Q2 2022 Eagle Materials Inc Earnings Call
Good day, everyone and welcome to Eagle materials second quarter of fiscal 2022 earnings Conference call. This call is being recorded at this time I would like to turn the call over to Eagles, President and Chief Executive Officer, Mr. Michael Haack. Mr. Haq. Please go ahead Sir.
Thank you.
Good morning, welcome to Eagle materials Conference call for our second quarter for fiscal 2022. This is Michael hack joining me today are Craig Kesler, our Chief Financial Officer, and Bob Stewart Executive Vice President of strategy corporate development and communications.
We're glad you could be with us today there'll be a slide presentation made in connection with this call to access. It. Please go to 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 this call. These statements are subject to risks and uncertainties that could cause results to differ from those discussed during the call for further information. Please refer to this disclosure which is also included at the end of.
Our press release.
Let me start my comments today by stating that this was another very good quarter for Eagle materials.
From a market perspective, we are well positioned U S. Heartland cement tatius materials producer and we are a national scale U S gypsum wallboard producer.
From the people perspective, we have a talented team that understands their markets and make great decisions.
Simply put this is a very good time to be in each of our businesses.
This is not just due to current conditions, but because the outlook for both businesses looks favorable.
I'll spend some time today on the macro backdrop as it provides some context to our favorable outlook.
Vaccination hesitancy lingering supply chain issues and federal budget uncertainties have weighed on economic momentum.
Offsetting these issues our job growth and consumer spending.
In 2021, we're seeing some of the strongest job creation in U S history, and strong consumer spending growth supplier.
Supply side headwinds are likely to pose less of a challenge in 2022, allowing for healthy industrial production growth as a monumental backlog of orders are gradually cleared.
Housing construction, which is an important driver for both of our businesses and especially for wallboard continues to enjoy strong demand.
With healthy household balance sheets, low interest rates and relative affordability by historical standards, we see good headroom for continued trend growth.
In this regard it should be noted that housing activity is especially strong in the southern U S.
This is important for Eagle as this is where most of our plants reside.
And this region represents more housing starts than all other regions in the U S. Combined over this past year.
There is a positive knock on effects from robust housing demand for repair and remodeling, which we expect will continue to grow at a mid to high single digit pace through 2022.
In cement the key wildcard remains infrastructure spend.
Most of the funding today comes from the states.
The states in our footprint generally have healthy balance sheets, driven by increased receipts from property and sales taxes.
The national discussion has focused on federal infrastructure spend.
Federal infrastructure funding will happen someday and is certainly necessary.
When it does happen it will intensify the supply demand dynamics of cement.
Commercial construction activity looks promising for pickup and again regional strength and leading indicators favor the Midwest and the south aligned with our U S Heartland footprint.
It is also worth noting that the U S shift towards renewables is very constructive for Eagle wind farm construction is concrete intensive.
If you look at the map of planned wind project in advanced development or projects under construction, it aligns well with our cement plants.
Cement imports will be increasingly required this cycle to meet demand as strong market conditions are leading to very high effective rates of capacity utilization and domestic plants.
These imports will come at a cost in both their higher intensity carbon footprint and in price as the Baltic dry index is up 135% from a year ago and is that a 10 year high.
Now, let me speak to volume pricing and cost trends for each of our two businesses.
First let's discuss volume.
Fortunately, we still have some capacity headroom in wallboard. However, the recent supply chain disruptions experienced by homebuilders is no doubt delaying the construction of some homes and pushing the demand up to the right.
Once these log jams clear, we expect to be even busier.
Our high cement utilization has been well chronicled we are virtually sold out and operating full tilt we are working closely with customers to meet their needs.
As demand increases there are limits to how much more volume growth, we can squeeze out of our Smith system unless of course, we could expand our system through acquisitions.
Quality U S cement plant that meet our strategic criteria are admittedly hard to come by and we are patient investors, which is why our balanced approach to share repurchases when quality assets are not available makes so much sense for a company like Eagle.
