Q3 2022 Eagle Materials Inc Earnings Call

January 27, 2022

Good day, everyone and welcome to Eagle materials third quarter of fiscal 2022 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 Haack. Mr. Haack. Please go ahead Sir.

Thank you Josh.

Good morning, welcome to Eagle materials conference call for our third 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 will 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.

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 result cause results to differ from those discussed during the call for.

For further information please refer to this disclosure, which is also included at the end of our press release.

Let me start off by saying this was another good quarter for Eagle.

Our achievement of record earnings per share highlight the fact that people and prudent investments make a huge difference.

First and foremost I am proud of our Eagle team.

And our plant the Eagle team relentlessly work to deliver our quality products to our customers timely and consistently.

I want to personally thank each and every one of our employees that made not only this quarter a success, but for the work performed during the previous two years against the Covid backdrop.

Secondarily this quarter has shown the benefits from a combination of many years of prudent investments.

<unk> that in some ways uniquely position us to take advantage of the opportunities that are presenting themselves to us today.

And that we believe will continue to present themselves to us in the quarters ahead.

Our performance in light of this the notable headwinds such as omni kron disruption supply chain disruption and inflation.

Is a testament to the resilience of our business model the soundness of our strategic choices.

And to our proven operational capabilities.

Let me elaborate on some of the reasons for this performance.

Let me start with omni crop.

We are fortunate to have a longstanding safety culture.

We will not do a job unless we can do it safely.

This foundation has served us well as we have managed the waves of the pandemic.

Those that follow us know that we enjoy an exceptional health and safety track record.

I am proud to say that we achieved the best safety performance in company history. These last nine months.

This underscores our deep commitment to our people and their well being.

Our health safety and environmental processes, which we view as actually quite closely related are robust and our well established safety first operating philosophies have been applied to meet the challenges of the pandemic.

Now, let me turn to the other two headline concerns.

Hi chain and inflation.

It is worth noting that we have several significant advantages here, we own or control our primary raw material inputs and our reserves are decades deep.

Arguably these resources have already been paid for and are not subject to supply chain disruption or inflation and the way that many other construction materials are.

Nor do we rely on key inputs that come from overseas.

Moreover, our operations are not particular as labor intensive as we have invested in process controls and reliable methods of production to relieve manual labor and improve safety.

These advantages have served us well this quarter and this was reflected in our operating results.

Now, let me turn to why we believe we have not achieved peak earnings margins or returns for our business as this cycle.

First let me talk about the light side of our business.

The underlying demand for our products is strengthening.

Our volumes in gypsum wallboard could have been even stronger this quarter. If homes that were started could have been completed.

Supply chain issues for other products slowed the completion of these homes and admittedly slowed some of our product distribution.

This portends well for the quarters ahead as this backlog is worked through.

There is a lot of evidence that the next 12 months at a minimum will be especially strong for demand on the residential front.

Home affordability is a growing concern we're still a long way from MP impeding demand in our markets.

We focus in the south in the Sunbelt and have no operations in the northeast our West coast, where the market affordability is most challenged.

Our key southern tier markets are in fact, seeing unprecedented migration from affordability challenged areas.

The outlook for repair and remodel is also robust.

The combination of new housing construction and repair and remodeling accounts for the lion's share of wallboard demand.

Although commercial and nonresidential is a relatively small application area. It is also strengthening in our southern tier markets.

Strong wallboard demand provides pricing opportunities.

All board prices for us were up 29% year on year.

We do not believe the positive pricing trajectory is over and this is evidenced with our January price increase.

In addition, we have the capability to flex existing production to meet short to midterm demand swings.

Now, let me turn to the heavy side of our business, where we are well positioned heartland U S producer of cement.

Here all of our plants are virtually sold out.

So we expect pricing will be our greatest profit lever for cement and the most immediate quarters ahead.

Infrastructure spend is on an upswing aided by federal initiatives and state and local budgets in our markets are generally strong.

Infrastructure and residential construction together are the most important end use demand segments for cement and will be important multi year drivers.

On the last call I've spotlighted, our intentions with respect to one of our five strategic thrusts highlighted in our environmental and social disclosure report on our website.

This product is one that will help us manage our carbon footprint and cement and is called limestone cement or plc.

So let me bring you up to date on the latest developments here. This is a very important initiative at Eagle due to the benefits of reducing our overall carbon footprint per ton of cement produced and.

And in making our scarce clinker go further.

In effect unlocking incremental cement production capacity.

Some aspects of achieving our objectives here are fully under our control and some are not.

Those that are operational considerations.

Those that are not include gaining approvals for product use in key applications.

Every one of our cement plants have now completed production trials and product performance testing.

As a result of these trials all of our cement plants have evaluated capital investment requirements.

Reach what we have calculated to be the target limestone substitution level.

These capital investments are a varying degree of complexity and will be completed over the coming months or years, depending on the location.

Regarding our customer acceptance, we have field trials underway with our customer base and are working with docs.

And all of our relevant market areas.

So far in FY 'twenty, two we have produced and sold over 100000 tons of this eco friendly product out of four of our facilities.

We expect increased sales of this product in FY 'twenty three.

We are making progress on testing and introduction of this product at an unprecedented pace at Eagle progress on this and our other ESG initiatives is a personal priority of mine and as reported to our full board quarterly.

I mentioned at the beginning of my remarks that we see good opportunity for expanded earnings margins and returns.

I commented on the first two now let me say a few words about returns.

We are generating a lot of cash.

Our priority for that cash is to grow the company recognizing we have strict financial and strategic criteria that we will always follow during intervals. We're in such growth investments are not feasible, we know what to do with the cash.

Our actions this quarter speaks to our convictions here fairly convincingly.

