Q2 2021 Eagle Materials Inc Earnings Call

Good day, everyone and welcome to Eagle materials second quarter of fiscal two.

2021 earnings conference call.

This call is being recorded at.

At this time I would like to turn the call over to Eagle's, President and Chief Executive Officer, Mr., Michael Hara Mr. Hecht. Please go ahead Sir.

Thank you.

Okay.

Materials conference call for our second fiscal quarter of 2021.

This is Michael <unk>, joining me today are Craig Kesler, our Chief Financial Officer, and Bob Stewart Executive Vice President strategy corporate development and communications.

We're glad you could be with us today.

There will be a slide presentation made in connection with the call to access. It. Please go to www Dot Eagle materials Dot 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 the call. These.

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.

I'm pleased to be able to report another consecutive quarter of record revenue and earnings growth along with further strengthening of our balance sheet.

Let me begin with four important facts.

First our EPS was up 20%, which I'm sure. You. Appreciate there is no small feat in this pandemic environment.

Second we shipped an all time record 2.2 million tons of cement during the quarter.

Third we shipped a second quarter record 720 million square feet of wallboard.

And fourth.

Most importantly, we achieved these results safely.

Now, let's turn to the outlook for each of our businesses.

Let me start with some men.

Cement volumes were up 23% for the quarter and up 28% for the fiscal year, reflecting the overall strength across all of our end markets.

So I'm on the call may not realize that state local budgets account for the lion's share of infrastructure funds not the federal government.

State and local budgets have been stretched during this pandemic, but do you see budgets have remained resilient today.

A significant portion of local government funds is property taxes.

It is worth noting that property values actually have been rising considerably through this pandemic.

There's also the potential for slower trend growth over the near term, especially with the current significant uncertainty about the overall economy.

The reality is that we are eagle are operating at very high levels of capacity utilization today, we are working hard to squeeze every last bit of cement capacity to meet the customers existing demand.

If demand where to continue at the pace, we have seen frankly, our production would not be able to grow with it.

Now, let me turn to wallboard.

The south leads the nation in the housing starts and it is more important than the north east West and Midwest combined in terms of construction activity.

We have long believed that the southern Belle meaning for us the lower half of the U S and not California is the right place to be a wallboard through cycles.

We have strategically positioned ourselves here do too long term construction activity growth and demographic migration trends.

Recent developments around out migration from the northeast Chicago land in California and.

And the prospects of even higher taxation and some space.

Reinforcing our optimism that this is a good long term strategic decision.

Our wallboard shipments were up 6% this quarter and we're up 6% for the fiscal year.

Consistent Tran.

Latest industry data showed industry shipments up 1% for the quarter.

We faired better through the pandemic.

Simply due to our geographic positioning.

Continued strong housing starts and related single-family permanent would suggest these trends should remain intact for the foreseeable future.

The relationship between single family starts and wallboard demand as it close one.

Single family construction, you as more wallwork multifamily on a per unit basis.

Against this backdrop, we have announced in wallboard price increase to be implemented next week.

Finally, let me comment on the status of the plant separation of these two businesses cement and wallboard.

The industrial logic for the separation of remains intact.

Those are intention to complete the separation by the time it remains uncertain.

And the fact that we must watch closely and carefully evaluating.

While the economy's 2020 trough seems to be in the rearview mirror the path to normality remains exceptionally and remarkably uncertain.

Because of this uncertainty we have non conservative the timing for the split.

We will continue to evaluate and watch the market.

It should be noted that although it is not a driver for the decision.

<unk>.

A distinct benefit of the business remaining together beyond the obvious ability to whether uncertainty as the larger enterprise is the speed of companies deleveraging competitive occurring.

This deleveraging is highly supportive.

Full separation launch and.

And a benefit that should not be underestimated as we formulate the capital structures and policies around turn return of cash to shareholders for each business.

Now, let me turn it over to Craig to discuss the financials.

Thank you Michael.

Second quarter revenue was a record $448 million, an increase of 12% from prior year.

This increased primarily reflects contribution from the Cosmos month business requirement in March.