You can see in this quarter, we purchased approximately $185 million of Eagle stock, we know our assets and know their value.
To reduce our carbon intensity at cementitious product level and to service our customers with additional volume.
It is our ambition to ramp up our limestone cement product offerings.
Over time this has the potential of literally creating another Smith plant worth of product for sale for us when fully implemented across our system.
Some aspects in realizing this ambition are not within our control such as dot approvals, but we are seeing good progress here and are encouraged.
Over the next three years, we expect to move the needle meaningfully on this initiative.
Moving on to pricing cement prices have not yet recovered as much as most of other building materials. In this cycle, we have announced the double digit cement price increases effective January one across the majority of our network.
As for wallboard pricing is most strongly driven by demand and demand has been strong as evidenced by our 33% year on year increase in wallboard prices.
I suspect it may raise the question in some people's minds as to whether we are nearing the peak for this cycle.
If our demand outlook is correct I think we are not.
Now to costs.
There has been a lot of discussion about cost headwinds in many case.
Exaggerated by supply chain disruption.
Let me put this in perspective for Eagle, we own and control virtually all of our raw material.
In some sense, one might say, we already purchased the raw material with our investments and reserves decades ago and by doing so have mitigated a supply chain issue concerning raw material.
Energy inputs are important we often get asked about hedging. We are currently hedged for approximately 50% of our natural gas needs through the remainder of our fiscal year at slightly under $4 per million, which should help us manage our costs wings.
Natural gas is the primary tool used in our wallboard business.
The spike in OCC costs, this summer where material this last quarter, but.
But as we've said many times pricing mechanisms in our sales contracts allow us to pass on higher OCC prices, albeit on a lag of one to two quarters.
Outbound freight in wallboard is also important and we saw a 14% increase in freight costs. This quarter. However, the good news is that freight costs seem to have plateaued during the summer.
Let me close my remarks, with an update we are proud to share as it aligns with our environmental and social disclosure report, we published on our website.
It is a recent noteworthy development on one of our long term initiatives that has to do with carbon capture.
We were notified on October 7th that chart industries, a technology development leader in this area has received a significant funding award from the U S Department of energy to conduct an engineering scale test to advance point source carbon capture with a specific mandate to conduct this research.
At our Sugar Creek cement plant.
Chart industries Pyrogenic carbon capture technology was recognized by researchers at MIP and XR as the most cost competitive among highly effective carbon capture systems.
Our role in this endeavor is to provide technical support and operational data during the development and execution of the project.
I want to emphasize that even with successful outcome. There are many other gates and hurdles to ultimate adoption include.
Including transport and storage.
But this is an important and significant step on the path to net carbon zero future.
With that let me now turn it over to Craig for the financial results.
Thank you Michael.
Second quarter revenue was a record $510 million.
An increase of 14% from the prior year.
The increase reflects higher sales prices and sales volume across each business unit.
Second quarter diluted earnings per share from continuing operations was $2 46.
A 14% increase from prior year.
And adjusting for our refinancing actions during the quarter adjusted EPS was $2 73, a 26% improvement.
Turning now to our segment performance.
This next slide shows the results of our heavy materials sector, which includes our cement and concrete and aggregate segments.
Revenue in the sector increased 5% driven by the increase in cement sales prices and sales volume.
Price increases range from six to $8 per ton and were effective in most markets in early April.
Operating earnings increased 13%, reflecting higher cement prices and sales volume as well as reduce maintenance cost.
Consistent with the comments, we made in the first quarter, because we shifted all of our planned maintenance outages to the first quarter or second quarter maintenance costs were about $4 million less than what they were in the prior year.
Moving to the light materials sector on the next slide.
Revenue in our light materials sector increased 28%, reflecting higher wallboard sales volume and prices.
Operating earnings in the sector increased 39% to $67 million, reflecting higher net sales prices, which helped to offset higher input costs, namely recycled fiber costs and energy.
