Eagle Materials Inc

Good day, everyone, and welcome to EGLE Materials' fourth quarter and fiscal 2023 earnings conference call. Today's call is being recorded. At this time, I'd like to turn the call over to EGLE's president and chief executive officer, Mr. Michael Hack. Mr. Hack, please go ahead.

Thank you, Jamie. Good morning. Welcome to EGLE Materials' conference call for our fourth quarter and fiscal year 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. 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. Today, I am proud to announce record results for EGLE materials across the board, safety, financial, and operational. This is remarkable when you think about all the market uncertainties that have reared their head during these last 12 months. Eagle's success in these areas are simply from the fact that, first, we have the best people in the industry. Many of our personnel put in long hours to achieve the safe, record, operational results that led to our financial success this past year. I want to thank each Eagle employee as you make Eagle what it is today. Second, at Eagle, we do not spend our time trying to control the uncontrollable, like the direction of the U.S. economy. We remain focused on what we could affect, and that is maintaining our low-cost producer position that serves us well in any financial cycle. Third, we remain steadfast in our capital allocation priorities, which gives us the flexibility to react in any market condition. Now let me talk about a few details regarding our results, starting with safety. We had the lowest recordable injury rate in the company history and the highest employee participation in our near-miss reporting program. Simply put, at Eagle, we care about fellow employees and look out for each other. Financially, Eagle Materials set records across the board for the fourth quarter and for our full fiscal year. To highlight a few of these records, Eagle generated annual revenue of $2.1 billion, up 15%, with $470 million of that coming in Q4. Eagle's annual EPS was $12.46, up 36%, with Q4 showing momentum at $2.79, up 47%. During the fiscal year, we also expanded gross margins by 190 basis points up to 29.8% while generating operating cash flow of $542 million. These results reflect the culmination of decisions EGLE has been making for many decades, namely geography matters. We remain well positioned to capitalize on the conditions of this past year given our geographic footprint across the U.S. heartland and fast-growing Sunbelt region. We control our raw materials with regards to proximity of our reserves to our plants, the quantity of the reserves, and the quality of the reserves we own, which helps insulate us from supply chain pressures. Operationally, the strength of our business was also reflected in our pricing and cost control initiatives this year. In wallboard, we were able to achieve a 260 basis point improvement in our operating margins. On the heavy side, we implemented two cement price increases in fiscal year 2023, including our recent January price increase. We continue to believe that we are in the early stages of a multi-year tailwind for our cement business. Looking beyond our financial results, I also want to highlight how well we executed on our strategic initiatives and priorities this year. In fiscal year 2023, EGLE was able to strengthen its network through several acquisitions, totaling almost $160 million. While we are always looking for transformative acquisitions that meet our strategic and financial criteria, our acquisitions this year were bolt-on in nature, extending our network of cement terminals expanding our aggregate operations, and improving our low-cost producer position. Because of our robust cash flow generation, these acquisitions were also executed alongside our flexible share buyback program. We returned $426 million to our shareholders, maintained our quarterly dividend, and bought back 3.1 million shares while simultaneously keeping leverage below 1.4 times. Finally, I want to close out the review of our year with an update on another top strategic priority for EGLE, environmental sustainability, in our transition to Portland Limestone Cement, or PLC. First, I'm happy to highlight that we updated our environmental and social disclosure report in February, highlighting the work we have done to date and the path forward for EGLE. We have made significant progress and will continue to work on the implementation of our strategy. As for PLC, at the beginning of the year, less than 10% of our cement was PLC, and I'm pleased to report that we were able to transition to over 30% by the end of the fiscal year 2023. We are on track to achieve 100% conversion of all construction grade cement by 2025 to PLC. In summary, while there is more work ahead, environmentally, operationally, and strategically, I could not be prouder of what we were able to achieve this year. That leads me into the next topic I'd like to spend some time on today, looking at our year ahead. I'll start with the demand picture for the Heaviside. Public support for infrastructure improvements remains high, as seen through the large percentage of infrastructure-related bills that passed following last November's midterm elections. We are beginning to see a meaningful increase in funding from the Infrastructure Investment and Jobs Act, which should last multiple years. This is in addition to the spending done at the state and local level, which continues to benefit from healthy budgets and tax receipts, especially in the states EGLE operates in. As a case in point, infrastructure contract awards for highways, bridges, and tunnels in states across EGLE's cement footprint have grown by over 35% in the last 12 months. Now let's talk about the supply side for heavy. As I've discussed in the past, even with the multi-year demand tailwinds for cement, supply capacity is unlikely to material increase due to permitting timelines, if you can get one, and investment requirements. In fact, even as cement consumption has increased over the last several years, clinker production has dropped. These supply-demand dynamics reinforce our outlook in the mid- and long-term for our heavyside businesses. To that end, as we previously announced, We recently closed on a cement import terminal acquisition in Northern California as part of our strategy to expand and strengthen the distribution reach of our cement network across our U.S. Heartland manufacturing system. This acquisition allows EGLE to participate in a robust market, fulfilling customer needs in an area where cement manufacturing supply is challenged, while increasing the optionality of our Nevada cement plant. Next, let me say a few words about the demand picture for wallboard. There is no question that continued uncertainty around the U.S. economy strength or the Federal Reserve's policy setting makes next year's demand picture unclear. What does remain clear, however, is that certain areas of the U.S. housing construction activity have proven incredibly resilient. For example, data shows housing units under construction to still be at near record levels, with multifamily units under construction at the highest level since 1973. Southern states, at the core of EGLE's footprint, are seeing a continued rebound in housing starts, hitting a nine-month high through March. Home inventory levels and months of supply are also still historically low, sustaining home building activity. Furthermore, the repair and remodel outlook seems stable, with prime remodeling years of home stock expected to grow over the next few years and homeowners sitting at all-time high levels of home equity. On the gypsum wallboard supply side, it is crucial to note that like cement, wallboard supply remains structurally challenged, albeit for different reasons. The difficulty in accessing natural gypsum as a raw material in the east and the reduction in synthetic gypsum is significantly impacting the cost curve and capacity utilization for the industry. As a result, nameplate capacity has remained essentially flat since 2017. This lack of new supply is unlike any prior cycle and means that a dip in demand does not necessitate the same pricing pressure we've seen in past cycles. With the supply-demand picture, we have reason to be cautiously optimistic as we have proven we can handle some volatility in the market if it were to materialize. Given the variable cost nature of the gypsum wallboard business, we have proven that we can flex production up and down appropriately. On the cost side, the stabilization in our input costs, namely OCC recycled paper and natural gas, should continue to provide a buffer. As our quarter and our year showed, demand is strong today and there are many reasons to be optimistic about the future. In summary, in the year ahead, we will continue to focus on executing well and preparing for things within our control. For EGLE, that means, first, we'll keep investing in our core. Our core businesses are well positioned and well prepared to capitalize on opportunities ahead. We will continue to invest in maintaining our plants in like new condition, investing in our operational and technology capabilities, and improving our sustainability for the long term. Secondly, we will be prepared for any eventuality. This includes keeping a healthy balance sheet with leverage currently at 1.4 times allowing us to manage cycles while ensuring we can capitalize on any organic or inorganic opportunities. And third, we will stay relentlessly focused on our priorities. Operationally, that means keeping our employees safe, executing at the highest levels, and meeting the needs of our customers. Strategically, we will continue to seek to grow our businesses with an emphasis on heavy-side acquisitions that meet our strategic and financial criteria. It also means sticking to our capital allocation priorities, including prudently returning cash to our shareholders. And environmentally, we'll drive our sustainability initiatives in Portland limestone cement and more broadly. With that, let me turn it over to Craig for the financial review of our quarter.