We repurchased one 2 million shares of our common stock for a total cash return to our shareholders of nearly $200 million during this quarter.

Now, let me turn it over to Craig for the financial results.

Thank you Michael.

Third quarter revenue was a record $463 million, an increase of 14% from the prior year.

The increase reflects higher sales prices across each business unit and higher cement sales volume.

The strong fundamentals in both cement and wallboard contributed to record EPS during the quarter.

Looted earnings per share from continuing operations was $2 53.

A 30% increase from the prior year.

This increase also reflects the reduced share count, resulting from our share repurchases.

Turning now to 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 9% driven by the increase in cement sales prices and sales volume.

Cement prices increased 6%, while sales volume was up 7%.

Our aggregate sales volume, however was down 42% in the quarter as several large jobs were delayed.

Operating earnings increased 11%, reflecting higher cement prices and sales volumes, partially offset by higher energy and maintenance costs.

Moving to the light materials sector on the next page.

Revenue in our light materials sector increased 21%.

Reflecting higher wallboard and paperboard sales prices as well as increased paperboard sales volume.

Operating earnings in the sector increased 32% to $63 million, reflecting higher net sales prices, which helped to offset higher input costs, namely recycled fiber and energy.

Looking now at our cash flow, which remains strong.

During the quarter operating cash flow was $167 million.

9% year on year decrease reflects the timing of working capital shifts of the prior year, primarily associated with the receipt of our IRS refund.

Capital spending increased to $28 million.

And as Michael mentioned, we repurchased approximately one 2 million shares of our common stock for $188 million and paid our quarterly cash dividend.

Combined we returned nearly $200 million to shareholders.

Year to date, we've repurchased approximately two 9 million shares or 7% of our outstanding.

Finally, a look at our capital structure.

At December 31, 2021, our net debt to cap ratio was 41% and our net debt to EBITDA leverage ratio was one three times.

The refinancing we completed last quarter resulted in this favorable capital structure with significant liquidity to continue pursuing our strategic priorities.

Thank you for attending today's call Josh, we'll now move to the question and answer session.

Thank you.

I'm here to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.

Our first question comes from Trey Grooms with Stephens you May proceed with your question.

Hey, good morning, Craig and Michael.

The work in the quarter and thanks for taking my questions.

Sure.

So the wallboard shipments.

In the quarter were down.

A little bit, which you kind of spoke to on the last earnings call with with some of the delays that home homebuilders we're facing.

But you mentioned that your order pace.

During the quarter and understanding that underlying demand is there.

Are you seeing some easing in the log jam, there and how should we be thinking about wallboard volume in the near to medium term.

Yes, Thanks Trey.

To your point during the quarter some of those effects of supply chains at the homebuilder level.

Still lingering.

But orders were very strong.

And have continued to be strong and we think 2020 to set up for another strong year, you've got low inventory level with homes.

Job creation continues to be very strong wage improvement.

And so we expect to see a good calendar 'twenty two on the residential side, which is the primary driver for wallboard.

Repair and remodel continues to be very strong as well and we are starting to see some improvement in the private nonresidential construction sector as well so all of that should add up for a pretty strong 22.

Okay. Thanks for that.

I guess, maybe shifting gears, a little bit to pricing.

You have price increases out in the market for January on both the heavy and light side of the business and Michael you touched on it briefly in your prepared remarks.

But to the extent you can can you talk about kind of what youre seeing there.

On the pricing front with these increases that you have out in the markets.

Yes.

Trey I appreciate the question.

Normally.

We really got to wait to see this as early in the cycle for us announcing these price increases.

So.

We will be able to give you more information after the next quarter.

But the supply demand dynamics look favorable for them.

Fair enough.

Last one for me and this is just on the comment made.

Kind of what was going on with some of the on the cement side with some of the large project delays.

Could you could you go into a little more detail there.

When you when you expect those to maybe come back into the picture.

The outlook for that.

Those big projects that you mentioned.

Yes, those were mostly on our.

Aggregate side of the business and it's really with some.

Projects and some other projects in the Austin area.

We've grown our inventory to satisfy those projects and its just a matter of us going we expect those to get back on track here in this next quarter and see some movement of that product that we have in our inventory right now.

Perfect Alright, thanks for the color I'll pass it on good luck.

Thank you. Our next question comes from Brent Thielman with D. A Davidson and company you May proceed with your question.

Okay, great. Thank you great quarter as well.

I guess first question you talked about the constraints homebuilders are still experiencing it doesn't seem like that's as much the case in the cement business in all the markets that business. So could you just talk about what youre seeing and hearing maybe among project owners and contractors I guess, particularly that rely on cement.

I think in sectors beyond residential but are they still mitigating these constraints I guess fairly better.

Yes, when you look at the two businesses.

They do have different some different end use markets with it but.

Overall demand has been very strong for our products with the on the cement side.

We have been and continue to be virtually sold out at our locations.

The other thing that you'll see as you know this.

This winter was a very late winter with it which led us to.

Really.

Not as.

As great of a demand reduction on that side.

The one thing that is worth mentioning on that side is that also does pull down inventory that we normally build during this timeframe. So the demand is there we don't see any reason why it won't be favorable on both those businesses with what we're hearing from.

And our customers.

Yes, Michael and then to that point, I mean, how Oems cement volume really strong.

I appreciate the color there I guess this is.

Six quarter tougher comparisons on the on the JV side, maybe maybe any color on what Youre seeing there light at the end of the tunnel, where we might start to see some volume improvement there.

Yes.

Look as we've said in Texas very strong market and our operating facility has been sold out now for years.

The volume.

Changes there are more about purchase product and the <unk>.

