09: I would say freight, you know, seems to have also flatlined here, plateaued from where we were in the prior year. That's more of a cost within the wallboard business. But, you know, some of them have kind of flatlined here. And OCC prices, as we mentioned earlier, have come down significantly in September and then again in October just post the quarter.
spk01: And, you know, with the big robust price increases in cement, you know, they've essentially – been necessary to maintain strong profitability. So percent margins are very similar today versus a year ago. Do you see an opportunity with the January price increase that you spoke about? Could pricing actually outpace inflation so we see year-over-year margin expansion potentially? Or how are you thinking about the price-cost balance into January?
spk09: Yeah, look, Jerry, we were able to expand our wholly-owned margins over 100 basis points this past quarter. So the pricing that we achieved in January of this year and again in July has been margin accretive. And given where the supply-demand dynamics are and where our production facilities are operating at a high utilization rate, as Michael mentioned, those price increases should more than offset some of these inflationary pressures that we're seeing.
spk01: I didn't mean to shortchange you on the improvement with the approximation. Can I ask you, you folks are very deliberate in your capital deployment program, big stock buybacks year to date, and you spoke about the signs that we're all looking for for residential construction to slow 12 months out. So can you just talk about the confidence you have in the wall board margin profile in your business given the cost increases there? For the industry, it feels like behind your stock buyback actions is confidence on better than historical trough margins in wall board, but maybe I can get you to expand on that.
spk09: Yeah, Jerry, it's a great point. I'll tell you my confidence is more around the cash flow generation capabilities of these assets throughout the cycle. To me, that is what these assets are all about. We've positioned the capital structure in a place where leverage is manageable, whether that is for opportunities to continue to grow the company, whether that is to manage cycles. That's always been a hallmark of how we position our capital structure. And so the free cash flow can then be used to either continue to expand our geographic footprint if the strategic criteria are met and the financial criteria are met. And to the extent we have additional free cash flow, we return that to shareholders and And we know how to do that pretty well through our share repurchase program. So I think it's just the confidence in the cash flow management and generation of these assets more than anything. And as you point out, the position of our company relative to where we were in prior cycles is dramatically more resilient given the geographic footprint that we have and given the position of our wallboard business relative to where we were 15 years ago.
spk01: Okay, appreciate the discussion. Thanks.
spk08: The next question comes from Stanley Elliott from Stiefel. Please go ahead.
spk05: Hey, good morning, guys. Thank you for taking the call. Quick question. I know it's probably very hard to do. Is there a way to size kind of what the industry typically sees from these major hurricanes, both for cement and then, well, I guess more for wallboard for you just from a regional standpoint?
spk09: Stanley, it's a good question. Here's what I would tell you. Our experience with hurricanes is that there is an initial surge for the cleanup of an event like that, and a very unfortunate event. The rebuild effort happens over such a broad time period that it's hard to parse out what's hurricane rebuild versus what's new construction. We just know that the fighting with the insurance companies and everything else that happens just happens over such a broad time period.
spk05: And then as it relates to the JV and some of the equipment issues, I mean, do we think that this, or is this basically pulling ahead capital spend or maintenance capex, however you want to think about it, for next year into this year so that, you know, vis-a-vis you're actually looking at lower capital maintenance spend across the system, or just kind of try to parse out a little bit more what exactly is going on at the JV?
spk07: Yeah, no, you know, you could, you know, just assume that the capital spend is going to be the same. We're going to do the same type of outage work with it, you know, where we had some issues were really one-off failures, and they were, you know, items that, you know, don't typically fail with us, and so we didn't have, you know, necessarily all the spare parts on site with it. So the supply chain of ordering these specialty parts took a little longer. But I would assume the same cadence and spend on an outage. We take our plants down. We usually go through all the plants, and we make sure they're in like-new condition, and we spend to make sure they operate. This was just one-off occurrences.
spk05: Perfect, guys. That's it for me. Thanks, and best of luck. Thanks, Stanley.
spk08: The next question comes from Adam Thalheimer from Thompson Davis. Please go ahead.
spk04: Hey, good morning, guys. Nice quarter. Thank you. I wanted to ask first about cement and wallboard margins, both of which are really good in Q2. What are your thoughts on the sustainability of that in the back half, kind of year-over-year margin improvement?