Thank you, Michael. Fiscal year 2023 revenue was a record $2.1 billion, up 15% from the prior year. Excluding the acquired aggregates business in northern Colorado, revenue was up 13%. The increase reflects higher cement and wallboard sales prices, as well as increased wallboard sales volume. Revenue for the fourth quarter was up 14% to $470 million, primarily reflecting increased wallboard and cement pricing. The strong fundamentals in both cement and wallboard contributed to record EPS during the year. Diluted earnings per share for the full year increased 36% to $12.46. This increase also reflects the reduced share count resulting from our share repurchase program. Fully diluted shares were down 9.5% from the prior year and are down nearly 30% from their peak in fiscal 2015. Fourth quarter EPS was up 47%. Turning now to segment performance, highlighted on the next slide. In our heavy materials sector, which includes our cement and concrete and aggregate segments, annual revenue increased 11% to $1.3 billion. The increase reflects higher cement sales pricing and the contribution from the aggregates business we acquired early in the year, partially offset by lower sales volumes, cement sales volumes. Cement sales volume was depressed because of record-setting snowfall in our northern Nevada and northern California markets in the fourth quarter. Operating earnings increased 7% to $297 million, again reflecting higher cement sales prices partially offset by lower sales volume and higher operating costs. Our fourth quarter cement price increased 16%, reflecting the price increase we implemented recently in January, which demonstrates the very strong demand environment and the sold out position in the U.S. cement industry. Moving to the light materials sector on the next slide. Annual revenue in our light materials sector increased 22% to $981 million, reflecting increased wallboard sales volume and prices. Annual operating earnings increased 38% to $378 million, reflecting increased net sales prices partially offset by higher input prices, namely recycled fiber and energy. However, both of these have recently declined. Looking now at our cash flow, we continue to generate very strong cash flow and allocate capital in a disciplined way. During fiscal 2023, operating cash flow improved 5% to $542 million, while capital spending increased to $110 million, as we continue to invest in and improve our operations. And as Michael described, we also completed multiple acquisitions during the year, with total acquisition spending of approximately $158 million. In fiscal 2023, we paid $38 million in dividends and repurchased approximately 3.1 million shares of our common stock for $388 million, returning nearly $426 million to shareholders. we have 7.7 million shares remaining under our current repurchase authorization. In fiscal 2024, we expect capital spending to increase to a range of 145 to 165 million as we ramp up several projects to expand the production of Portland limestone cement and to improve our low-cost assets. And finally, a look at our capital structure. At March 31st, 2023, Our net debt to cap ratio was 48%, and our net debt to EBITDA ratio leverage was 1.4 times. Total liquidity at the end of the fiscal year was approximately $602 million, and we have no meaningful near-term debt maturities, giving us substantial financial flexibility. Thank you for attending today's call. We'll now move to the question and answer session.