Timing of ships coming in and activities like that so which are a little bit out of our control, but at the operating level. We continue to remain sold out.

Okay.

Maybe Greg and this might be for you, but on cement do you do you have the unit cost headwind or maybe just absolute dollar impact.

Higher energy pass.

During this quarter just some sense there.

Yes, it was generally a couple of million dollars.

And if you think about cement production, it's an energy oriented business fuel and electricity.

<unk>.

We are seeing some inflation there we were able to more than keep pace with that on the pricing front.

But that is something that we are closely watching but it was a little bit of a headwind this quarter.

Alright, just lastly on the paperboard side, it looks like you're starting to recapture.

Higher costs I think previously you thought you might return to something closer to normal kind of levels of profitability may be by fiscal year end.

Do you think that might push you a little more into the second half of the calendar year, just as youre seeing costs somewhere in there.

Yes, when you look at how our paperboard is structured those cost capacity asked on a quarter lagging and it really depends on OCC pricing and where OCC price is OCC price was flat this last quarter pretty much a little bit of a down.

So those costs will continue to be passed on in the subsequent quarters as OCC price changes.

Yeah.

Okay very good I appreciate it thank you.

Yeah.

Thank you. Our next question comes from Adrian Huerta with Jpmorgan you May proceed with your question.

Thank you good morning, Hi, Mike and Greg. Thank you for taking my question two questions.

Number one is.

Can you just remind me view.

<unk> did a second price increase.

Last year for cement and what are the chances to do a second price increase this year and my second question has to do with the plc cement.

It means that you were making.

Can you just give us.

A rough sense on the potential investments that you will have to make on this and these.

These investments will basically expanding your capacity by what percentage will help anymore.

Cement capacity, you're planning on adding by doing these investments thanks sure.

Sure.

Both both of those for you.

With regards to pricing really pricing in our businesses is really demand driven.

Factor with it we are continuing to monitor.

Both our costs and our.

Our customer base with that and we will continue to monitor that.

For potential second price increase we have not made that decision at this point.

We will continue to monitor the dynamics supply demand dynamics with that over.

Over the next coming months.

As for plc side.

Plc is going to be something that we will implement as I said in the comments over the coming months to coming years, depending on the capital.

You picked up on the capital comment if you've kind of looked at.

<unk> all of our cement facilities and with figuring our normal capital burn and added another $25 million to $30 million for the next two years that would get us to where we need to be to produce that for all of our cement.

Assets that we have.

With regards to that plc is up to a 15% limestone addition, each plant we will have a different characteristics of how much. It can put in to still meet the ASTM specification of that product.

So we're looking at.

Eight.

12%, depending on the plant.

Eventual addition, now what also needs to be kept in mind as that's not across the board all cement because we also produce some other cement for oil well, which is a minor section of it and some type III cement.

Other cements with it.

So it will be for our main core product that we produce.

Excellent. Thank you Mike appreciate it so just to clarify you.

You did not implement a second price increase in any of your markets from cement.

The only market we did have a second price increase and was in Texas that was a full price increase.

This year, we increased the timing or sped up the timing of this agent will increase to January .

Excellent. Thank you Craig and Mike I appreciate it.

Thanks.

Thank you. Our next question comes from Anthony Pettinari with Citi. You May proceed with your question.

Hi, good morning.

Just following up on the last question on cement balls.

You saw volume up maybe 1% year to date or fiscal year to date, maybe putting aside any investments in plc.

Level of volume growth do you think you can reasonably drive maybe looking out to 'twenty three should we think about flat volumes or do you think you can get to that kind of long term low single digit.

<unk> through Debottlenecking.

Yes, so we look at our plants.

Uh huh.

For capital investments all the time and we have put in some capital investments of some additional storage facilities and some mill.

But we are getting close to the end of where we could get there. Our teams have always been creative and we've always been able to eke out that extra.

A percent or two.

But again I do want to remind the group that does that.

<unk>.

Anybody on the call is located this was a very mild winter.

So normally we build inventory coming into the November December January February time frame to kick off the construction season in November and December was very busy.

Our inventory side is at one of the lowest points we've seen for clinker.

For cement product.

Okay. That's helpful. And then just clarifying the plc investment I think you referenced in the 8% to 12% capacity increase that would be.

Our cement capacity increase not a clinker capacity increase or is there a <unk> impact of clinker or how should we think about that no. That's exactly right. It's a cement capacity increase as the product is in our ground with the clinker.

Okay.

And maybe just switching gears last one for me you, obviously have a lot of balance sheet flexibility. When you look at potentially M&A or the pipeline are there any kind of general comments, you can make about availability of assets.

Maybe valuation of assets on the either the heavier the white side.

Yes, we look at.

Anything that's available.

<unk> out there, but we have very strategic strict.

Financial and strategic.

Criteria to make a investment in.

Just because we have a lot of cash does not mean, we will stray from those.

The criteria, we have and so the deal the deals out there right now from some of the deals that closed in the last bid looked a little expensive to us, but also theres not much out there right now, but we look at everything Thats coming available right now.

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.

Michael I was wondering if we could just dig in on a comment you made in your prepared remarks about opportunities take margins higher particularly.

In wallboard, so given the moves in transportation cost and gypsum synthetic gypsum costs.

How do you think about where your margins could get to.

In this cycle I guess, when we look at the impact on the cost structure for folks that aren't co located.

<unk>.

5% plus to the overall cost structure.

Do you see your business getting to potentially the mid 40% margin range for wallboard with that cost structure change for the industry.

Yes.

Look at that comment that I made there is really on.

Unlike the cement side of our business, we still have capacity on the wallboard side of the business.

