Q4 2021 Eagle Materials Inc Earnings Call
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Good day, everyone and welcome to the Eagle materials fourth quarter and fiscal 2021 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.
Ladies and gentlemen, 1 moment. Please your conference will begin momentarily.
Ladies and gentlemen, please standby your conference of again will begin momentarily. Thank you for your patience and please standby.
Ladies and.
Many of you and your music hold to your conference begins thank you for your patience and please standby.
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Good day.
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Ladies and gentlemen, apologies for the technical difficulty piece and we now have everything set good day, everyone and welcome to the Eagle materials fourth quarter and fiscal 2021 earnings Conference call. This call is being recorded at the.
The time I would like to turn the call over to Eagle's, President and Chief Executive Officer, Mr. Michael Haack. Mr. Haq. Please go ahead Sir.
Good morning, welcome to Eagle materials conference call for our fiscal year and fourth fiscal quarter of 2021.
This is Michael hack joining me today are Craig Kesler, our Chief Financial Officer, Bob Stewart, Executive Vice and Bob Stewart Executive Vice President of strategy corporate development and communications.
In addition, joining us today is Mike Nicholas Eagles, Chairman of the Board who is here to comment on 2 north noteworthy developments that were included in our earnings release.
1 related to the board's decision to remain a combined company and the other to the reinstatement of our quarterly cash dividend.
We're glad you could be with us today.
And there will be a slide presentation made in connection with this call to access. It. Please go to www dot Eagle materials Dot com and click on the link to the webcast.
And why Youre 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.
I'll begin today with some perspectives on the quarter the fiscal year and our outlook.
Our latest results represent and culmination of a decade of sustained top line growth for the company, while our bottom line has grown by more than Twentyfold.
And every respect fiscal 2021 was an extraordinary year for Eagle materials.
Our resilient business model and our team's commitment to Eagle vision and strategic priorities have enabled us to achieve record financial results.
Integrate the largest acquisition and the company's history operating all facilities safely during COVID-19 and quickly rebound from a historic winter storm.
These results would not be possible without the extraordinary talented and dedicated employees of Eagle materials.
My personal thanks goes out to all of them for navigating these challenging times safely.
We have long emphasized the favorable cash flow characteristics of Eagle materials and this was never more clearly illustrated then during this year and.
In effect, we were able to repay the entire $665 million purchase price of the Cosmos acquisition during the fiscal year, providing us with significant balance sheet firepower and financial flexibility going forward.
A few additional strategic items that I'd like to highlight our around our completion of the expansion of our vertically integrated paper mill and some portfolio shaping.
The paper mill expansion added 20% additional capacity, allowing eagle to set a monthly production record for wallboard paper and March.
And the expansion will also provide cost and value benefits that we expect to realize longer term.
The business.
Portfolio shaping involved the divestiture of Eagle's profit business and other noncore assets and northern California.
We found buyers where alternative ownership value exceeded operating value for us.
With regards to operations I'm, especially pleased with our safety performance and this disruptive pandemic year.
Progress on our relentless focus on safety was confirmed our leading and lagging safety indicators.
Our safety culture has never been stronger with leading indicators of safety observations and increasing by 114%, resulting in all of the Eagles businesses outperforming industry metrics, yet again and this gap is widening.
Another important.
Port and topic that we are very excited about is our progress on our environmental and social agenda. We.
We will post an updated environmental and social disclosure report to our website this quarter and it will give a more comprehensive and granular expression of our ESG agenda and to our progress.
Both of which were a source of pride for us.
E. S. P is well integrated into our strategic planning and investment decision, making process at Eagle.
Let me now turn to some specifics around our demand outlook and why we believe the underlying demand fundamentals and our markets will continue to be strong.
See strong volume and pricing strength.
Like we saw during the second half of our fiscal year.
Residential construction and repair and remodeling, our very closely and related and our important demand drivers for eagle materials.
These 2 items drive approximately 80% of the demand for gypsum wallboard and about 30% of the demand for cement.
In this regard the outlook for housing starts, especially single family starts which are particularly important for wallboard demand is strong.
We have been under building against underlying demand in the U S for over a decade. This under building has led to a record shortage of homes.
At the same time the household formations are expanding.
As long as mortgages and mortgage interest rates stay and the lower quartile by historic standards. This demand growth should be largely sustainable through the mid term.
Now turning to cement.
