Eagle Materials Inc

Good day, everyone, and welcome to Eagle Materials' third 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. Good morning. Welcome to Eagle Materials' conference call for our third quarter of fiscal year 2024. This is Michael Hack. Joining me today are Craig Kessler, our Chief Financial Officer, and Alex Haddock, 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 out by saying that I'm excited to report on another quarter of superior execution at Eagle Materials. A few financial results that I want to highlight from our third quarter are Record revenue of $559 million, up 9%. Gross profit margin increased 130 basis points to 32.3%. Adjusted EPS was up 16% to $3.72, and we returned $106 million to shareholders through stock repurchases and the quarterly dividend. These results would not be attainable without the over 2,600 fantastic employees at Eagle Materials that make the company successful through their safe, hard work, and dedication to customer satisfaction. Each of you contributes to the results I'm proud to report on. Thank you. Because of these impressive results, Eagle Materials continued to produce strong cash flows. Over the years, we have been very clear as to how we will use the free cash flow generated from our operations. Our investment priorities have been consistent for years and will continue to remain so. They consist of three main components. First is to maintain or widen our low-cost producer strategy by keeping our facilities in like-new conditions. Second is to grow the company with emphasis on expanding the heavy materials segment through acquisitions or investments that increase existing capacity. And third, when investment opportunities do not meet our disciplined return on investment criteria, we prudently return excess cash to shareholders. In the first nine months of fiscal year 2024, we have returned an impressive total of $276 million of cash to shareholders through share repurchases and dividends. Our ability to execute our investment priorities relies on the long-term sustainability of our businesses. A business is not just the hard assets of the equipment but consists of our most vital asset, the people operating the plants, their safety, and ensuring we are good stewards of the environment. We have made and continue to make progress in these areas, and I would like to spend a little time highlighting a few items here. In 2023, we were able to sustain our total recordable injury rate well below industry averages. Any incident is one too many, and we will continue to strive for zero incidents, but I am proud of the work that was done to sustain our step change in TRIR from previous years. Environmentally, we continue to make significant gains on our transition to blended cements. This quarter, our blended cements accounted for over 75% of our manufactured sales volume. These cements lower our CO2 content per ton of material and enable us to extend our clinker capacity. We also announced agreements with Terra CO2, granting us exclusive rights to use Terra's technology to produce low-carbon, supplementary cementitious material in three regions, complementary to EGLE's current footprint. This product has the potential to lower the carbon intensity of our cementitious materials and will enable us to fulfill the increased cement demand in today's virtually sold-out market, especially as other SCMs, like Flyash, continue to decrease in availability. We look forward to highlighting these achievements and much more in our updated sustainability report to be published later this quarter. In the report, you will see significant progress from EGLE, both in what we are doing for our businesses, but also in how we are reporting that progress. With that, let me turn to the specifics on the quarter, starting with the heavy materials business. Our heavy materials performance this quarter continued to benefit from favorable business conditions. Public infrastructure spending is robust. The bulk of the United States investment in roads, bridges, and highways comes from the state and local level, and tax receipts continue to be strong while state budgets remain healthy. In addition, increased infrastructure spending from the federal IIJA funds should increase noticeably for the next several years. Private non-residential spending also continues to provide demand tailwinds for our business. While certain pockets of non-residential construction, such as warehousing, may be a drag on the total spending, the outlook from heavy industrial projects in manufacturing construction give us confidence in the visibility for our cement business. The passing of the CHIPS Act and Inflation Reduction Act has led to meaningful increase in heavy industrial projects focused on computer, electric, and onshoring of other manufacturing. Signs also suggest residential construction may have bottomed. From these facts, our demand outlook remains positive, and we will continue to focus on executing to provide materials for our customers. Turning to the supply side dynamics for heavy, we still see no meaningful supply additions for the cement industry on the horizon. Blended cement products, while important for making clinker go further, will not add enough U.S. cement capacity to alter the supply-demand fundamentals. Imports are increasingly required to meet U.S. demand, as they have been in the past. Since we are a well-positioned, low-cost heartland producer, Eagle remains generally insulated from imports, as transportation is very expensive and is expected to remain so. Against this supply-demand backdrop, half of our markets are implementing a January 1st price increase, while the other half of our markets have announced an April 1st price increase. Now let me turn to the light side of our business. This quarter, our light materials business held steady in an uncertain environment. Gibson Wallboard continues to benefit from a long-tail