And organic revenue improved 2%.

Collecting increased cement and wallboard sales volume.

Second quarter earnings per share from continuing operations were $2.16 an improvement of 20%.

As we highlighted in the press release.

Second quarter results include a one time 14 cents per share task.

This benefit related regulations issued during the quarter to clarify the calculation certain interest deduction limitations.

Before we turn to the segment performance I'd note that having completed the sale of our oil and gas province business. During September the current and prior periods financial results that business.

Been presented separately and discontinued operations on the income statements and balance sheet.

Let's look at our heavy material results for the quarter highlighted on the next slide.

The heavy matterative materials sector includes our cement concrete an aggregate segments.

Revenue in the sector increased 15% driven primarily by the addition of the recently acquired hospitals none of those.

Organic Smith sales volumes and prices improve 1% and 4% respectively.

Operating earnings also increased 15% again, reflecting the addition of the Cosmos business.

As we discussed last quarter because of COVID-19, we delayed certain plans cement plant maintenance outages until our second quarter, which resulted in approximately $5 million of higher maintenance costs this quarter compared with the prior year period.

Moving to the light materials sector on the next slide.

Second quarter revenue and our wallboard paper business was up 1% as a group sales volumes, partially offset by a or prices quarter.

Quarterly operating earnings in the sector declined 1% to $48 million again, reflecting lower woolworth zales prices, partially offset by increased volume.

Looking now in our cash flu cash flow, which remains strong.

During the first six months of the year operating cash flow increased 94%.

Reflecting earnings growth.

Disciplined working capital management, and the receipt of the majority of our IRS refund.

Capital spending declined to $41 million and we continue to expect capital spending in the range of 60% to $70 million for fiscal 2021.

Finally, I will look at our capital structure.

We continue to prioritize debt reduction as a primary use of cash at this time in.

And the preservation of financial flexibility in line of pandemic related uncertainties.

At September 30th 2020, our net debt to cap ratio was 48% and our net debt to EBITDA leverage ratio was two times.

Total liquidity at the end of the quarter was over $700 million and we have no near term debt maturities.

Thank you for attending today's call will now move in question and answer session Lisa.

At this time I would like to remind everyone. If you would like to ask a question. Please crestar get the number one on your telephone keypad.

Your first question comes from the line of the same karami with da Davidson.

Further.

Hello can you guys hear Russell.

Oh, okay.

That.

Well congrats on.

According to the license in there.

My first question would be more easily.

Along the.

Side of things off a little bit about all of it.

Particularly.

Touching on them I think.

Dynamics and demand changes.

Yes, I think invaded where you asked me about cement pricing.

Yes, yes.

Yes, it is so.

So is it cement pricing and demand across markets.

Again.

Had a hard time hearing you.

Yes so.

Very well basically say about that.

All of our markets contributed.

Over this last quarter.

We feel very comfortable with.

How our network is performing on the heavy side of the business.

There's not one location.

Like out over any other location with it.

Location contributed and they contributed equally both with the.

Pricing improvements and on the demand side of the picture.

Gotcha, and then pretty much.

Earlier as well.

<unk> environment, but I was hoping you could talk a little bit.

On the key states for you and how they're doing.

Most of the regard through second half as well calendar Tony.

Yes so.

I'm not going to talk about the the projections forward, what we see great basically is what we've always been saying, it's low single digit growth. There's nothing that's changed our thought process on that.

We're seeing here currently as you can tell by right smack volumes demand is very robust and the locations we offer a.

As you know, we're primarily a heartland company. So you know with the states that are impacted are primarily up that heartland side, along with the you know the Nevada operation out to the west.

Okay great.

The Congress.

Yeah.

Your next question comes from the lineup Anthony Tommy we continue.

Q.

Capacity utilization for yourself.

Right now.

And then you had a large competitor announcement.

Patsy project during the quarter swimming, you can just talk about supply demand balance if maybe you see any opportunities to expand your footprint given.

Strong demand that will thing.

In terms of Covid, we're really not appropriate for us to comment on other people's capacity announcements.