Approximately half of cement demand is from investments and infrastructure there.
And there has been a lot of discussion about president Bidens intentions around federal funding for infrastructure and this is needed and it is welcome.
Implementation will further challenge U S cement supply in many parts of the U S, which is already straining to meet current demand.
And is also important to remember that the lion's share of funding for infrastructure comes from states not the federal government.
There was quite a bit of concern about state budgets being impacted by the pandemic, but as we shared in our prior earnings calls our analysis of sources of the state funding suggested the impact would likely not as be as great as some feared especially in the U S Heartland States and which we operate.
In fact, remarkably state and local tax revenue grew by 1 8% in 2020.
This is largely because state and local personal income tax receipts rose 3 4% and state and local property tax receipts were up 3.9%.
On top of the tax revenues States were provided federal grants as part of President Bidens American rescue plan.
Finally, the nonresidential demand is the smallest demand driver for Eagle.
We have seen strong demand and distribution centers warehousing and datacenters, but overall this area has been less certain and.
As America continues to reopen after COVID-19, we expect this demand driver to continue to strengthen.
The point of this is that the demand picture is robust for both of our businesses the.
The factors driving the strength should be sustainable at least through the midterm.
Moving from the demand side to the supply side, we have been talking from some years about the diminishing supply of synthetic gypsum and the eastern half of the U S.
This is due to less burning of coal as Powerplants change fuel sources from coal to natural gas and from outright closure of coal fired power plants.
With a diminishing supply of synthetic gypsum existing synthetic wallboard plants will be limited and their ability to fully utilize current capacity increase current capacity or build new capacity.
Conversely, almost all of the Eagles plants have many decades of raw materials supply, which are primarily own natural gypsum deposits.
We are largely insulated from the direct effects of this diminishing synthetic gypsum trend while our plants are also in a position to indirectly benefit from the supply demand dynamics that this trend creates.
In this way it is notable that the gypsum wallboard industry is increasingly looking more and more like the cement industry.
With respect to our cement business, there are significant regulatory and capital barriers to the U S cement capacity expansion, whether it be at existing facilities or through the construction of new ones.
And face of the increasing demand and with industry capacity now nearing full utilization quake.
Clinker capacity and the number of cement kilns.
Has not only not expanded since 2010, the clinker capacity and the number of cement kilns has actually been reduced and the U S.
This trend is why imported cement will increasingly be required but it is increasingly expensive with rising Baltic freight index rates.
Imported cement also carries a much larger carbon footprint and locally produced cement because of the ocean freight and logistics required to get it to the point of views.
Eagle is well positioned and the heartland of the U S away from the Seaboard and here too the company will be affected virtually indirectly and of positive way by these trends.
In short favorable demand outlooks constrained.
Constrained U S manufacturing supply capability and limited practical substitutes for both businesses and up to a very bright future for Eagle materials.
With this backdrop I'd be remiss, if I did not spend a little time on our pricing initiatives.
With regards to wallboard subsequent to the quarter, we implemented a price increase effective in April and have announced a further price increase for June.
For cement, we have implemented a price increase and April across our network and announced the second price increase and Texas for mid summer.
We are continuing and continuing to see growing demand and our other markets and we'll update you on future calls on any further price increases we implemented later in the year.
Now before I pass the baton over to Mike.
I'd like to take just a moment here to again formally thing.
And employees for their extraordinary efforts and focus over this unprecedented year.
Thank you.
Mike Thanks for joining us today, let me turn it over to you.
Thanks, Michael and thanks for the invitation to join the call today.
The first key announcement is that Eagles board of directors has decided to remain a combined company as you've read in our press release and I'm here, because I'd like to share some perspectives around this decision.
Much has transpired since the separation announcement that has caused the board to reevaluate the separations merits.
First the size and financial strength of the combined company with its diversified asset base geographic diversity and robust balance sheet have provided great comfort stability and value to our shareholders employees customers and suppliers.
During an unprecedented and uncertain time.
Second given the continued consolidation of the industries and which we participate.
And the company's rigorous examination of a number of strategic alternatives since the announcement of the proposed separation and it has become clear that the combined company with greater financial scale and flexibility will be better positioned to pursue key strategic growth options and enhance shareholder value.
Third since the announcement of the proposed separation the company has streamlined its business portfolio, including the divestiture of its oil and gas proppant business and other noncore assets.