We operate our plants very efficiently, we own our own raw materials. So some of the inflationary aspects.

Not necessarily seen from us.

As I said in the comments.

When you have.

Multi decade.

Reserves at some locations that are already paid for and paid four years ago.

<unk> us on that side, so really when im looking at that on a volumetric side end to end on a some of the cost headwinds that some others are seeing we may not be seen with regards to reserves.

And Michael maybe to expand on that what level of operating profit drop through do you anticipate as you ramp up volumes very incremental margins have been obviously super attractive of wallboard over the past year do you think you could deliver 50, 60% drop through on.

Incremental sales from here based on your comment on having paid for that.

Historical reserves.

Yeah, I'm not going to answer a certain percentage on that side you know, it's all going to depend on our distribution channels and what the supply demand dynamic look like in the future. We just don't think we're at the peak yet with.

Supply demand dynamics.

Okay, and then on your price increase letter.

It looks like Youre not protecting orders past January .

Third ship date is that correct. So the price increase that you folks are implementing wallboard will roll through immediately in the March quarter.

That's right.

Okay.

And lastly, Greg can you talk about that.

Cement price increases.

As you look around the footprint any differences in terms of the effective price increase date.

The price increase amount.

Across your plants.

In the past we've had some increases staggering into March and April and it sounds like the increase are happening earlier instrument. This year, but can I get you to expand on that if you don't mind.

Yes, they are largely all scheduled for early January .

With one exception here in Texas. It was an April increase because of the.

The fall increase that that was just recently implemented so but across the wholly owned network. It was all early January as we said last quarter. They were all double digit increases and as Michael has said a couple of times now.

A really mild winter start to the winter at least.

<unk> entered this.

We will enter this construction season with very low inventory levels.

Terrific. Thanks.

Thank you. Our next question comes from Stanley Elliott with Stifel. You May proceed with your question.

Thank you. Our next question comes from filming with Jefferies. You May proceed with your question.

Hey, guys.

Plc initiatives to free up more clinker capacity that sounds like a home run, but curious how prevalent is this across the industry and Ken your peers take a.

Similar initiatives to free up some capacity as well.

Yeah. So.

Great question with it.

This is a product that can be produced by our competitors also it is a limestone addition to cement.

Each plant in our network, we feel we're we're aggressively approaching this so we've done our homework our research and looked at when we could have our capital in place.

And start realizing the benefit of this.

<unk>.

I can't comment on our competitors, where they stand in that cycle.

How much investment who will take how much time it will take.

For them to be operational on those aspects.

Got it okay.

And then for me on your wallboard business good to hear that your orders picked up but any color on your volumes inflect. It late in the December quarter, and you expect it to inflect positively in the March quarter.

Yeah, I would just say fill more broadly rather than going quarter to quarter. We just expect to see a good 22.

Given the backdrop and the fundamentals that are supporting construction activity in the U S.

I think it's I think it's a little too early to say, we've cleared the logjam of supply chain.

Things things incrementally improve a little bit but.

We're not done with it yet.

Okay, and then Michael you made a point that we're nowhere near a peak on your wallboard.

From a profitability standpoint.

Pricing was certainly very robust this past year, how should we think about the cadence in 2022 is assuming the demand backdrop is as upbeat as youre thinking about or are we going back to a year or it's going to really be dictated by demand.

It will be totally dictated by demand.

So.

As we.

We continue to evaluate that just as we do on the cement side and you saw that in our cadence last year and we will make those decisions as we go through this year on our supply demand fundamentals of our business.

Okay I appreciate it thanks, a lot guys.

Thank you. Our next question comes from Josh Wilson with Raymond James You May proceed with your question.

Good morning, Thanks for taking my question.

Thanks, Josh.

Craig could you spell out for US what you think capex will be both.

Fiscal 'twenty, two and 'twenty given the various initiatives.

Yes.

We would've traditionally say our annual capital spending and this is for all of Eagle is in the 80 million to $100 million level.

We'll be a little below that here in fiscal 'twenty, two but if you use that as a kind of a normal run rate for 'twenty three 'twenty, four but thats kind of the sustaining capital with some incremental projects, but as Michael mentioned as we're ramping up plc across the network. There is some investment in there and that could add up to.

5% to $30 million on top of that kind of core number so.

It's going to be in that range for 'twenty three 'twenty four as we as we sit here today.

And then as we look at the Paperboard margin can you just peel the onion, a little more about which were the biggest headwinds in this quarter and how quickly they might change or improve.

Yeah look a bit where OCC prices by far and away are the biggest headwind that we had the <unk>.

Large spike in those costs in the late summer early fall.

And as Michael alluded to earlier it takes it takes some time for that to actually work itself through the.

The pricing mechanism.

The good news is that seems to have plateaued here over the last couple of months, we actually saw a drop in January so it does look like that headwind is reversed.

But but that certainly was the biggest driver of this quarter.

Thanks, I'll turn it over.

Thank you and as a reminder to ask a question you will need to press star one on your telephone.

Our next question comes from Dennis.

<unk> with <unk> Securities You May proceed with your question.

Hi, Good morning. This is Dennis <unk> stepping in for Keith Hughes, Congrats on a solid quarter and thanks for taking my questions.

So can you just add some color on just the acceleration in aggregates pricing.

Whether youre seeing anything from any particular geography, or any particular factors driving that and then can you give us a sense of just where wallboard capacity utilization is for the company and maybe you can comment on where it might be for the industry. Thank you.

Yes, Thanks, Dennis on on your first question.

The change in pricing this quarter in aggregate had more to do with the discussion we had earlier about some of these jobs getting delayed that was primarily around base material, which is on average generally lower priced so youre going to just buy product mix skew a little bit higher so.