I think they were pretty clear in terms of our capacity utilization across arm wallboard plant network as Michael highlighted we're very fortunate in the regions in which we compete and operate those markets of southern half of the U S. Generally has been very resilient.

Utilization rates have certainly picked up.

With a single family construction being the most significant driver of demand for wallboard on for the foreseeable future we see <unk>.

<unk> volume in our markets.

Okay. That's that's helpful.

On the Wall Board price increase is it possible to give any kind of 21 magnitude or timing or just kind of the setup compared to maybe maybe previous the price hike attempts to deal with that ear.

They look through the price increase is will be implemented early next week.

November and with strong demand behind us.

It should be supportive of a price increase we're certainly having those conversations directly with our customers.

At this time.

Okay, I will turn it over to the thanks.

Your next question comes from the lineup savagely Goldman Sachs.

Southern come out on behalf of January onwards.

You, please talk about which field cement markets have had more success and putting through price increases.

Yeah like I said before you know when we look at this and that we really look at our cement now is a network of crossing each section of the network is contributing equally.

We were very happy with our pricing and our price increases across the entire network. So there's not one that I would spike out.

There to the others was pretty consistent across the us.

I would add to that if you look at the price realisation of organic realisation was an increase of 4% that is ahead of what we've seen in the last two years. So I would just point that out in terms of the the strength that we've seen in our markets.

Alright. Thank you I'm in residue, we are seeing strong price increases across basic commodities.

<unk> optimistic about getting more pricing by October the next 12 months compared to challenges in recent years.

Yeah, when you look across.

You know.

With a high utilization, we're having across both of our businesses.

I think that's a good assumption to make.

We have a very high capacity utilization on our plants and is.

In my opening comments.

I did discuss on and some end cider production.

Production.

Keep up with the demand growth that keeps growing at this pace with it so utilization is going to be a key factor, which will result in discussions on pricing with our customers.

Thanks, a lot.

Your next question comes from the lineup.

North Dakota.

If you could comment on Ah.

And the <unk>.

And the wallboard business, how would you change residencies focus happening in wallboard is doing versus the more commercially focus.

My Bank.

Kevin or demand is around 85% driven by residential construction large piece of that being do within a follow on repair and remodel. The other piece of it commercial driving nonresidential is by far away the smallest portion of the demand.

And.

Effort for wallboard, So and I think Michael commented as in beginning but when.

When we talk about new residential construction, we really focus on a single family side of that multifamily.

Is good we appreciated but single family consumed two two times more than multifamily unit dose. So that's what really drive or demand here in the U S.

Okay Gotcha and then.

Kind of talk about how they may have.

Order in here and do October have friends been pretty pretty steady or have you seen any acceleration or.

And demand trends as time has gone on.

Yeah.

To put it in perspective wallboard consumption into a home or building is 60 to 90 days. After the start. So you were just starting to see this pickup and starts pulling through his business.

And so we have seen as you saw for the quarter strong volume. There October has continued to be strong as well.

So which is very natural to follow housing starts in that way.

Okay, great. Thank you very much.

Your next question comes to remind them now.

<unk>.

<unk>.

This call. So hopefully this this is clear.

Yeah.

Alright, so cause I wanted to start with the Cosmos.

The volumes for Kosmos for like 25% above what we remodeling.

And I'm just curious if that's a good run right to use.

Obviously normal seasonality, but are there any puts and takes in the quarter Cosmos.

Yeah. It really when you look at Cosmos Cosmos was in line with our expectations on the volumetric side.

This month and in there will be seasonality as he noted so you should take into account, it's a little bit more northern open markets there will be some seasonality.

But it was it was in line, what our expectations are and and you know the.

The non seasonal months.

Okay helpful.

On on Wallboard, what was the what was the quarter in Rosewood Craig.

Right around the average rent the one dollar below the average for the quarter.

Alright, and then the last one for me.

And I think a couple of people I've tried on this I just wanted to try one more time, what how would you characterize the overall.

Cement volume environment, as we head into the fall and the winter.