Looking now at our cash flow, which remains strong.
During the first six months of the year operating cash flow was $262 million.
<unk>, 7% year on year decrease reflects the receipt of our IRS refund and other tax benefits in the prior year.
Capital spending declined to $27 million.
And as Michael mentioned, we restarted our share repurchase program and our quarterly cash dividend this year and returned $259 million to shareholders. During the first half of the year.
We repurchased approximately one 7 million shares or 4% of our outstanding.
At the end of the quarter five 6 million shares were available for repurchase under the current authorization.
Finally, a look at our capital structure.
Eagle maintains a strong balance sheet.
Access to liquidity and a well structured debt maturity profile.
During this quarter, we completed the refinancing of our capital structure, which included issuing $750 million of 10 year senior notes with an interest rate of two 5%.
We extended our bank credit facility five years paid off our bank term loan and retired our 2026 senior notes.
Thank you for attending today's call, we will now move to the question and answer session Josh.
Thank you.
A reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key 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, Michael and Craig Nash results in the quarter.
So thanks, so much.
Sure. Thanks, Michael.
<unk>.
In your prepared remarks, a ramp up in the.
Submit product offering cement side of the business.
And in that thinking noted another cement plant worth of materials that could come out of this in a three year kind of time frame.
Can you talk a little bit more about this.
The extent you can.
Maybe the magnitude of the capacity pick up.
It sounds very meaningful.
But as far as you know like maybe more details around the mechanics behind the capacity expansions within existing plants.
What what plants could lend themselves to this so somewhere maybe taken place and then.
Any ideas or color around the capital required for these expansions would be helpful.
Yes no.
I appreciate the question on it.
What we're talking about here is plc to Matt, which is a limestone addition to cement.
Which is an approved product with it depending on the plant and the location.
And other factors that go in with the <unk>.
When you look at the quality of our cement product it will increase the cement limestone addition by 10% to 15% at Max.
Basically this is effective for all of our facilities and it is something that we've been looking at four four.
Quite a while.
We still have approvals to go through in some states with at.
The timeline is dependent is really.
Each plant has a slightly different timeline, depending on the capital investment. That's why we said over the three year window with some of the investments we have to make at some of the plant the investments really are not real material.
At the plants. So it is really just.
Adding limestone to the product and inner grinding that limestone with the product so.
Just to have the capital in place is why we're giving that three year window, we will have.
A little bit of that this next year some more of the year after and the final implementation in year three.
Got it okay. Thanks for the details but.
And in effect, though you are actually.
I guess can be considered a can actual increase in capacity or maybe your capacity just goes further.
Another way to look at it and you are talking about somewhere in the 10% to 15% range.
Yes. So what you do is you put limestone and with your clinker. So you could extend your clinker further so.
If you look at our capacity across the system you configure in that.
Right around that.
10% area is where your price increase and product for sale.
Across our entire network.
Perfect.
Super helpful.
And then switching gears.
I guess one thing to note was the cost inflation when you talked about it briefly.
It's something that most of the world is facing in a pretty big way right now.
You called out energy and paper.
Asleep shouldnt be a surprise given the swings we've seen there but.
Really my question is more around how we should be thinking about the cadence of the margins.
Across your business segments, given the timing of pricing as it flows through the timing of when costs flow through.
So I mean, I know, there's a timing aspect, which you called out a little bit particularly in wallboard.
In paperboard for that matter, but.
So I also wanted to ask about the outlook, though for the cement side of the business and.
Submit cost and any potential inflation you might be seeing there.
Trey this is Craig.
On the pricing front as Michael mentioned, we did.
Announced price increases across the majority of our cement network.
We're.
Double digit increases 10 to $12 a ton or more.
Across our markets and that is effective January one which is three months ahead of our typical cadence for cement pricing.
Most of our energy contracts in the cement market or on an annual basis, which is through our at the end of our fiscal year. So it would really be.
Starting fiscal 'twenty, three where we would see some of those energy.