Nothing more than more product mix than anything.

For us in that business in terms of wallboard utilization levels as Michael said earlier, we do have some incremental capacity.

As demand calls for it we will continue to ramp that up but it effective levels utilization rates are pretty high right now for <unk>.

So I hesitate and we'll talk about where the industry might be as we certainly don't know where others positions are but for us we.

We've got some opportunity as demand grows.

Thank you and can you just.

Can you just remind us on what organic price for something that was for the quarter.

Yes, it was up 6% year over year.

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.

Thank you Josh we appreciate everybody calling in today and we'll look forward to talking to you here in the next quarter.

Thank you.

Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.

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Good day, everyone and welcome to Eagle materials third quarter of fiscal 2022 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 Haack. Mr. Haack. Please go ahead Sir.

Thank you Josh.

Good morning, welcome to Eagle materials conference call for our third quarter for fiscal 2022.

This is Michael ha joining.

Joining me today are Craig Kesler, our Chief Financial Officer, and Bob Stewart Executive Vice President of strategy corporate development and communications.

We are glad you could be with us today.

It'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 result 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.

Yeah.

Let me start off by saying this was another good quarter for Eagle.

<unk> a record earnings per share highlights the fact that people and prudent investments make a huge difference.

First and foremost I.

I am proud of our Eagle team.

At our plant the Eagle team relentlessly work to deliver a quality product to our customers timely and consistently.

I want to personally thank each and every one of our employees that made not only this quarter a success for the work performed during the previous two years against the Covid backdrop.

Secondarily this quarter has shown the benefit from a combination of many years of prudent investments.

<unk> that in some ways uniquely position us to take advantage of the opportunities that are presenting themselves to us today.

And that we believe will continue to present themselves to us in the quarters ahead.

Our performance in light of this the notable headwinds such as omni crop disruption supply chain disruption and inflation.

As a testament to the resilience of our business model, the soundness of our strategic choices and.

And two our proven operational capabilities.

Let me elaborate on some of the reasons for this performance.

Let me start with omni crop, we are fortunate to have a longstanding safety culture.

We will not do a job unless we can do it safely.

This foundation has served us well as we have managed the waves of the pandemic.

Those that follow us know that we enjoy an exceptional health and safety track record.

I'm proud to say that we achieved the best safety performance in company history. These last nine months.

This underscores our deep commitment to our people and their well being.

Now, let me turn to the other two headline concerns the supply chain and inflation.

It is worth noting that we have several significant advantages here, we own or control our primary raw material inputs and our reserves are decades deep.

Arguably these resources have already been paid for and are not subject to supply chain disruption or inflation and the way that many other construction materials are.

Nor do we rely on key inputs that come from overseas.

Moreover, our operations are not particular labor intensive as we have invested in process control and reliable methods of production to relieve manual labor and improve safety.

These advantages have served us well this quarter and this was reflected in our operating results.

Now, let me turn to why we believe we have not achieved peak earnings margins or returns for our business as this cycle.

First let me talk about the light side of our business.

The underlying demand for our products is strengthening.

Our volumes in gypsum wallboard could have been even stronger this quarter. If homes that were started could have been completed.

Apply chain issues for other products slowed the completion of these homes and admittedly slowed some of our product distribution.

This portends well for the quarters ahead as this backlog is worked through.

There is a lot of evidence that the next 12 months at a minimum will be especially strong for demand on the residential front.

Home affordability is a growing concern we are still a long way from MP impeding demand in our markets.

We focus in the south in the Sunbelt and have no operations in the northeast our West coast, where the market affordability is most challenged.

Our key southern tier markets are impacting unprecedented migration from affordability challenged areas.

The outlook for repair and remodel is also robust.

The combination of new housing construction and repair and remodeling accounts for the lion's share of wallboard demand.

Although commercial and nonresidential is a relatively small application area. It is also strengthening in our southern tier markets.

Strong wallboard demand provides pricing opportunities.

Billboard prices for us were up 29% year on year.

We do not believe the positive pricing trajectory is over and this is evidenced with our January price increase.

In addition, we have the capability to flex existing production to meet short to midterm demand swings.

Now, let me turn to the heavy side of our business, where we are well positioned heartland U S producer of cement.

Here all of our plants are virtually sold out and so we expect pricing will be our greatest profit lever for cement and the most immediate quarters ahead.

Infrastructure spend is on an upswing aided by federal initiatives and state and local budgets and our markets are generally strong.

Infrastructure and residential construction together are the most important end use demand segments for cement and will be important multi year drivers.

On the last call I've spotlighted, our intentions with respect to one of our five strategic thrust highlighted in our environmental and social disclosure report on our website.

This product is one that will help us manage our carbon footprint and cement and is called limestone, some Matt or plc.

So let me bring you up to date on the latest developments here. This is a very important initiative at Eagle due to the benefits of reducing our overall carbon footprint per ton of cement produced.

And then making our scarce clinker go further.

In effect unlocking incremental cement production capacity.

Some aspects of achieving our objectives here are fully under our control and some are not.

Those that are operational considerations.

Those that are not include gaining approval for product use in key applications.

Every one of our cement plants have now completed production trials and product performance testing.

As a result of these trials all of our cement plants have evaluated capital investment requirements.

<unk>, what we have calculated to be the target limestone substitution level.

These capital investments are a varying degree of complexity and will be completed over the coming months or years, depending on the location.

Regarding our customer acceptance, we have field trials underway with our customer base and are working with Dod.

And all of our relevant market areas.

So far in FY 'twenty, two we have produced and sold over 100000 tons of this eco friendly product out of four of our facilities.

We expect increased sales of this product in FY 'twenty three.

