Eagle Materials Q2 2024 Earnings Call Transcript

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October 26, 2023

There are 10 speakers on the call.

Operator

Good day, everyone, and welcome to Eagle Materials' 2nd 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.

Operator

Hack, please go ahead, sir.

Speaker 1

Thank you, MJ. Good morning. Welcome to Eagle Materials' conference call for our Q2 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.

Speaker 1

There will be a slide presentation made in connection with this call. To access it, please go to eaglematerials.com disclosure regarding forward looking statements made during this call. These statements are subject to risks and uncertainties 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 Eagle Materials. In the Q2 of fiscal 2024, Eagle generated record revenue of $622,000,000 Up 3%.

Speaker 1

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 7th Annual Health, Safety and Environment Conference. This conference brings together our operations and HSE leaders from across all of Eagle. We have an open and honest discussion about where Eagle is currently And where we will be going with regards to HSE.

Speaker 1

From the focus and dedication of our people, Eagle has been able to Continue to be an industry leader in keeping our employees safe as measured by our total recordable incident rate, 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 Q2. 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.

Speaker 1

These announced projects total almost $500,000,000,000 nationwide 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 past the expansion challenging. This creates the ingredients for a strong pricing environment.

Speaker 1

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, 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.

Speaker 1

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 multiyear 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.

Speaker 1

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 Because of these dynamics, we are optimistic about our short, mid and long term outlook for our heavyside businesses. Now let me turn to our quarterly performance on the light side.

Speaker 1

For Gypsum Wallboard, sales volumes declined 6%, while the average Gypsum Wallboard 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 An 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 Sunbelt in the South. In this market, single family housing starts have held up relatively well.

Speaker 1

Similarly, single family permits in the South, coinciding with homebuilder orders given the limited supply of existing homes sale should translate in the wallboard consumption in 2024. Looking longer term, we see the structural underbuilt 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 LifeSci businesses, we have spoken many times of the effect of the lack of synthetic gypsum is having Let me provide an example looking at the prior two cycles, 1995 through 2000,021,000 through 2,008 represented 2 significant housing demand cycles in the U.

Speaker 1

S. 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. Ebrahim's pricing has reached record levels.

Speaker 1

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 supplies designed to utilize synthetic gypsum. Because of this, the effective economic viability of the industry capacity It's likely lower than nameplate figures imply. Eagle Materials benefits from the maturity 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.

Speaker 1

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 industries, we focus on cycle management and on maintaining financial flexibility 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 $86,000,000 of cash to shareholders through share repurchases and dividends.

Speaker 1

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.

Speaker 2

Thank you, Michael. 2nd quarter revenue was a record 6 $22,000,000 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 volume. Excluding the Stockton acquisition, revenue was up 1%. Again, this past quarter, we generated record earnings per share.

Speaker 2

2nd 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 highlight on the next slide. In our Heavy Materials sector, which includes our Cement and Concrete and Aggregates 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.

Speaker 2

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 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 $93,000,000 Reflecting lower wallboard sales volume, partially offset by reduced input costs, primarily for recycled fiber and energy. Looking now at our cash flow.

Speaker 2

We continue to generate strong cash flow and allocate capital in a disciplined way. During the 1st 6 months of our fiscal year, operating cash flow improved 4% to $313,000,000 While capital spending increased to $66,000,000 and we acquired the cement import terminal in Stockton for $55,000,000 We also repurchased a total of 917,000 shares or 2.5 percent of our outstanding for $151,000,000 In addition to paying our quarterly dividends, returning a total of $169,000,000 to shareholders during the first half of our fiscal year. We have approximately 6,800,000 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.

Speaker 2

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 $47,000,000 of cash on hand. Total committed liquidity at the end of the quarter was approximately $627,000,000 and we have no meaningful near term debt maturities giving Thank you for attending today's call. MJ, we're ready to move to the question and answer session.

Operator

Thank you, Mr. Kessler. We will now begin the question and answer session. Today's first question comes from Trey Grooms with Stephens. Please go ahead.

Speaker 3

Hey, good morning and thanks for taking my question. So We've seen volume down in Wallboard now for, I guess, the last two quarters and no surprise. And I think it's actually holding in better Than most would have thought. And Michael, you gave a little color on the demand outlook there, but understandably with the backdrop of Higher rates, this clearly creates more uncertainty, at least around the residential backdrop here. But Given what we've seen from starts and completions on the residential side, to the extent that you can talk about it, how are you thinking about The wallboard volume outlook in the near term and then at what point do you expect that we could start to see some stabilization there?