There is no question that the company is exceedingly well positioned and is performing as well as at any time in its history. Both major business segments continue to post industry, leading metrics on just about every measure.
As a shareholder I cannot be more pleased with the position of the company.
While the board will continue to evaluate the merits of of separation on a periodic basis as we have and the past.
And it is concluded in consultation with external advisors that the combined companies and the best positioned to create long term shareholder value.
This is and this was an important decision for Eagle and for the board and 1 that was very carefully consider.
The second decision that the board has made relates to our quarterly cash dividend.
This decision is an important 1 and the context of our capital allocation priorities, which I might add remain unchanged.
We have 3 capital allocation priorities. The first are growth investments that meet our strict financial returns criteria, and which fall squarely within our strategic focus boundaries.
The second investment priorities organic improvement investments these.
And these are investments to maintain our facilities and like new condition strengthen the low cost producer positions and to ensure the long term sustainability of our operations.
The third priority is the return of cash to shareholders and this has been primarily through share repurchases and fact over the past 3 years, we have invested just over $625 million and share repurchases and dividends.
This compare compares with nearly $700 million and growth acquisitions, and 300 million and organic improvement investments over that same time period.
Currently over 7 million shares remain under the current repurchase authorization.
Now, let me turn to the quarterly cash dividend decisions.
Pandemic, uncertainties urged and abundance of caution broadly around capital allocation of Eagle and until we could regain confidence around the sustainability of the recovery.
As part of that Cautiousness, we suspended our quarterly cash dividends.
Our confidence in the sustainability of the recovery is now high while our cash position is very healthy as.
As such I'd like to announce that we of reinstating our quarterly cash dividend of 25 cents per share on our common stock.
The dividend will be payable on July 16th 2021 to shareholders of record at the close of business on June 18th of 2021.
This amount represents a 150% increase over the quarterly dividends that had been paid preceding the suspension.
We're very pleased to be able to make this decision on behalf of our shareholders.
The reinstatement of the dividend reflects eagle strong operational and financial performance, our confidence about the resilience of the business and our commitment to reward shareholders. Our strong balance sheet combined with the robust cash flow outlook allows us to pay this dividend, while very importantly, preserving the financial flexibility.
To continue to grow and improve eagle and create long term shareholder value.
With that now let me pass the baton over to Craig for the regular business of the earnings call with the discussion about the financials. Thank you Mike.
Fiscal year 2021 revenue was a record $1.6 billion of 16% from the prior year.
The increase was driven by contribution from the acquired Cosmo cement business and increased cement and wallboard sales volume and pricing.
The Kosmos cement business contributed approximately $176 million of revenue during the year.
Revenue for the fourth quarter was up 12% to $343 million, reflecting a very strong and to our fiscal year.
Annual diluted earnings per share increased 46% to $7.99.
Reflecting the contribution from the Cosmo cement business improvement and.
Of the organic businesses.
And the gain of approximately <unk> 98 per share on the sale of our northern California businesses during the first quarter.
The fourth quarter EPS comparison was affected by the cares Act, which generated a $37 million were 76 cents per share benefit and the prior year period.
This year's fourth quarter financial results were affected by the disruption of winter storm Yuri.
Prior to and during the storm, we brought down operations and all of our Oklahoma and Texas facilities.
This was done in a controlled manner to ensure the safety and security of our employees communities and assets.
I commend our manufacturing teams for their focus as these facilities ultimately lost utilities, including electricity and natural gas.
Fortunately, we avoided significant damage to our critical equipment and our operations were fully restored by late February.
The total financial impact from the Winter storm was approximately $12 million during the fourth quarter.
Most of the impact resulted from higher variable costs, namely higher energy. However.
However, we also had negative fixed cost absorption.
Freeze related repairs and restart costs.
And on the flip side, we were able to curtail other operations and sell a portion of our natural gas commitments to offset these higher costs.
These offsets were included in the other non operating income.
Turning now to segment performance, let's look at heavy materials heavy material results for the year highlighted on the next slide.
This next slide shows the results of our heavy materials sector, which includes our cement and concrete and aggregates segments.
And your revenue and the sector increased 19% driven primarily by the acquired Kosmos cement business and higher cement sales volume and pricing.
This was partially offset by the divested concrete and aggregates business results and the prior year.
Operating earnings increased 27% again, reflecting the acquired business and increased sales volume and pricing.