I mentioned at the beginning of my remarks that we see good opportunity for expanded earnings margins and returns.

I commented on the first two now let me say a few words about returns.

We are generating a lot of cash.

Our actions this quarter speaks to our convictions here fairly convincingly.

We repurchased one 2 million shares of our common stock for a total cash return to our shareholders of nearly $200 million.

During this quarter.

Now, let me turn it over to Craig for the financial results.

Thank you Michael.

Third quarter revenue was a record $463 million, an increase of 14% from the prior year.

The increase reflects higher sales prices across each business unit and higher cement sales volume.

The strong fundamentals in both cement and wallboard contributed to record EPS during the quarter.

Diluted earnings per share from continuing operations was $2 53.

A 30% increase from the prior year.

This increase also reflects the reduced share count, resulting from our share repurchases.

Turning now to segment performance.

This next slide shows the results of our heavy materials sector, which includes our cement and concrete and aggregate segments.

Revenue in this sector increased 9% driven by the increase in cement sales prices and sales volume.

Cement prices increased 6%, while sales volume was up 7%.

Our aggregate sales volume, however was down 42% in the quarter as several large jobs were delayed.

Operating earnings increased 11%, reflecting higher cement prices and sales volumes, partially offset by higher energy and maintenance costs.

Moving to the light materials sector on the next page.

Revenue in our light materials sector increased 21%, reflecting higher wallboard and paperboard sales prices as well as increased paperboard sales volume.

Operating earnings in the sector increased 32% to $63 million, reflecting higher net sales prices, which helped to offset higher input costs, namely recycled fiber and energy.

Looking now at our cash flow, which remains strong.

During the quarter operating cash flow was $167 million the 9% year on year decrease reflects the timing of working capital shifts in the prior year, primarily associated with the receipt of our IRS refund.

Capital spending increased to $28 million.

And as Michael mentioned, we repurchased approximately one 2 million shares of our common stock for $188 million and paid our quarterly cash dividend.

Combined we returned nearly $200 million to shareholders.

Year to date, we have repurchased approximately two 9 million shares or 7% of our outstanding.

Finally, a look at our capital structure.

At December 31, 2021, our net debt to cap ratio was 41% and our net debt to EBITDA leverage ratio was one three times.

The refinancing we completed last quarter resulted in this favorable capital structure with significant liquidity to continue pursuing our strategic priorities.

Thank you for attending today's call Josh, we'll now move to the question and answer session.

Thank you.

Under to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.

Our first question comes from Trey Grooms with Stephens you May proceed with your question.

Hey, good morning, Greg and Michael.

The work in the quarter and thanks for taking my questions.

So the wallboard shipments.

In the quarter were down.

Little bit, which you kind of spoke to on our last earnings call with with some of the delays that home homebuilders we're facing.

But you mentioned that your order pace improved during the quarter and understanding that underlying demand is there.

Are you seeing some easing in the log jam, there and how should we be thinking about wallboard volume in the near to medium term.

Yes, Thanks Trey.

To your point during the quarter some of those effects of supply chains at the homebuilder level.

Bill lingering.

But orders were very strong.

And have continued to be strong and we think 2022 is set up for another strong year, you've got low inventory level of homes.

Job creation continues to be very strong wage improvement.

And so we expect to see a good calendar 'twenty two on the residential side, which is the primary driver for wallboard.

<unk> model continues to be very strong as well and we are starting to see some improvement in the private nonresidential construction sector as well so all of that.

Should add up for a pretty strong 22.

Okay, Thanks for that and.

I guess, maybe shifting gears, a little bit to pricing.

You have price increases out in the market for January on both the heavy and light side of the business and Michael you touched on it briefly in your prepared remarks.

But to the extent you can could you talk about kind of what youre seeing there.

On the pricing front with these increases that you have out in the markets.

Yes.

Trey I appreciate the question Union normally.

We really got to wait to see this as early in the cycle for us announcing these price increases.

So.

We will be able to give you more information after the next quarter.

But the supply demand dynamics look favorable.

Fair enough.

Last one for me and this is just on the comment made.

Kind of what was going on within some of the on the cement side with some of the large project delays.

Could you could you go into a little more detail there.

When do you expect those to maybe come back into the picture.

Yes, the outlook for that that those big those big projects that you mentioned.

Yes, those were mostly on our.

Aggregate side of the business and it's really with some <unk>.

Projects and some other projects in the Austin area.

Perfect Alright, thanks for the color I'll pass it on good luck.

Thank you. Our next question comes from Brent Thill with da Davidson <unk> Company. You May proceed with your question.

Okay, great. Thank you great quarter as well.

I guess first question you talked about the constraints homebuilders are still experiencing it doesn't seem like that's as much the case in the cement business and all of the markets that business. So could you just talk about what youre seeing and hearing maybe among project owners and contractors I guess, particularly that rely on cement.

I think so.

Beyond residential but are they still mitigating these constraints I guess fairly better.

Yes, when you look at the two businesses you know they do have different some different end use markets with it but.

Overall demand has been very strong for our products with the on the cement side.

We have been continuing to be virtually sold out at our locations.

Other thing that you'll see.

As you know this winter was very late winter with it which led us to.

Really not.

Not.

As great of a demand reduction on that side. The one thing that is worth mentioning on that side is that also does pull down inventory that we normally build during this timeframe. So the demand is there.

Don't see any reason why it won't be favorable on both those businesses with what we're hearing from.

Our customers.

Yes, Michael and then to that point I mean, how we owned cement volume really strong.

Any color there I guess.

It is.

Yes, six quarter of tougher comparisons on the on the <unk>.

Syed maybe maybe any color on what Youre seeing there light at the end of the tunnel, where we might start to see some volume improvement there.