And like I said before you know were consistent across.

All of our location.

Had a good consistent run rate like Craig said on the wallboard side cements no differently waiting to October with a very consistent rental rate.

Some that were smack gets more impacted from the ball as we are weather dependent so.

We're going to have more whether dependency than than anything else.

As I said October is held up various consistently with the last.

Months word and we don't see it changing and less whether it's us.

Perfect. Thanks Koestler alternatives.

Your next question comes from the lineup English Jeffrey.

Is that mostly mix or you you did see some price compression and then going forward.

Appreciating that non Reds might be a little weaker will that have an impact on your ASP and margins going for it.

Phil you are actually the first 10 seconds of your question cut out there's some issue with the viewing that's going on if you could just kind of reintroduced the question sure no problem Craig.

On your wallboard pricing and the quarter it looked like it slipped a little bit sequentially, how much of that was mixed related versus like for like pricing and then when we think about going forward.

I appreciate it non raised might be weaker than.

New Reggie does that have an impact on your <unk> our margins.

So it was not a lot of product mix impacted the price for decor.

Pretty like for like.

And in terms of margins.

Five eighths versus happens, they're pretty consistent or higher priced on the commercial products because of the incremental costs for it so.

Any change in non Reds wouldn't really impact overall margin profile of the business.

Got it yeah.

Yeah, I mean, you're you're just you're organic volumed met was really impressive holding.

Far better than your heavy materials.

Peers any thoughts on you know, what's driving some of the resiliency and have you seen a slowdown in somebody big states from like lighting Tampa no bidding at this.

At this juncture it sounds like October is holding up really well.

Yeah October October has been holding up well, we haven't seen anything that that is a major.

Distraction from any of our markets right now on the heavy side.

The biggest thing that will experience that's as I said before is we're more weather dependent on that side of the business. So depending on if we have a winter or not if you recall last year, we did not have much of a winter.

So.

We were very busy throughout the whole time frame and this year will be more dependent on on if we have that winter or not.

Okay great.

And then we're seeing some signs that great and logistics spot prices are starting to pick up a bit and maybe supply is getting a little more constricted curious, what you're seeing and what kind of impact it's having in your business.

Deerfield, we see the same things on the margin here's the economy is starting to pick up.

And we're getting out of the shutdown areas, so, but we haven't seen an impact as materially at this point, but certainly as economic activity in the residential side certainly that's over that we're monitoring very closely.

Thanks, a lot really appreciate you guys.

Your next question comes from online is trained currently Steven.

Hey, good morning, and thanks for taking my questions.

Dropped off here for a little bit so forgive me a few.

B.

Are these questions have been asked.

But.

On the wallboard side.

The OCC.

Spiked earlier in the year did that have any impact in the third quarter and.

How are we thinking about wallboard margin just.

Going forward here in the next quarter too.

This is a good question trip you saw sequentially.

Rental profitability improved significantly a part of that was associated with the ramp up of.

The new equipment that we installed in the spring, but certainly the other piece of that is the pricing mechanism that we pass through the higher OCC prices from the spring they get pass through a quarter later.

So that really contributed their conversely of awkward side certainly they did have a higher paper costs.

Ends up reversing itself becomes OCC prices, then fell again during during the summertime early summer they've been fairly flat now for three or four months.

So.

On the balance of the year equalize out in terms of the OCC price impact for the wallboard business Yo longer term, we think about our business.

We've got a long term supply of natural gypsum, we've got a unique synthetic gypsum supply agreement. So we have.

Good low cost structure, we don't see any significant headwinds for that and so we think we send them pretty unique position that we can drive margins higher from here give me the strength of a single family residential construction.

Okay. Good thanks for that Craig is helpful.

And then you kind of touched on my next question was on the <unk> side.

I know there was some noise around Santee Cooper.

And maybe some of the.

Shutdowns or something along the lines of one of their plants there, but my understanding is that that is.

It's not gonna be impactful to you guys and your supplied by.

The plant that's going to continue to be up and running.

That's right.