And margins improved 140 basis points to 23%.
As I mentioned earlier, our cement and concrete operations in Oklahoma, and Texas were negatively affected by winter storm Yuri.
The impact of the sector was approximately $6 million and mostly reflects higher energy costs.
And as Michael mentioned previously, we recently implemented cement price increases across our entire cement network the.
The price increases range from 6 to $8 per ton and were effective in most markets in early April.
Moving to the light materials sector and the next slide.
The annual revenue and a light materials sector increased 5%, reflecting improved wallboard sales volumes and prices.
Annual operating earnings increased 2% to $193 million, reflecting higher net sales prices, partially offset by higher input prices, namely recycled fiber costs and the impact of starting up the paper mill after the expansion project.
As with the cement business, our wallboard plants and paper mill, and Oklahoma experienced production curtailments and significant spikes in energy during the February Winter storm.
The biggest impact was of our paper mill, which was fully curtailed for the week and during the shutdown process experienced escalating energy costs.
Again as Michael highlighted subsequent to the quarter, we implemented of wallboard price increase and early April and announced another price increase last week for early June.
Looking now at our cash flow, which remains strong.
During fiscal 2021 operating cash flow increased 61% to $643 million.
Reflecting earnings growth.
Disciplined working capital management, and the receipt of our IRS refund.
Meanwhile, capital spending declined to $54 million.
The increase of our cash balance combined with debt reduction enabled us to repay the entire cosmos cement purchase price during fiscal 2021.
And fiscal 2022, we expect capital spending to increase to a range of $95 million to $105 million as we restart several projects that were delayed because of the COVID-19 pandemic.
And finally, a look at our capital structure.
During the year, we prioritized debt reduction as the primary use of cash providing us significant financial flexibility in light of pandemic pandemic related uncertainties and potential opportunities.
At March 31, 2021, our net debt to cap ratio was 36% down from 60% of the end of the prior year and our net debt to EBITDA leverage ratio was 1 3 times.
We ended the year with $264 million of cash on hand, and total liquidity at the end of the quarter was approximately $1 billion and we have no near term debt maturities.
Thank you for attending today's call, we will now move to the question and answer session Josh.
Thank you either of my.
And you ask a question and you will need for Crestar 1 of your telephone.
All of your question Christopher from Keith Please standby, while we compile the Q&A roster.
Our first question comes from Trey Grooms with Stephens you May proceed with your question.
Hey, good morning, everyone. Thanks for taking my question.
The first is on pricing.
You guys have seen nice traction on wallboard pricing to date and.
And as you mentioned.
You've announced in April increase and then and then also of a June increase and wallboard and then likewise and cement.
Nounced April increase and and.
And the second increase and Texas.
To the extent you can can you can you talk about how those are going and wallboard and cement and and are you thinking about.
The possibility of a second price increase and cement and any of the other markets.
Yeah. Trey this is Michael thanks for the question.
No.
For the wallboard 1 again you know we just it was just announced that we need time for that.
B and our discussions with our customers and the market and everything.
Moving to the cement side, you know, we announced and Texas and we are going to look at you know the demand drivers on the cement side of the.
The business and each market individually and see where that.
And resides in the coming months and then we'll make a decision and what we do with pricing and those markets working with our customers at that time.
So we are constantly evaluating every market and the cement side to see.
And how the demand maintained throughout the year.
Okay fair enough and the <unk>.
And secondly, clearly the outages during the quarter impacted the margins.
On both businesses and.
But with production back online and have these margins are gets back to wallboard and cement both.
The margins bounce back to what you would expect there are those kind of erode day, any lingering issues or or cost impacts whether it be raw materials or energy anything like that that are lingering on or should we expect kind of a bounce back there in the in the margins.
Yeah no. Thanks, Troy this is Craig.
The lingering issues from the Winter Storm March was was a very strong month for us.
And on the cost side again, we're a little unique and that we own our primary raw materials on the cement side, that's limestone and we generally of close to 50 years worth of limestone located right near our facilities.
And that's the primary raw material on the gypsum or on the wallboard side. Its gypsum again very similar our raw material reserves or close to the plants. We've got a good solid foundation of deposits. There energy prices are still low gas is still below $3 of million. This morning.
So from a margin perspective.
We're in good shape.
Alright, Thanks, Craig I'll I'll.
I'll leave it there and pass it on thanks Good luck.