spk09: Yeah. Look, the wallboard – You know, we have seen, as I mentioned, freight's kind of plateaued. So if you think about the different pieces, you know, we had good price realization in the quarter. OCC prices are coming down. Gas prices have come down here the last couple of weeks. So that's all been positive for the wallboard business. On the cement side, again, the July price increase was realized across the majority of our markets in good shape. And Yeah, look, I will tell you, on the cement side, it's all about when does winter show up in the December quarter, especially for some of those more northern climates. But, you know, the businesses are in a good spot. The maintenance programs are largely done. And we have a good margin profile.
spk04: And then a similar question, but as it relates to the OCC projects, price declines. To what extent have you been eating the higher OCC prices at the paper board segment?
spk09: Yeah, so we don't have a lot of inventory on hand of recycled fiber, so you see that benefit within the paper business pretty quickly, especially when prices fall like they have here in the last two months or so.
spk04: The paper board margins used to be in the gross operating margins in the 30% range, could they snap back to that range that quickly with OCC down? Or does it take more than that?
spk09: Yeah, look, you know, certainly we saw nice margin improvement both year over year and sequentially in the paper business this quarter. I would tell you relative to, call it four or five years ago, energy prices are still higher for that business. Freight costs are still higher for that business. So that will impact the ability for margins to get back to those levels. But we have seen nice improvement here.
spk04: Okay. Last one, Texas cement. The price spiked a lot sequentially. Is that sustainable, or was that kind of a one-off related to the production issues?
spk07: No, that's sustainable. That's our pricing in that market. That market is very consolidated, and the supply-demand profile in that market is very extreme right now.
spk08: Great for you guys. Thanks a lot. The next question comes from Phil Ng from Jefferies. Please go ahead.
spk02: Hey, good morning. This is actually Colin on for Phil. I just wanted to touch on your prepared remarks. You talked about eXp being well positioned in its principal markets for the second half of the fiscal year here despite the increase in interest rates. Can you just elaborate on what you're seeing in your markets and what this implies for wall board volumes in the back half of the year And then just as you start to look out into calendar year 23, any preliminary thoughts on what wall board volumes might look like for you guys?
spk09: Yeah, Colin, good question. As we said, our orders, our shipments in wall board have remained steady throughout the quarter. And a lot of that is because of the Construction cycle for building a home elongated. There is a quote unquote backlog of construction activity as those homes need to be completed. I think it's a little too early to speculate on 2023 volumes quite yet. We're all trying to figure out what is the recent rise in interest rates due to the home building industry. Certainly, there's still a significant demand for homes. here in the U.S., whether that be single-family or multi-family. I'd also say, again, we operate in the southern half of the U.S. generally. Those markets have been much more resilient than the national average you saw this past quarter. So we think we're well-positioned from that perspective as well.
spk02: Okay, that's helpful, Kohler. And then in your prepared marks, you also talked about some constraints from the supply side and capacity additions for wallboard. Can you just dive into those constraints a little bit more? And then just given these dynamics, how are you thinking about the resilience of wallboard pricing going forward, especially if we start to see volumes decline given that interest rate spike?
spk09: Yeah, Colin, those constraints are for the eastern half of the U.S., generally where synthetic gypsum was the predominant raw material that was expected to be used to produce wallboard. That was a lot of the new capacity that was added 15 years ago and 20 years ago was designed to utilize synthetic gypsum, which is generated from coal-fired power plants. As that has reduced, as we've generated less power via coal, the availability of that gypsum is diminished. And, you know, that's a material amount of the capacity in the U.S. was wanting to use that material. So that's going to be a major constraint. The alternative is generally to go overseas, which is expensive and can be difficult to arrange. So that, in large part, is why the wallboard... cycle could be very different this go-around versus prior cycles where we were actually adding capacity in advance of a demand pressure. This cycle, we're not seeing much new capacity, so that's why we think this cycle could shape up to be very different than prior cycles.
spk02: Great. Thank you for the color.
spk08: This concludes our question and answer session. I'd like to turn the conference back over to Michael Hack for any closing remarks.
spk07: Thanks, Josh. Thank you for joining the call today, and we look forward to talking to you at the next call early next year. Thanks.
spk08: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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