construction backlog that has kept demand steadier than expected, and construction across the South, where much of our footprint is, has held up particularly well. The near-term outlook remains dynamic, with the latter half of our fiscal third quarter seeing constructive market conditions for housing and wallboard demand given the drop in interest rates. In the medium term, the direction of the U.S. monetary policy and its effect on mortgage rates remains uncertain, and will dictate the big component of the demand picture. While we expect multifamily housing starts in construction to drop off, single-family housing starts are recovering nicely, especially in the south, and home builders are reporting favorable outlooks. The longer-term housing deficiency in the U.S. will need to be addressed through new home construction. The wallboard demand backdrop continues to be set against supply constraints, that are fundamentally changing our business. As the availability of synthetic gypsum continues to diminish, the approximately 50% of the wallboard industry designed to use synthetic gypsum faces raw material challenges, challenges from which EGLE is generally insulated given the surety of raw material we maintain at all of our wallboard plants. The result of the synthetic gypsum shortages is a steepened industry cost curve and crimped industry capacity. We do not see any improvement in cost or capacity in the medium term. Against these market conditions, we recently announced a wallboard price increase for February 1st. Given these structural and operational dynamics, we believe our heavy and light materials businesses look increasingly similar. Structurally, as I have discussed, supply side dynamics mean capacity remains constrained for both cement and wallboard, although for different reasons. On the demand side, each business is supported by long-term demographic-driven tailwinds that should provide meaningful growth. Operationally, our two core businesses are well-defined, well-established, and well-positioned. Each uses mined minerals that have many decades of owned reserves. And each are in cyclical sectors, so cycle management skills are important. And we have proven for decades that operating through the up and down of the cycle is where we excel. In all, the combined businesses produce meaningful free cash flow, keeping our balance sheet healthy and positioning us to capitalize on growth opportunities when they come. With that, I'll turn it over to Craig to go through our financial results in more detail.

Thank you, Michael. Third quarter revenue was a record $559 million, an increase of 9% from the prior year. The increase reflects higher cement sales volume and prices and contribution from the recently acquired import terminal in Stockton, California, partially offset by lower wallboard sales volume and prices. Excluding the Stockton acquisition, revenue was up 7%. Again, this past quarter, we generated record EPS. Third quarter earnings per share was $3.72. That's a 16% increase from the prior year and represents the 10th consecutive quarter of year-over-year improvement. This quarter's increase was driven by higher earnings and a 5% reduction in fully diluted shares due to our buyback program. Turning now to segment performance, highlighted on the next slide. In our heavy materials sector, which includes our cement and concrete and aggregate segments, revenue was up 18% to $366 million. This revenue growth was driven primarily by an increase in cement sales prices that were implemented earlier this year, higher cement sales volume, and the contribution from the recently acquired cement import terminal in Northern California. Operating earnings were up 43%, primarily because of increased cement prices and sales volume. Cement prices increased 13%, and sales volume was up 7%. Given the strong market conditions that Michael discussed, we have announced another round of price increases for the first half of calendar 2024. Moving to the light materials sector on the next slide. Revenue in our light materials sector decreased 4%, reflecting lower wallboard sales volume and prices, partially offset by record recycled paperboard sales volume, which was up 9% in the quarter. One comment on our wallboard sales price this quarter. With wallboard sales volume coming in stronger than we had anticipated, we had a catch-up in our customer rebate program this quarter that impacted our quarterly average wallboard sales price. Excluding the catch-up, our wallboard sales price declined would have been about half sequentially. Operating earnings in the sector declined 13% to $83 million, reflecting lower wallboard sales volume and prices. Looking now at our cash flow. As Michael discussed, we continue to generate strong cash flow and allocate capital in a disciplined way. During the first nine months of our fiscal year, operating cash flow was up 4% to $501 million. capital spending increased to $88 million, and we acquired the cement import terminal in Stockton, California for $55 million. We repurchased approximately 1.5 million shares, or 4% of our outstanding, for $249 million in addition to paying our quarterly dividends, returning a total of $276 million to shareholders during the first nine months of the fiscal year. We have approximately 6.3 million shares remaining under our current repurchase authorization. Finally, we also used our strong cash flow to strengthen our balance sheet. Let's look at our capital structure. At December 31st, 2023, our net debt to cap ratio was 43%, and our net debt to EBITDA leverage ratio was 1.2 times. We ended the quarter with $49 million of cash on hand, Total committed liquidity at the end of the quarter was approximately $684 million, and we have no meaningful near-term debt maturities, giving us substantial financial flexibility. Thank you for attending today's call. Rocco will now move to the question and answer session.