Thank you. Our next question comes from Brent Thielman with D. A Davidson you May proceed with your question.
Yeah, great. Thank you.
And you're able to provide the specifics of the price increases debt that had been announced to customers.
Brent as we said so the April price increase in cement was 6 to $8 per ton across our entire network on the wallboard side that those specific price increases were communicated directly with customers. We haven't given any quantification. There we will certainly do that for you and our call.
And a couple of months here and in July.
Okay fair enough.
And he just that your thoughts where you're seeing the strongest sort of momentum and your wallboard markets right now.
Yeah, Brent again, Fortunately, we sit in the southern half of the U S with our operations generally and you'll look we're seeing and across all of our markets.
From the West Coast of East Coast of singles.
Single family and again remember within the the the demand dynamics for wallboard single family construction is the biggest driver of the intensity of wallboard and the single family home is much greater than it is of multifamily unit and so as we've seen single family construction activity pick up that's been very meaningful for us.
And it's been very strong across all of our markets.
Okay great.
I guess with the decision to stay as the combined company.
Curious, which of the 2 platform do you see the best opportunity to grow and and I guess through this process of evaluating the span and and and also just thinking about your ability to payout cosmos so quickly.
And any change in views of what your tolerance for leverage is 3 times still kind of the upper band of what you'd want to push too.
Brent Let me say it this way 1 of the hallmarks of Eagle has been to understand how to manage cycles and a big component of that is managing the balance sheet. So that when opportunities come our way, we have the balance sheet capacity to execute on those transactions.
That then that has served us very well during uncertain financial times like the great financial crisis. This past 14 months with the COVID-19 pandemic.
And you'll recall that over the last 8 years coming out of the financial crisis, and we've more than tripled the cement business, which was a 1 billion and a half dollar of investments and.
And the quality of the assets of we were able to acquire are without question.
Keep in mind at the same time right our balanced approach to capital allocation. We've also taken out 15% of the float over that same time period. So.
And I continue to look at the capital allocation priorities as the commitment we've always had to.
You know a high degree of of financial requirements with the strategic background as well for sure as we look at M&A and we look at it across the company and Windows of opportunities don't meet our hurdle rates, we have been very happy to return cash to shareholders and we've generally done that through a through share repurchase.
Yeah.
Okay.
Last quick 1 just the the other non operating income I think related to the natural gas commitment and they're going to be any carryover of that and the first quarter of should be sort of see that line item normalized yet.
And that will normalize that was very specific to the 7 to 10 day winter storm that we dealt with.
Yes.
Okay, great. Thanks for taking the questions.
Thank you. Our next question comes from Adrian Huerta with Jpmorgan you May proceed with your question.
Hi, thank and good morning, everyone.
Going back again to the yen to the capital deployment.
Well the focus continues to be more due to look for opportunities from the heavy side versus the the light side and any potential to get into other new businesses as well.
On the heavy side that are not necessarily just the cement or ready mix.
Yeah.
Thanks, Adrian and for the question now of this Michael.
You know as Craig said, we are very disciplined and how we approach stuff or our strategy and the past as Greg highlighted as we've grown the heavy side of the business. We continue to look for opportunities on the heavy side of the business as we always do we will stay to our core values of we have really 2 businesses that are 2 pure play businesses with the.
The heavy and light side with the and that is going to be our focus.
Areas is growing either 1 of those businesses with special emphasis on the heavy side of the business.
Yes.
Thank you.
Thank you. Our next question comes from Anthony Pettinari with the.
The city, we have received with your question.
Good morning.
And what are the names.
Hey in cement you saw volumes down 2% and for Q, I think ex Cosmos and I'm guessing that was due to the weather impact I'm. Just wondering if you could talk a little bit more about how volumes have trended quarter to date and you see that as kind of a potentially a good run rate per volumes over the course of the year and 'twenty 2.
And so Anthony you know.
You know we had the little hiccup, you know with the winter storm coming into play and we had some there.
Cement during this time of the year is more weather dependent than anything else with it if we get a lots of rain and areas, we have less shipments and you know.
And with what we look at for the demand drivers, which went through at the earnings.
And with the preamble side.
Our demand across all markets is very strong we've also talked to everybody on the in the past and earnings calls on you know the capacity expansions, we've done with grinding mills and everything with it.
You know our cement plants pretty much across our network are near or at capacity.