Speaker 2

Yes, Trey, you bring up a lot of interesting points. Look, the higher interest rate environment, Yes, we'll navigate through and there's factors on the other side, most notably a shortage of homes in many markets Across the U. S. Of existing homes, which is a very different environment than we've seen in prior cycles. It's also important to note where we operate in the southern part of the U.

Speaker 2

S. Where activity has been more robust than the other parts The country and I think that's our core market. And look, we continue to have homeowners Requiring to live somewhere. So there are a lot of factors and you've seen homebuilder orders improved this quarter And again last quarter as well. So it's hard to predict right now, but we think we're positioned pretty well.

Speaker 3

Okay. And I guess, with that, just kind of sticking with the demand picture, on the cement side, Granted there's maybe some more or quite a bit more visibility there Into the demand picture, which sounds like it's still pretty good. But as we look into maybe the calendar 2024, With this kind of increased uncertainty again that's created by the rate situation, Is it your expectation that we should continue to stay in what is kind of Sold out position or at least nearly sold out position as we kind of look over the foreseeable future?

Speaker 2

Yes. As opposed to the wallboard industry, which is more residentially oriented, cement and aggregates demand is more driven by Infrastructure spending and obviously with the multiyear highway bill that those funds are starting to really Benefit of highway awards and that activity, that should more than offset the residential impact on the heavy side. Not to mention, and Michael pointed at the Mount, several large kind of manufacturingindustrial type projects for Battery plants, semiconductor facilities, that activity is at a multi decade high. So That's what gives us some confidence around the outlook for the heavyside demand, not just for 2024, but beyond that, Given those projects are multiyear in nature.

Speaker 3

Okay. And I've got to sneak one more in here if I could. Color you could give us on maybe magnitude or maybe how widespread these announcements are?

Speaker 2

Yes. It's across most of our markets. January 1, Still evaluating all of our markets, but the announcements have ranged between $10 to $15 a ton.

Speaker 3

Perfect. Thanks for all the color. I'll turn it over. Good luck.

Operator

Thank you. The next question comes from Stanley Elliott with Stifel. Please go ahead.

Speaker 4

Hey, good morning guys. Thank you all for the question and congratulations. I was just curious, when you talk about the wallboard pricing has been so resilient, Is there a way to quantify kind of the differences that you're seeing in the East and the West? And you spoke a little bit about some of the synthetic piece. Was curious to what that might have a be having an impact on it.

Speaker 2

Yes, Stanley. Look, Michael mentioned It's such a different environment this cycle than what we've seen in prior cycles, where not only were you facing demand pressures, But there had been a significant amount of new supply being added and most of that was centered around the availability of synthetic gypsum. As the source of gypsum has declined significantly as we've reduced the power generation via coal, that's Reduce that raw material and it's more predominant in the eastern half of the U. S. No doubt.

Speaker 2

But again, the western and southern part of the country is where A lot of the construction activity has been more robust. So it's a balance and I'd say pricing is kind of held in Pretty well nationally and different factors across the country for sure.

Speaker 4

And you Talked a little bit about the balance sheet kind of 1.3 times. You should be generating a bunch of cash on a go forward basis. Help us again with kind of what's happening with the M and A pipeline. You've been active buying shares. Just curious a little if we could get a little more color On plans around that or should we see leverage continue to tick down with the thought of maybe something larger coming down the pipe?

Speaker 4

Just really more curious than anything.

Speaker 2

Yes. Sali, it's a great question. The capital allocation is an area where we spend a lot of time and focus We are generating a high level of free cash flow. And as we've always said, maintaining the assets is paramount and a bedrock function of Eagle as is the capital structure management, which we've put ourselves in a good position in both of those fronts. And so the next use is to continue to grow the enterprise.

Speaker 2

As you know, we have very high strict Criteria both financially and strategically for that investment. And when those investments don't meet that criteria, We're happy to continue to return cash to shareholders. We obviously saw value in the shares this past quarter and continue to balance That capital allocation between those two opportunities and it's dependent upon The balance of whether the investment in front of us meets those criteria or not and that's kind of the way we've operated for a long time.

Speaker 4

Perfect. Thanks so much. Best of luck.

Operator

Thank you. The next question comes from Brent Thielman with D. A. Davidson. Please go ahead.

Speaker 5

Hey, thanks. Good morning. Just wanted to come back to Wallboard. I guess I'd just be curious of what you've seen Sort of fiscal year to date, considering your sort of conversations with customers, what you see around your regions and then we have these prevailing mortgage rates. I mean, Does this still feel like sort of a down mid single digit environment for volume over the short term?