Yes, Brent look as we've said in Texas very strong market and our operating facility has been sold out now for years.

The volume.

Changes there are more about purchase product and.

And the timing of ships coming in and activities like that so which are a little bit out of our control but.

At the operating level, we continue to remain sold out.

Okay.

Maybe Greg and this might be for you, but on for Matt do you do you have the unit cost headwind or maybe just absolute dollar impact.

From the higher energy costs.

During this quarter just some sense there.

Yes, it was generally a couple of million dollars.

And if you think about cement production, it's an energy oriented business fuel and electricity.

And.

We are seeing some inflation there we were able to more than keep pace with that on the pricing front.

But that is something that we are closely watching but it was a little bit of a headwind this quarter.

Alright, just lastly on that paperboard side, it looks like you're starting to recapture.

Higher costs I think previously you thought you might return to something closer to normal.

Levels of profitability, maybe by fiscal year end.

Do you think that might push a little more into the second half of the calendar year, just you're seeing costs go in there.

Yes, when you look at how our paperboard is structured those cockpit passage asked on a quarter lagging and it really depends on OCC pricing and where OCC price is OCC price was flat this last quarter pretty much a little bit of down.

So those costs will continue to be passed on in the subsequent quarters as OCC price changes.

Okay very good appreciate it thank you.

Thank you. Our next question comes from Adrian Huerta with JP Morgan You May proceed with your question.

Thank you and good morning, Hi, Mike and Greg. Thank you for taking my question two questions.

Number one is.

Can you just remind me have you implemented a second price increase.

<unk> for cement and what are the chances to do a second price increase this year and my second question has to do with the plc cement com.

Comments that you were making.

Can you just give us.

A rough sense on the potential investments that you will have to make on this and.

These investments will basically expand your capacity by what percentage you have anymore.

Cement capacity, you're planning on adding by doing these investments. Thanks.

Sure.

Dressed both both of those for you.

With regards to pricing really pricing in our businesses is really demand driven.

Factor with it we are continuing to monitor.

Both our costs and our.

Our customer base with that and we will continue to monitor that.

For potential second price increase we have not made that decision at this point.

But we will continue to monitor the dynamics supply demand dynamics with that.

Over the next coming months.

As for plc side.

Plc is going to be something that we will implement.

The comments over the coming months to coming years, depending on the capital.

You picked up on the capital comment.

Kind of looked at.

Cross all of our cement facilities and was figuring our normal capital burn and added another $25 million to $30 million for the next two years that would get us to where we need to be to produce that for all of our cement.

Assets that we have.

With regards to that plc is up to a 15% limestone addition, each plant will have a different characteristics of how much. It can put in to still meet the ASTM specification of that product. So.

So we're looking at.

Eight to 12.

12%, depending on the plant.

Eventual.

Edition now it also needs to be kept in mind as that's not across the board all cement because we also produce some other cement for oil well, which is a minor section of it and some type III cement and other cements with it.

So it will be for our main core product that we produce.

Excellent. Thank you Mike appreciate it so just to clarify you did not implement a second price increase in any of your markets on cement.

The only market we did have a second price increase and was in Texas that was a full price increase.

This year, we increased the timing or sped up the timing of this agent will increase to January .

Excellent. Thank you Craig and Mike I appreciate it.

Thanks.

Thank you. Our next question comes from Anthony Pettinari with Citi. You May proceed with your question.

Hi, good morning.

Just following up on the last question on cement balls.

You saw volume up maybe 1% year to date or a fiscal year to date maybe.

Maybe putting aside any investments in plc.

Target through Debottlenecking.

Yes, so we look at our plants.

For capital investments all the time and we have put in some capital investment system additional storage facilities and some mill.

But we are getting close to the end of <unk>.

We can get there our teams are always been creative and we've always been able to eke out that extra.

As a percent or two but again I do want to remind the group that does that.

Hi.

Wherever anybody on the call is located this was a very mild winter.

Normally we build inventory coming into the November December January February time frame to kick off the construction season in November and December was very busy.

Our inventory side is at one of the lowest points we've seen.

Our clinker.

And for cement product.

Okay. That's helpful. And then just clarifying the plc investment I think you referenced in the 8% to 12% capacity increase that would be.

Cement capacity increase not a clinker capacity increase or is there a impact of clinker or how should we think about that no. That's.

The rates of cement capacity increase as the product is in our ground with the clinker.

Okay.

Maybe valuation of assets.

Either the.

The heavier the white side.

Yes, we look at.

Anything thats available.

<unk> out there, but we have very strategic district.

Financial and strategic.

Criteria to make a investment in.

Just because we have a lot of cash does not mean, we will stray from those.

Criteria, we have and so the deal the deals out there right now from some of the deals that closed in the last bid looked a little expensive to us, but also theres not much out there right now, but we look at everything that's coming available right now.

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.

Michael I was wondering if you could just dig in on a comment you made in your prepared remarks about opportunities take margins higher particularly.

In wallboard, so given the moves in transportation costs and gypsum.

Fedex gypsum costs.

How do you think about where your margins could get to.

In this cycle I guess, when we look at the impact on the cost structure for folks that arent co located.

To add.

5% plus to the overall cost structure.

Do you see your business getting to potentially the mid Forty's margin range for wallboard with that cost structure change for the industry.

Yes.

Look at that comment that I made there is really on.

Unlike the cement side of our business, we still have capacity on the wallboard side of the business.

We operate our plants very efficiently, we own our own raw materials. So some of the inflationary aspects.

Not necessarily seen from us.

Having said in the comments.

When you have.

Multi decade.

Reserves at some locations that are already paid for and paid four years ago.