Impacts start to come through but in other cases, we also had two year agreements in place. So we're going through that process right now.
On the wallboard side.
That's going to be again, the natural gas and as Michael mentioned, we've we pre purchased effectively forward purchase contracts for more than 50% of our gas needs within the wallboard business. So we've mitigated some of the.
Uptick in natural gas prices, there and then on paper you obviously saw this quarter the profitability in the paper mill down and Thats, just a function of the mechanisms that for pricing we pass through the majority of our raw material input increases it just happens over a one to two quarter lag.
And so youll see the majority of that come back to us and what would be our Q4, although it'll be a little bit of it here in Q3, but then we will see the full benefit in Q4.
And all of that is relative to what OCC prices do.
We're expecting them to plateau here, a little bit as we left the summer. So that's been good to see.
Perfect.
Is it for me I'll pass it on thanks again for taking my questions and best of luck and take care. Thank you.
Thank you. Our next question comes from Brent Thielman with D. A Davidson you May proceed with your question.
Okay. Thank you and good morning, great quarter as well.
I guess first question is on the cement JV you had a relatively modest decline in sales.
Volume was down a little harder and that's totally surprising the profit dollars declined I guess more than I would've expected from last year anything in particular to be aware of that for that business.
Yes, when you look at that business you can see the volumetric side is really if you strip it back between manufactured product and purchase product.
We were pretty flat on the manufactured product side.
So it's really on what we could go out in the market and purchase and resell on that side that was the biggest impact on there. We also did have an additional outage down at that facility. This year. So that's what the majority of the cost side was in so this last quarter, we had an outage in that area.
Okay, Alright sounds like fairly transitory inventory things.
And then obviously great.
Accretable pricing traction in wallboard this quarter.
I guess my question is in some of the challenges the builders are experiencing whether that's labor.
Whether it sort of supply chain related issues just in terms of moving their jobs forward.
Yes, Michael I'll be curious your thoughts is that hindering yours of the industry's ability to recognize even more pricing than what we're seeing in the business today.
Wallboard is really driven by <unk>.
Everything with supply and demand on the side and when this does get pushed out a little bit there was a little bit.
Less demand in the last last month with it we expect that as just a transitory temporary item with at the backlog for builders is very strong.
And we have we have headroom capacity at our facilities to supply that.
And so we really think as this.
The supply chain gets back in order and the builders get back into their construction process and don't have the supply chain interruptions.
That that demand will be busy and busy year than it was even than we are today, which is very busy.
And then are you seeing any sort of improved momentum in volume in that business.
What you reported in the quarter.
Hi.
We've been pretty consistent with what we've been.
<unk> been doing these last months with it.
So it's been consistent.
Okay. I appreciate you taking the questions I'll pass it on.
Yeah.
Thank you and our next question comes from Anthony Pettinari with Citi. You May proceed with your question.
Good morning.
On cement.
On cement understanding that Youre sold out can you talk a little bit about what youre seeing in terms of underlying demand.
And understanding that you don't necessarily have full visibility in terms of where your Smith ultimately going just any thoughts on sort of public versus private demand and specifically if youre seeing any kind of pickup in private nonresidential or commercial activity, which has maybe been a little bit softer for the industry. This year.
Yes.
Cement plants are located and everything we've seen a pretty consistent demand profile across cross all of our end markets with it some.
Some are stronger than others, but it's been a very consistent demand profile.
You can see in the notes that we said you know in my comments that we're working with our customers to satisfy all their demand in areas with it because we are at or near sold out capacity, but we're actually adding that capacity across our across our facilities with it.
The demand is like I said is consistent across residential and.
Sure.
Commercial is starting to pick up more and more and so we see a very favorable demand profile across all aspects.
Okay. That's very helpful. And then just on wallboard in terms of the delays that homebuilders are seeing in kind of this this monumental backlog of orders that needs to be cleared.
Is your expectation that wed see that kind of volume pick up.
