Eagle Materials Inc

Good day, everyone, and welcome to Eagle Materials' second quarter of Fiscal 2024 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, MJ. Good morning. Welcome to Eagle Materials' conference call for our second quarter of Fiscal Year 2024. This is Michael Hack. Joining me today are Craig Kessler, our Chief Financial Officer, and Alex Paddock, Vice President of Investor Relations, Strategy, and Corporate Development. 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 that I'm excited to highlight another quarter of record operating and financial performance for EGLE materials. In the second quarter of fiscal 2024, EGLE generated record revenue of $622 million up 3%. Eagle expanded gross margins to 33.6%, up 150 basis points, and we achieved record net earnings per diluted share of $4.26, up 15%. A key reason for our superior margin performance is our commitment to our long-term sustainability of our plants, our businesses, and our employees. On the employee front, I want to highlight an event that we conducted this past quarter, one that I always look forward to attending and participating in, our seventh annual Health, Safety, and Environment Conference. This conference brings together our operations and HSE leaders from across all of EGLE. We have an open and honest discussion about where EGLE is currently and where we will be going with regards to HSE. From the focus and dedication of our people, EGLE has been able to continue to be an industry leader in keeping our employees safe, as measured by our total recordable incident rate, reduce emissions through our focused implementation of PLC cement, reduce water usage through the redesign of our systems to ensure that they are closed loop, and focus our efforts through best practice sharing and leading indicators to eliminate more serious injuries, as demonstrated in our lost time injury rate. I'll now turn to more specifics on our operational and financial performance for this quarter, starting with the heavy materials businesses. Revenue increased 10% versus the prior year's second quarter. Within our footprint, public highway and infrastructure awards continue to outpace the national average. Similarly, announced manufacturing construction projects of semiconductors, EV batteries, clean energy, and heavy industrial projects have been benefiting the markets we serve. These announced projects total almost $500 billion nationwide since 2021. On the supply side, U.S. manufactured cement supply continues to be outpaced by demand. Total capacity has fallen since 2010 when further regulations were enacted known as NESHAP, making new plant construction and capacity expansion challenging. This creates the ingredients for a strong pricing environment. Thus, we implemented a second round of cement price increases in early July across half our markets, and we have begun announcing the next round of increases for January of next year. This quarter, we also made meaningful progress in our conversion to Portland Limestone Cement, or PLC, surpassing 60% across our system. PLC makes our clinker go further and it is an important lever at our disposal for lowering the carbon intensity of our footprint. So we are excited about the opportunities PLC provides us. I'd be remiss if I did not add a little color around Texas Lehigh JV operation since it was mentioned in the last quarterly earnings call. I'm happy to say that we have made substantial progress on our kiln system and the plant is performing much better. We still recognize that there is some more work to do, but I'm very pleased with the progress to date. In regards to the mid and longer term outlook for cement, concrete, and aggregates, we have multi-year visibility into demand, and the volume picture for cement remains robust across our end markets. Both public and private non-residential construction, particularly within manufacturing projects, continues to see strong spending. With the layering of federal infrastructure dollars, there is a meaningful runway for construction projects for years to come. There is often a long tail of demand from these projects as well, as communities and other local infrastructure must be built out. Moving to the supply side outlook for the heavy side of our business, we have very stringent permitting requirements in our industry. Because of this, we do not foresee any significant new plant builds or expansions in our markets that would materially change the supply picture. Since we are so constrained on manufacturing capacity, the sold-out markets around the coastal areas will have to turn to imported cement in order to meet the demand. To this extent, we have continued the integration of our recently acquired cement import terminal in Northern California to supplement our supply chain on the West Coast. Our manufactured cement footprint is made up of U.S. Heartland Network that will remain largely insulated from imports, given the high delivered cost to our markets. Because of these dynamics, we are optimistic about our short-, mid-, and long-term outlook for our Heaviside businesses. Now let me turn to our quarterly performance on the light side. For Gypsum-Waldward, sales volume declined 6%, while the average Gypsum-Waldward net sales price was flat with the prior year. It has been encouraging to see shipments, orders, and pricing maintain their resiliency to date. Since housing is the most critical end market for us, we recognize the rise in interest rates and unclear path of consumer spending may mean the environment stays choppy in the short term. Looking at the mid- and long-term demand outlook for gypsum wallboard business, we operate in markets in the Sun Belt and the South, In this market, single-family housing starts have held up relatively well. Similarly, single-family permits in the South, coinciding with home builder orders, given the limited supply of existing homes for sale, should translate into wallboard consumption in 2024. Looking longer term, we see the structural underbuild of housing in the U.S. getting worse before it gets better, as rate lock-ins keep people in their current homes for longer. creating a tailwind for our businesses as new homes are built or existing homes undergo repair and remodel projects. With regard to the mid- and long-term supply outlook for our light side businesses, we have spoken many times of the effect that the lack of synthetic gypsum is having on the ability to add capacity to the industry. Let me provide an example looking at the prior two cycles. 