Help us on that side, so really when I am looking at that its on a volumetric side and to end on a some of the cost headwinds that some others are seeing we may not be seen with regards to reserves.

And Michael maybe to expand on that what level of operating profit drop through do you anticipate as you ramp up volumes and the incremental margins have been obviously super attractive of wallboard over the past year do you think you could deliver 50, 60% tight dropped in one.

Incremental sales from here based on your comment on having paid for.

Thank you.

Historical reserves.

Yeah, I'm not going to answer a certain percentage on that side, it's all going to depend on our distribution channels and what the supply demand dynamics look like in the future. We just don't think we're at the peak yet with.

Supply demand dynamics.

Okay, and then on your price increase letter.

It looks like Youre not protecting orders past January .

Third ship date is that correct. So the price increase that you folks are implementing wallboard will roll through immediately in the March quarter.

That's right.

Okay.

And lastly, Craig can you talk about that.

Cement price increases.

As you look around the footprint any differences in terms of.

<unk> price increase date.

The price increase amount.

Across your plants.

In the past we've had some increases.

Through March and April and it sounds like you are increasing are happening earlier in cement this year, but can I get you to expand on that a few months.

Yes, they are largely all scheduled for early January .

With one exception here in Texas. It was an April increase because of.

Really mild winter start to the winter at least.

We've entered this.

Under this construction season with very low inventory levels.

Terrific. Thanks.

Thank you. Our next question comes from Stanley Elliott with Stifel. You May proceed with your question.

Thank you. Our next question comes from Bill <unk> with Jefferies. You May proceed with your question.

Hey, guys.

<unk> initiatives to free up more clinker capacity that sounds like a home run, but curious how prevalent is this across the industry and 10 year periods take a <unk>.

Similar initiatives to free up some capacity as well.

Yes, so Phil.

So great question with it.

This is a product that can be produced by our competitors also it is a limestone addition to cement.

Each plant in our network.

Feel where we are aggressively approaching this so we've done our homework our research and looked at when we could have our capital in place and.

And start realizing the benefit of this.

No.

I can't comment on our competitors, where they stand in that cycle.

How much investment who will take how much time it will take.

For them to be operational on those aspects.

Got it okay.

And then from me on your wallboard business.

Good to hear that your orders picked up but any color youre volumes inflect. It late in the December quarter, and you expect it to inflect positively in the March quarter.

Yes, I would just say Phil more broadly rather than going quarter to quarter. We just expect to see a good 22, given the backdrop and the fundamentals that are supporting construction activity in the U S.

I think it's I think it's a little too early to say, we've cleared the logjam of supply chain.

Things things incrementally improve a little bit but.

We're not done with it yet.

Okay, and then Michael you made a point that we're nowhere near a peak on your wallboard.

Business from a profitability standpoint.

It will be totally dictated by demand.

So.

As we.

Okay I appreciate it thanks, a lot guys.

Thank you. Our next question comes from Josh Wilson with Raymond James You May proceed with your question.

Good morning, Thanks for taking my question.

Thanks, Josh.

Craig could you spell out for US what you think capex will be both.

Fiscal 'twenty two 'twenty three given the various initiatives.

Yes, so we would've traditionally say our annual capital spending and this is for all of Eagle is in the $80 million to a $100 million level.

It will be a little below that here in fiscal 'twenty, two but if you use that as a kind of a normal run rate for 'twenty three 'twenty, four but thats kind of the sustaining capital with some incremental projects, but as Michael mentioned.

As we are ramping up plc across the network. There is some investment in there that could add $25 million to $30 million on top of that kind of core number so.

It's going to be in that range for 'twenty three 'twenty four as we as we sit here today.

And then as we look at the Paperboard margin can you just peel the onion, a little more about which were the biggest headwinds in this quarter and how quickly they might change or improve.

Yeah look a bit where OCC prices.

<unk> away or the biggest headwind there we had the large spike in those costs in the late summer early fall.

And as Michael alluded to earlier it takes it takes some time for that to actually work itself through the.

The pricing mechanism.

The good news is that seems to have plateaued here over the last couple of months, we actually saw a drop in January so it does look like that headwind is reversed.

But but that certainly was the biggest driver of this quarter.

Thanks, I'll turn it over.

Thank you and as a reminder to ask a question you will need to press star one on your telephone.

Our next question comes from Dennis.

<unk> with <unk> Securities You May proceed with your question.

Hi, Good morning. This is Dennis <unk> stepping in for Keith Hughes, Congrats on a solid quarter and thanks for taking my questions.

So can you just add some color on just the acceleration in aggregates pricing.

Whether youre seeing anything from any particular geography, any particular factors driving that and then can you give us a sense of just where wallboard capacity utilization is for the company and maybe you can comment on where it might be for the industry. Thank you.

Yes, Thanks, Dennis on on your first question the.

The change in pricing this quarter in aggregates had more to do with the discussion we had earlier about some of these jobs getting delayed that was primarily around base material, which is on average generally lower priced so youre going to just buy product mix skew a little bit higher so.

Nothing more than more product mix than anything.

And for us in that business.

Terms of wallboard utilization levels as Michael said earlier, we do have some incremental capacity.

As demand calls for it we'll continue to ramp that up but it effective levels utilization rates are pretty high right now for us.

And we will talk about where the industry might be as we certainly don't know where others positions are but for us we.

We've got some opportunity as demand grows.

Thank you and can you just.

Can you just remind us on what organic price first and that was for the quarter.

Yes, it was up 6% year over year.

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.

Thank you Josh we appreciate everybody calling in today and we'll look forward to talking to you here in the next quarter.

Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.

Q3 2022 Eagle Materials Inc Earnings Call

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