Speaker 5

Are you actually more optimistic than that?

Speaker 2

Yes. Brent, as we said in our prepared comments, look, I think you got to recognize The recent increase in interest rates and traditionally what that how that would impact homebuilding, there's just some other Today that are in place that are very different and as we pointed them out, the shortage of homes, existing homes that are At very, very low levels across the country and you have this idea where you've got a significant amount of the mortgage that are outstanding that are Sub 4% and so folks just aren't moving like they once were and which just It puts more pressure on the need to build new homes. And so it's hard to predict. We've kind of been running in this down mid single digit. It wouldn't surprise me that you're in that range for a little while.

Speaker 2

But again, it's not it's very different than what we've seen in prior cycles.

Speaker 5

Understood. And Craig, the wallboard Margins, I mean, considering some top line pressure in the business were comparably stronger, a little better than last year. I wonder if you could just Sort of flush out a few of the variables there that are allowing you to keep margins up.

Speaker 2

Yes. Look, again, it's not a big volume oriented business. It's not a high fixed cost business. So down volumes doesn't hurt as much. And paper prices, which is a large input, are down year over year.

Speaker 2

That continued to be a benefit, A nice tailwind as is energy. So energy is down a couple of dollars a $1,000,000 versus where we were last year And seems to be continuing to track that direction. So what had been tailwind or headwinds a year ago have kind of turned around and help keep margins Pretty flat.

Speaker 5

Okay, great. Thank you.

Operator

Thank you. The next question comes from Anthony Pettinari with Citi. Please go ahead.

Speaker 4

Good morning. Can you talk a

Speaker 6

little bit more about the rationale for the Stockton terminal acquisition? What was attractive about that asset and how it supplements And then just following up on Stanley's question on M and A. You had a lot of success with the Kosmos acquisition. Are there heavyside assets out there that could potentially be attractive? Those just kind of so scarce that kind of once a blue moon?

Speaker 1

Yes. So this is Michael. Appreciate the question. Yes. When we look at first, I'll take your second question first.

Speaker 1

We're always involved if any acquisition work come to light. We evaluate a bunch of stuff. But as Craig and I both mentioned, we have some strict financial performance criteria. But again, if anything were to come to light, we We'd be interested in it. One of our cash allocation criteria is to keep our existing assets in like new condition and grow Through acquisition if something were to come available.

Speaker 1

We look at a lot of different businesses out there and we only select the ones that really fit our network As for Stockton, if you look at the West Coast and everything where we stand, We have a business on that side. That import terminal really supports our business as we grow with our Nevada cement opportunity. We were already bringing cement into California from Nevada. And as Nevada continues to grow and Some of the surrounding areas there continue to grow. We're finding we're a little light on supporting our customers.

Speaker 1

So we saw this as a great opportunity to Bring in a product to support our customers and continue to grow in that market that supports one of our cement facilities there.

Speaker 4

Okay. That's very helpful. I'll turn it over.

Operator

Thank you. The next question comes from Jerry Revich with Goldman Sachs. Please go ahead.

Speaker 7

Hi, good morning, everyone. This is Jatin Khanna on behalf of Jerry Ravitch. How are you thinking about Cement pricing for 2024 in light of the extreme volatility in diesel prices and overall inflation?

Speaker 2

Just to be clear, diesel prices don't have as much of an impact on us In our cement business and so we have announced price increases in cement for early January. So we said earlier, kind of between $10 $15 a ton depending upon the market. And that's our announced plans at this point.

Speaker 7

Thanks a lot.

Operator

Thank you. The next question comes from Adam Thalhimer with Thompson Davis.

Speaker 8

Hey, good morning guys. Nice quarter. Greg, what was the exit price in Wallboard It

Speaker 2

was pretty consistent with the quarterly average.

Speaker 8

Got it. And then cement volumes Down 1% year over year, you cited weather. How are you thinking about the December quarter, you have an easy comp, you were down 13% last year. I don't remember what Probably weather, but how are you thinking about that comp and then kind of early 2024 cement volumes?

Speaker 2

Brent, yes, look there's always weather in different quarters. But look the underlying fundamental demands for Cement continue to go in the right direction, whether that's the infrastructure, the highway awards that continue to grow These large industrial facilities, it's hard to predict quarter to quarter depending upon when certain things happen Or project delays or whatnot, but we continue to see an environment where utilization rates should remain high Across our network and there's a good demand backdrop for us.