So we we feel very very strong and the demand picture looks good our plants are operating well and we should return to a normal.
Shipments schedule and as you've seen in the past.
Okay. That's helpful.
And then on the JV I think volumes were significantly below your wholly owned business and was that due to disproportionate impact of the weather or I think you had some reduced oil well cement activity.
Have you all after that or do you start to lap that soon just any color there.
Yeah. Anthony this is Greg certainly the winter storm impacted Texas and a way that we haven't seen in quite some time. So February was a rough month you know the <unk>.
Instruction sees and has gotten off to a very good start.
Here in April.
Oil well cement really has become a non factor and this business for our company at least for the last several years.
It hasn't it hasn't been meaningful for for quite some time.
Okay. That's helpful I'll turn it over.
Thank you. Our next question comes from Jerry Revich with Goldman Sachs. You May proceed with your question.
Yes, hi, good morning, everyone.
Good morning, Jerry.
I'm wondering if you could talk about just the range of strategic options that you're evaluating.
And each business day, just expand on the opening remarks.
Wouldn't mind as well it sounds like there was the really expensive process and I'm wondering if you just the extra.
And you can comment.
And just say more please.
Yeah, Jerry look I don't we wouldn't as a matter of course talk about specific.
Items there.
No look I think as we've always done and we continue to do it is turning over every rock and trying to figure out the best ways to enhance shareholder value and growing the company.
And that that's where we would would ended but it was a very extensive process no doubt.
Including.
The acquisitions and other business combinations.
Beyond just the separate listing correct Greg.
If we don't we have looked at every way to enhance shareholder value and being very creative and.
We didnt leave any stone unturned.
Okay.
And what I think Jerry I might add to that that continues right. So we will continue to go through that exercise and I'm looking for ways to enhance value and grow the company again against the very specific set of strategic priorities and the financial requirements as well.
Okay terrific and then I'm wondering if you could talk about the wallboard pricing cadence.
Over the course of the quarter.
How does that have all of us yet.
The additional job codes rolling through did we exit.
Higher price point and we.
And of the quarter.
And I would say we were largely so remember we had a price increase that was implemented in November and another 1 in early January and then the next price increase was in early April so the quarter.
The really reflects the January price increase.
And we try not to get too granular month by month, but the.
And we're largely ended the quarter in line with the average and then the the April price increase would be incremental as would this additional June price increase that we recently announced.
Okay and.
And Craig to your point you know between the April increase of the January increase and the.
The June increase I mean, we haven't seen this type of pricing and the market for.
The 5 or so years now can you talk about how you see the environment today comparing to 2012 2013 timeframe of when you folks were posting price increase of that are similar to what's been announced by the industry. So far.
What are your key cyclical observations.
Comparing this environment to debt.
Environment of at that point.
Yeah look this is a very different demand environment that we're operating and.
You've seen housing starts over the last 9 to 12 months really accelerate and that's what's driving this opportunity is as demand has increased Michael highlighted in the beginning you've.
You've got some supply constraints are certainly around the synthetic gypsum shortages and diminishing availability and utilization rates and therefore are much higher than where we were in 2012 and 2013, just coming out of the financial crisis. So you'll very much much better demand environment than we've seen for quite quite some time.
Okay terrific. Thanks.
Thank you. Our next question comes from and then also Harlan Northcoast Research you May proceed with your question.
Hey, good morning, everybody.
Wondering if you could comment on the wallboard side.
Thank you guys.
On your some.
Some of your Investor presentation show you of about 4 billion square feet of the <unk>.
Pat nameplate capacity, you've got you know youre operating at the start of 3 billion square feet of of sales volumes at this point, but I think you know sort of.
It seems like there's a lot of room to grow there. So I'm wondering how much capacity do you have the grow there because it you know 1 of the things I think that I've at least learn and currently is that I think nameplate capacity for the entire industry is like $33 4 billion square feet, but it seems like were operating well below that and we're pretty much sold out conditions with lead times extended and everything so I'm curious how much capacity.
And maybe part of that is the the synthetic gypsum shortage and some of the COVID-19 related downtime and some of these claims of head, but can you comment on.
Can you can you ultimately sell 4 billion square feet of can you get to that nameplate capacity or how much room do you have to grow available capacity do you have to grow within that wallboard business, what's a realistic.
You know amount of these plants can actually produce.
I guess and effective utilization you can get to.