As we normally would in calendar <unk> with the spring season or is there any reason that you might think it would be maybe pushed out a little bit and can you just talk a bit about sort of the normal seasonality with wallboard volumes versus what we might be seeing in the current environment.
Yeah look Anthony I think we would say that it's probably a little too early a little too difficult to speculate on when that logjam clears.
There is lots of pieces that go into that but there is no doubt as you said.
The the logjam just continues to build and there is a lot of pent up demand for these homes.
So we are expecting to be a very busy next year.
That does release.
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.
Hi, Good morning, everyone. This is Jonathan on behalf of Geneva, which could you the light some color on the capital deployment opportunities and how would you got it right.
M&A pipeline and the opportunity set from here. Thanks.
Yes.
Yes, great question, it's really the most important question here at Eagle around capital allocation.
We've said this for many years, it's been very consistent.
Primary and first use of capital to continue to maintain our assets in like new condition.
So that we can continue to keep very high utilization rates.
Closely followed by that is a desire to continue to grow Eagle.
Found many opportunities over the last decade to.
To grow the business with very high return projects predominantly on the heavy side of the business and.
And we continue to explore those opportunities, but as we've also said.
There is a high barrier at a strategic level at a financial return level for those investments.
And we have not relaxed those standards and so.
When those opportunities don't meet our hurdle rates or strategic strategic criteria.
Our next use of cash and we did that in a significant way. This quarter is to return excess cash to shareholders. We generally do that through our share repurchase program. We do have a modest quarterly dividend cash dividend that we pay but.
That is <unk>.
As we've seen good margin expansion.
And then how will higher OCC impact gypsum margins.
We will start to see some of that flow through into the wallboard business in Q3.
And into Q4.
Function of those pricing mechanisms, we price internally at the same level that we do externally and.
So thats just the way the cadence will fall.
And then as we've been saying really the opportunity to expand margins there is going to be demand driven as some of the supply chain disruptions on the line.
Okay understood and then on the.
On the M&A.
M&A front.
Craig would you say that are you not seeing any opportunities or are you just not happy with where the prices now.
Greg was mentioning there with that is we continuously look at the market for opportunities, where we're actively and aggressively looking for opportunities. They just need to make the strategic criteria that Craig mentioned there.
Understood. Thanks, guys.
Thank you. Our next question comes from Phil <unk> with Jefferies. You May proceed with your question.
Hey, good morning, everyone.
Given the well documented challenges on supply chain logistics, how has that impacted your business I know in the past, perhaps limits distance you and your competitors may ship on wallboard.
And curious what you're seeing on the import Frank for cement as well.
Yes.
And in the comments, where I mentioned, you know Baltic freight dry index is up 135%.
There is going to be a supply dynamic demand dynamic that needs imported cement, but it's going to come in at.
A more costly.
<unk> than previous years with that freight costs being up.
Other supply demand dynamics as what we talked about previously as we see on the wallboard side, the demand being pushed to the right, but it's been building its not going away and our views. So that logjam will break at some time when the supply chain gets an order and we should see even busier demand.
On the wallboard side.
That's great.
Double digit price increases for cement next year, that's certainly very encouraging that's a nice step up have pretty much all your competitors in the markets you compete in match that increase for January.
Yes, we don't really track what our competitors do we really look at supply demand dynamics and what we feel is right for our footprint and our company with it so I'm not going to comment on what others are doing just with just where we stand.
Got it and Michael you mentioned that you have some headroom still on capacity for wallboard can.
Can you give us a little color how quickly can you unlock some of that capacity is that mostly from adding a shift and just given some of the labor challenges.
I'm just curious how quickly can you ramp that up.
Yes.
One of the hallmarks at Eagle as we do a lot with glass and really our facilities are set up where it is just the people addition, more than anything else.
And it's not a significant people add with it so ramping up would be.
Feasible, depending on what the demand profile looks like and it should be.
We quickly if we decided to do that.
Okay Super I appreciate it.
Thank you. Our next question comes from kind of a hospital with.