Speaker 8

Do you see any more variability than normal Geographically?

Speaker 2

No, I don't think so. There's again, for us, it's interesting. If Think through the prior cycle, we're nearly 3 times the size that we were back then. We've got exposure from Northern California, East Ohio, South Texas. So we very much more represent a national average today versus where we were A decade or so ago where we were kind of a very reach, smallish regional player.

Speaker 2

So we just operate more markets today than we ever had before.

Speaker 8

Got it. And then I'm trying to back into because the cement margins remain exceptional. But I'm wondering, do you have any thoughts on cement cost per ton in the back half of the year?

Speaker 2

Yes. So, yes, as you pointed out, our margin profile continues to do very well in that business. And as we've said, what The tailwinds a year ago were around energy, specifically fuel. Those have abated Certainly here in FY 2024 as you start looking beyond FY 2024, certainly fuel costs, which for us is Today predominantly solid fuels have trended lower. So you should see some benefit there.

Speaker 2

Maintenance costs we've seen, Inflation across parts and services, I would hope that that might start to turn and go the other direction or at least become less inflationary. So it should be a reasonable environment for us.

Speaker 8

Good news. Thanks, Greg.

Operator

Thank you. The next question comes from Phil Ng with Jefferies. Please go ahead.

Speaker 9

Hey, good morning. This is actually Colin on for Phil. I just wanted to touch on the Stockton terminal really quickly. It was a nice contributor to the cement segment this quarter. Can you just help us think about the volume contribution from that plant going forward?

Speaker 9

Does it have the ability to ramp up from its fiscal 2Q contribution? Or is it at capacity at this point? And then any color as to how those margins look versus your wholly owned margins?

Speaker 2

Yes. Look, imported margins are going to be lower than your normal manufacturing Margins is just a function of it's a distribution business versus a manufacturing business. But it is operating With a good margin profile and as we expected, we pointed out in the earnings release, there's some kind of Purchase price allocation still flowing through there this quarter, but that's largely behind us and a good amount of depreciation. But In terms of the volume profile, I'd expect it to remain in this level in the immediate term. And there are some opportunities to And that, that we are exploring, but we've not made any decisions on that quite yet.

Speaker 9

Great. That's helpful. And then just going to the wallboard side of the business, you've seen wallboard EBIT margin north of 40% for the 5th consecutive quarter now. I guess how sustainable is this level of margin just given the uncertain macro backdrop that we're in?

Speaker 2

Colin, look, it's a function of price and cost. And price, as we've said, has been much more resilient, Pretty much flat and almost exactly flat year over year. And again, we just don't face Some of the other uncertainties that we had in prior cycles, so not surprised to see pricing more resilient here. And then on the cost side, as we pointed out, paper prices have stabilized here, at least sequentially. Gas prices For us, natural gas has remained pretty stable here, dollars 3 or a little below that on the MMBtu basis.

Speaker 2

Those are the primary inputs Into the manufacturing of wallboard and don't see any significant changes on the horizon as we sit here today. So those are the biggest And they've been very supportive so far.

Speaker 9

Great. I appreciate the color. Thank you.

Operator

Thank you. This concludes our question and answer session. I would now like to hand the call back over to Mr. Michael Hack for closing remarks.

Speaker 1

Thank you, MJ. Just want to say appreciate everybody joining us for the call today and we will talk to you in early 2024.

Operator

The conference has now concluded.

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Key Takeaways

  • Eagle reported record Q2 revenue of $622 M (up 3%), expanded gross margins to 33.6% (up 150 bps), and achieved record net EPS of $4.26 (up 15%), attributing its performance to a sustained focus on plant reliability and employee safety.
  • In heavy materials, constrained U.S. cement capacity and multiyear federal infrastructure and manufacturing projects enabled multiple price increases (with more slated for January 2024), while progress on PLC conversion and improved Texas Lehigh JV kiln performance strengthen its supply position.
  • Gypsum wallboard volumes were down 6% but with flat pricing and lower recycled fiber and energy costs, margins stayed resilient; mid- to long-term demand is supported by underbuilt Sunbelt housing markets and a synthetic gypsum shortage.
  • The company generated strong operating cash flow (up 4% to $313 M in H1), invested $66 M in capex, acquired the Stockton import terminal for $55 M, and returned $169 M to shareholders through buybacks and dividends, ending Q2 with 1.3× net debt/EBITDA and $627 M in liquidity.
  • The Stockton terminal acquisition enhances West Coast cement distribution, complements its Nevada production growth, and integrates imported capacity to serve coastal markets.
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