Yeah, and it's a good question yeah, we look at our plants.
You know a weekly or monthly on on you know what the capacity is those capacities are are good capacities that we we publish out there that that you quoted with it we can get to those capacities.
And the 1 advantage we have that Craig really highlighted before is we own our natural gypsum reserves. So when we look at expansion opportunities or anything or bringing on and additional line or our increasing capacity of any of the facilities with the it's really just a people and and small amount of capital addition, with it.
We are not constrained by raw materials side of the business, which we.
We feel some of our competitors may be constrained at some point if the the synthetic gypsum market does.
With the trend we're seeing today.
Okay and can you comment on the OCC cost and what type of inflation did you see here and and this quarter and you know.
What type of.
Impacts of you're expecting and in fiscal 2020 2.
Yes, the OCC prices.
1 of the raw material ingredients into paper, we've seen that tick up slightly over the last couple of months just recall, Kevin that the majority of that gets passed through it does happen on a quarterly lag, but are our supply agreements and the paper business allow for that pass through to happen.
Okay, all right. Thank you very much.
Thank you.
Thank you. Our next question comes from Adam Palmer.
Thompson Davis you May proceed with your question.
Thanks, Good morning, guys I wanted to ask on organic cement volumes, just not sure of how to think about those over the next couple of years.
And just given your preamble about.
Pass of the anti <unk> is there anything you can do to expand capacity areas various flat kind of the right expectation for the next couple of years.
We continuously look at ways to get an extra ton out of our facilities. If we can get that 10 out we're going to continue to be diligent on that side.
We have a fantastic engineering group that we've been able to squeeze extra capacity out but right now we are running at or near capacity at all of our facilities. So we will continue to progress to see whatever time, and we could get out of that facility, but I don't have a quantified value of what that would be.
Alright, and then just kind of wanted to push back a little bit on your mid term housing outlook curious how you see.
Variety of material prices playing into that.
Yeah look Adam it's a good question.
Think of as many of said, we've under built homes and the U S now for broker of decade and.
That has led to an extreme shortage of homes and in most markets. There is no existing homes for sale and the only way to create inventory is to build new.
Albeit.
While while costs are going up interest rates are still very low of affordability is still very good and and this idea of going out to a single family home versus a more of a densely populated multifamily unit has certainly continued to push the demand level for single family homes. So.
The our view on the the near term and the medium term is very positive very constructive around single family construction.
Okay, and then just quickly Craig on state budgets is there any state and to call out in terms of.
And where are you seeing either.
Improving and are cause for concern.
No no look we're seeing good good growth and D O T budgets across our network and again, what we like about our network is it's pretty pretty diversified we stretch from northern California, all the way east to the.
Ohio, and Pennsylvania, and South, Texas. So you know markets are in good shape those state budgets are in good shape as well.
Okay. Thank you.
Thank you. Our next question comes from Mylan, Inc.
With Jefferies. You May proceed with your question.
Hey, good morning, guys. So it looks like you're pretty much sold out and Smith and your footprint.
Do you of any color in terms of how your competitors are running are they running pretty full and the regions that you compete in and then any color in terms of the.
The market's at year end, where it's a little more tight I mean, you kind of hinted at Texas all of these quite tied because you're going for a second increase there.
And so you know we don't want to speculate on where our competitors are with it and we'll talk a little bit about ourselves and and as he stated you know we're pretty much at capacity yet.
Our cement facilities across our network.
So we see the demand fundamentals and the markets. We operate is very strong at this time.
Okay and <unk>.
Outside of Texas are there any markets that you compete and cement where you've seen your competitors actually announced the second cement price increase already and appreciating Michael you're still assessing at this point.
Yeah again.
No.
I don't want to talk about what our competitors may or may not be doing you know, we evaluate each of our markets independently and we look at ourselves and say you know what is our supply and demand.
Outlook look like and what is our cost structure of look like and we make our decision independently.
Okay fair enough.
Wallboard demand was up a solid 3%, but given how strong housing is and the way you kind of characterized the demand backdrop I would've thought shipments might've been a little better was there any pre buy of dynamic and the quarter and and did you see any impact from storms that may have weighed on shipments and in the quarter.
Yeah, Phil I would point you to the latter.
Pre buy activity was interesting a decade ago when economic activity was low it's less interesting today.