1995 through 2000, and 2000 through 2008, represented two significant housing demand cycles in the US. In both those periods, the wallboard industry added significant new capacity through the cycle and beyond the demand peak. This cycle has played out much differently. The industry has added no new capacity in over a decade, even as pricing has reached record levels, This is indicative of the effect raw material shortages are having on the broader industry. It needs to be noted that about half the industry supply is designed to utilize synthetic gypsum. Because of this, the effective economic viability of the industry capacity is likely lower than nameplate figures imply. Eagle Materials benefits from the surety of raw material supply for all of our wallboard plants insulating us from the cost curve and the capacity pressures facing much of the wallboard industry. In fact, the demand-supply dynamics benefiting our wallboard businesses resemble many of the qualities that make our cement and aggregates businesses so attractive as well. Closing out on our business performance through the first half of our fiscal year, I'd like to mention how well we continue to execute our capital allocation playbook. Eagle Materials' cash flow generation is a key reason why the business is so attractive through cycles. Given our businesses are in a cyclical industry, we focus on cycle management and on maintaining financial flexibility to create long-term value for our shareholders. Our priorities remain the same to continue to grow our businesses and improve our low-cost competitive positions through acquisitions and organic investments that meet our strict strategic and financial return criteria. And when those opportunities don't materialize, we use our share repurchase program to return cash to shareholders in a meaningful way. Last quarter, we returned $86 million of cash to shareholders through share repurchases and dividends. We also used our strong cash flow to strengthen our balance sheet. Our leverage ratio ended the quarter at 1.3 times. With that, I'll turn it over to Craig to go through our financial results in more detail.

Thank you, Michael. Second quarter revenue was a record $622 million, an increase of 3% from the prior year. The increase reflects higher cement sales prices and contribution from the recently acquired cement import terminal in Stockton, California, partially offset by lower wallboard and paperboard sales volumes. Excluding the Stockton acquisition, revenue was up 1%. Again, this past quarter, we generated record earnings per share. Second quarter earnings per share was $4.26, a 15% increase from the prior year. The increase was driven by higher earnings at a 5% reduction in fully diluted shares due to our share buyback program. Turning now to our segment performance, highlighted on the next slide, In our heavy materials sector, which includes our cement and concrete and aggregate segments, revenue increased 10% driven primarily by the increase in cement sales prices implemented earlier this year and the contribution from the recently acquired cement import terminal in Northern California. Operating earnings were up 19% primarily because of increased cement prices. Given the strong market conditions that Michael discussed, We implemented a second round of cement price increases in early July, and our average cement price increased approximately $5 per ton, or 3% sequentially. We've also recently announced cement price increases in most of our markets effective January 1, 2024. Moving to the light materials sector on the next slide, revenue in our light materials sector decreased 8%, reflecting lower wallboard and recycled paperboard sales volume while wallboard sales prices were flat. Operating earnings in the sector declined 2% to $93 million, reflecting lower wallboard sales volume, partially offset by reduced input costs, primarily for recycled fiber and energy. Looking now at our cash flow, we continue to generate strong cash flow and allocate capital in a disciplined way. During the first six months of our fiscal year, operating cash flow improved 4% to $313 million, while capital spending increased to $66 million. And we acquired the cement import terminal in Stockton for $55 million. We also repurchased a total of 917,000 shares, or 2.5% of our outstanding, for $151 million, in addition to paying our quarterly dividends. returning a total of $169 million to shareholders during the first half of our fiscal year. We have approximately 6.8 million shares remaining under our current repurchase authorization. Finally, we used our strong cash flow to strengthen our balance sheet. Let's look at our capital structure. At September 30, 2023, our net debt to cap ratio was 45%, and our net debt to EBITDA leverage ratio was 1.3 times. We ended the quarter with $47 million of cash on hand. Total committed liquidity at the end of the quarter was approximately $627 million, and we have no meaningful near-term debt maturities, giving us substantial financial flexibility. Thank you for attending today's call. MJ, we're ready to move to the question and answer session.