Gross research you May proceed with your question.
Hey morning, everybody.
Craig you mentioned that the wallboard pricing exiting the quarter was similar to the quarter average I think you guys had a price increase for mid September.
In wallboard, so curious if that means at that one.
Didn't necessarily gain a lot of traction or we've also heard that that's been pushed back maybe October or something so maybe that's just a sign of that but curious if you could just kind of comment on that most recent.
Price increase.
Yes, no Kevin consistent with what we've been saying is some of these supply chain issues at the homebuilders.
We're being work through price.
Price increase as you said well chronicle that have got moved out.
And so we're still working through that but pretty consistent with what you would've expected to see.
Okay and then.
You guys had talked about.
I know you've talked about this in the past but.
On the synthetic gypsum side of things.
That's obviously a challenge for the wallboard industry, which I think you guys are pretty well immune to just given your you mined most of your own natural rock and have a favorable situation kind of where you do use synthetic gypsum. So I'm just wondering if you could just give us an update on how this has evolved because I know.
One of your competitors I believe it is building an import terminal in Florida to bring in natural rock. So it seems like maybe it's getting to the point, where some others have to take actions. So I guess, if you could just kind of update US is this getting worse, just given demand getting better in coal keeps coming offline.
Back to just keep getting worse.
For the industry and then.
It seems like you guys wouldn't necessarily be effective and then you would benefit I would imagine as others are impacted but I'm curious if you can just give maybe a little bit of color there.
Yes, when you look at synthetic gypsum synthetic gypsum is generated really from plants burning coal. So youll see some some short term noise potentially if gas prices spike in more coal burn with it but over the midterm and longer term horizon.
The calculus as you know as the U S goes to greener sources of.
Power generation.
That lets call will be burned and lessen thetic gypsum will be produced and so.
I'm not surprised with your comment that you said somebody is building an import terminal to bring in.
Iraq.
And to satisfy their facilities.
Her time, you can see the power plants have decreased in there and they are coal consumption and we expect that to continue so that that's just a straight supply and demand there'll be less supply of the product at some point in the future.
Okay. Thank you very much.
Thank you. Our next question comes from Josh Wilson with Raymond James You May proceed with your question.
Yes, good morning, Mike and Craig Thanks for taking my question and congrats on the quarter.
Thanks.
On the paperboard side could you give us a sense of what the price was exiting the quarter in that business.
Yes, Josh again that price is contractually developed.
<unk> developed and so and it changes on a quarterly basis. So the average in the quarter is pretty consistent.
It'll change October one it'll change January one based on the price of inputs and so we will see a meaningful change in that price.
In Q3, and then another meaningful change in that price in Q4, consistent with what the raw material inputs.
And were there any mix impacts on your pricing in any of those products.
No.
Got it.
Very good.
Thank you. Our next question comes from Dennis Kim Yes, Yeah with two Securities. You May proceed with your question.
Hi, Good morning. This is Dennis Comanche of calling in for Keith Hughes. Thanks for taking my questions. So just two brief ones.
In terms of supply side headwinds you mentioned that the likelihood of pose less of a challenge.
Going forward, just generally I wanted to touch briefly on labor and whether you anticipate or have been seeing challenges in labor and to what extent that plays into the bigger up supply chain Challenge picture and then just briefly just to touch on paperboard when their costs in this business, whether you anticipate that these costs are maybe peaking and what.
Since that.
When that piqued my com or when these costs might level off thank you.
Yeah, what I would tell you. The first question is.
It's not a labor intensive business generally across our footprint both in cement and wallboard.
That's not as big of an issue for us.
And then on your last point as we said earlier, we saw a significant increase in OCC prices through the summer July August and September they seem to have plateaued here more recently.
I don't want to speculate too much but the.
The educated guess right now is that they remain in this range for a little bit until until further until further notice.
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.
We appreciate everybody calling in today and look forward to talking to you in the after the first of the year. Thank you.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
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