But that winter storm really did shut things down and especially in Texas for pushing 10 days and then and then you've got to re mobilize crews et cetera. So I would have told you as you looked at the cadence during the quarter.
The the January and March months were very very strong where February just had a.
Of the big impact from the from the storm.
Okay Super helpful. Sorry, just 1 last 1.
Michael you highlighted said, Jeff having an impact on cash.
The dial down the road are now.
On the synthetic gypsum side have you seen no extra tightness and the market where some of your competitors have had of like idled capacity or the cost per really tick up and then I know in 2018, when freight did get a little tighter and that kind of limited your ability and just the broader market.
Moving board of routes that and actually tightened the market as well. So just curious both on the synthetic gypsum side as well as freight are you seeing natch.
Governor Gov.
Governor of dynamics in terms of the supply just creating a tighter market of all and all yes.
And so part of the answer that as you know we have 1 plant and the east coast area that we.
We do run synthetic gypsum, we have a fantastic partner with Santee Cooper there that you know we.
We have a great relationship with.
No the only perspective I could give you on that as that plant has been at capacity and we continuously look at how we get the next.
Msf of of board out of that.
The plant with it so you know it's.
All of them that we look at continuously.
On that side, and you know the demand and that and that market has been strong.
And in the freight dynamic.
Yeah of freight dynamic that's a interesting point you know we continue to monitor the freight side with the business right now and.
And that's 1 thing that is has a higher cost driver for us. So we're going to and continue to keep monitoring that we've seen a little bit of creep on the freight rates with it and we'll continue to watch that and work with our suppliers are.
Vendors on that side with it but it is something that we are going to watch closely over the coming term.
Okay Super Thanks, a lot guys.
Thank you and our next question comes from Josh Wilson with Raymond James and proceed with your question.
Good morning, and thanks for taking my questions and good luck.
Execution, despite the tough tough weather.
Thanks, Josh.
Wanted to get into the the strategic growth opportunities you talked about.
Better addressed as the combined company can you give us a sense of how much that was and inorganic comment versus and organic comment and what.
What the possible timing of either of those might be.
Yeah look, it's certainly and in organic discussion.
The the building of new facilities more greenfield or organic is.
Something that week advantage and.
And but again because of permitting restrictions are difficult to do that and a meaningful way.
So it's really looking at the the M&A landscape, where where the the larger transactions are.
And again, we won't go into specifics, but certainly.
That's the direction, we're talking about.
And as we think about your capital needs.
Your guidance for 'twenty, 2 still not where you were prior to the pandemic. We will how should we think about either the split maintenance versus growth or how that might evolve in the coming years.
Yeah. So you know look this past year at $54 million was on the low end of the sustaining needs of the business, it's closer to a $60 million to $70 million type of level.
And which again is what you might consider low I would say pre pandemic there were a number of large.
Expansion projects, we're going through for example, the paper mill and that's completed that doesn't happen again so.
And it's gonna be and this range until there's a specific projects.
And that meet our hurdle rates, but you.
So this is kind of where the the businesses and that's why you love. These businesses. They don't require a tremendous amount of cash on an annual basis and that's why they do have the high free cash flow generation capability.
Got it thanks.
Thank you and our next question comes from Keith Hughes. The Truth. You May proceed with your question.
Thank you and we've heard of watts.
Earnings for the last couple of weeks about something.
Nonresidential construction and seeing some some life I guess.
And I guess my question from you. If you took out of the cement side are you are you is your are your sales people starting to see the quotation activity picking up.
The pick up of that business this calendar year or next.
Yeah look the the nonresidential the private nonresidential construction side.
Is really the the hardest to predict there's so many subcategories as we highlighted earlier things like warehouses data centers, those things have been strong and or only continuing to grow.
And as you say some of these other sectors subcategories are starting to percolate and and improve a little bit I'd add to that right. The then you got to look at geographically where you are.
And again were fortunate where we're located better economies generally.
So new York might be very different and Texas. For example, we're not in New York So.
And then last <unk> add to that we don't necessarily sell direct to a specific job, we're selling through to our ready mixed company or on the wallboard side would be of distributors. So we don't have the the direct and consumer are project insight, but but I think I generally agree with you that the non res side.
And it started to pick up a little bit.
Okay. Thank you.
Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to Michael <unk> for any further remarks.
Thanks, Josh.
Thank you all for joining us today, and we look forward to talking to you again here and a couple of months.
Okay.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
And then.
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