Hey to Cooper has been a wonderful partner with equal over many many years now they continue to be the requirements as stated in the contract.

And so we don't have any concerns there there's been a great partner with US and then last one for me.

Maybe a little bit bigger picture, but still around since gimp is.

Is is there a way and I know the thought as long term.

That's in Gibb continued to be in.

Shorter and shorter supply.

How are you guys thinking about that that dynamic and the more you know maybe medium term over the next year or two do you see that being.

Contributing to.

Some cost increases for the industry over the maybe maybe a medium term.

Yeah.

It's a phenomenon and the trend that is only continued to pick up pace for those might not be familiar synthetic gypsum of the byproducts of a cold or a power plant.

Is coal fired power plant production has come down significantly over the last couple of years the supplies Enthetic gypsum has diminished.

We sit in a very unique position with our supply agreement.

Can't speak to how others have positioned themselves, but over a long run.

Gypsum is becoming harder to find more expensive to get and so you would expect to see for many of the cost curve increase but again I don't know everybody situation I, just know ours and renewed easily position over the long term supply agreement there with our one plant in southeast.

Great. That's it for me guys thinking lodge congrats on the good quarter.

Yes.

Your next question comes from the line attached Wilson with Raymond Jane.

Good morning, or at the other quarter it makes perfect sense.

Thanks.

Oh.

A few one off for me Karen.

With a case of it for technical difficulties as well so I apologize.

Hi.

Whether that you mentioned in the rest of the week.

So you said that last part then we quantify what just you mentioned some adverse weather impacting that had ended funny.

So it was the first couple of weeks of September we just commented on it but it didn't dramatically changed the quarter, but it certainly that a couple of weeks filled there for us.

Okay, and then as it relates to the margin going forward is there any other shaved and the timing of maintenance costs or was there a benefit from fuel that you want to call out his non-recurring that we shouldn't continue forward.

The only thing we have is.

Endemic side, we've we've shifted around some of our outages. We have one more plant we're going to do an outage at which is just.

It won't be a significant pull on a quarter or anything with it but we do <unk> from the first part of the year. We stayed speeds out so I wouldn't have more than one or two plants down at any time during the quarter. So we're going to complete the last plants outage here this last quarter, but.

It it's not going to be real significant of value.

Got it and then last one was for me the ramp up for both paperboard equipment are we now at the full run right for that or is there more benefit to come.

Well, we do have the equipment installed now we were able to give to people over that we needed to to get the equipment installed.

We're still working through that equipment, we probably have a a couple of quarters of getting that equipment up and running as you can see by our volume side, though with it are very happy with where where we ended up this last quarter. We were seeing some improvement on a volumetric standpoint, we expect over the next two quarters that you'll see some creeping up on.

Volumetric side as we as we get the equipment fully integrated and running.

Good luck with the next court.

Your next question comes from the line of Kevin He's that's released.

Yeah. This is Keith you some truest just a question back on the split obviously external things have delayed this.

What type of things will we need to see in the market for you to go ahead and complete the split is it around virus cases that around demand patterns I'm, just trying to pick up what what would give us a clue becoming.

Yeah, you know what we're really looking for and you know in my opening comments I said some of it is you know around.

Seeing something that's sustainable and everything I mean every time it.

And you pick up the paper you see different things and it's affecting the economy in different ways. So I'd like to see some normality and sustainability in a couple of quarters of of run right, where we feel comfortable with taken these two business is out on their own they're both going be smaller businesses and I'd like to see them just.

Runway in front of them that that has some consistency.

Okay.

And the <unk>.

Talked about pricing and wallboard a little bit earlier, there is at least one competitors announced an increase for January.

January of next year.

There may have been more since I saw the first letter is that something you think the industry, which is fine are you going to participate with.

Yeah.

<unk> any future pricing decisions will communicate that to customers first.

And before we try to speculate on us.

Okay Alright, thank you for the question.

And at this time there are no further questions.

Okay. Just wanted to say thank you all for attending the call. It was great talking to you and we look forward to talking to you in the first part of next year.

This concludes today's conference you may now disconnect.

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