Q2 2023 Eagle Materials Inc Earnings Call
Yeah.
Good day, everyone and welcome to Eagle materials second quarter of fiscal 2020 three.
Earnings Conference call.
This call is being recorded at this time I'd like to turn the call over to Eagle's, President and Chief Executive Officer, Mr. Michael Haack. Mr. Hecht. Please go ahead Sir.
Thank you Jason.
Good morning, welcome to Eagle materials Conference call for our second quarter fiscal 2023. This is Michael Ha. 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 the 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 the 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.
This morning, I'd like to offer a few perspectives about our quarter and the outlook for our business and our ESG agenda.
First let me talk about the quarter.
The demand for our products continues to be strong I am pleased to report record revenues up 19% and record earnings per share up 51%.
Our earnings results are driven by robust price improvement across our businesses and across our entire geographic system.
Price realizations more than mitigated the cost of inflation pressures.
We also returned $110 million to shareholders through dividends and the repurchase of roughly 840000 shares.
This quarter's performance reflects our strategic and operational discipline.
Disciplines, which service well at all points in the economic cycle.
We have been growing and improving our businesses systematically in keeping with a strong strategic focus and clear strategic boundaries.
This quarters actions included the acquisition of a distribution terminal in Nashville, which extends our profitable operational reach in this high growth southeastern region and the purchase of aggregates quarry in northern Nevada, increasing our access to aggregate reserves and our ability to serve this rapidly growing market.
<unk>.
The decisions we have made over the years are providing significant advantages today and the decisions. We are making today will provide significant advantages to us in the future as we make our operations increasingly sustainable every failure.
The successful and well demonstrate pursuit of our low cost producer strategy positions us well for any eventuality is that might be ahead. This cycle.
We will continue to grow the heavy side of our business as we have been doing in two ways.
First is through asset acquisitions that meet our strategic and financial return criteria and the second is through growth investments to expand our system capabilities.
We will also continue to invest in improving the profitability and the sustainability of our existing assets.
Now, let me turn to the outlook for our businesses starting with the heavy side.
Of course in that as well as aggregates, we have perhaps the best multi year visibility into demand and into the opportunities for pricing power and then perhaps ever before we have announced cement price increase across our network of plants effective January one 2023.
The die is pretty well cast for public construction and infrastructure over the next three to five year timeframe.
It is not a stretch to think we could see public construction spending substantially higher.
Some facts supporting demand optimism for Eagle are state D. O T budgets are running well above prior decade averages the infrastructure portion of state D. O T budgets are receiving high fund allocations.
And the magnitude of state D O T budget dollars, skus favorably or Eagle cement system footprint.
Infrastructure contract award values are trending above national averages in the states in which we operate.
At the same time U S cement manufacturing supply response is highly constrained and we see no material builder expansion in markets that will fundamentally change this picture.
Bottom line, we have excellent visibility on U S cement demand for the next three years, we have excellent visibility on cement manufacturing capacity expansion in our markets or the lack thereof or the same timeframe.
And we know how expensive imports are on a delivered basis to our U U S Heartland markets.
These facts should provide a relatively healthy formula for cement pricing power.
Now turning to the life side.
First as the demand given the rapid rise in interest rates. It is reasonable to expect some softening in the wallboard demand ahead I want to emphasize that we have not seen softening yet as our quarterly results of the test.
The main reasons for this are there are one 7 million housing units under construction in the U S. Today. This is an all time record or.
Our wallboard business has its production footprint in the U S. Sunbelt the South region is the most important in the country more important than the three other regions in the U S combined.
We are where the action is.
Repair and remodeling is another important driver of wallboard demand in the near term outlook implications for wallboard appear favorable.
Now turning to the supply side and.
In many ways, our wallboard business today has its characteristics resembling our cement business to name three and wallboard, we operate a highly capacity utilization and comparatively our cement plants are sold out.
Our demand outlook would suggest these higher utilization conditions will be persistent through the midterm for both businesses.
Both businesses have significant constraints to capacity addition, albeit for different reasons.
Both cement and wallboard our products with very limited substitutes and each are essential to U S. Construction and the growth in rebuilding of America.
Now, let me turn to operations.
I am delighted with the results we reported across our network of plants as a whole, but I'd be remiss in not talking about one plant that has recently struggled with equipment failure issues.
This plant is our Texas, Lehigh cement plant joint venture.
As you know one of our hallmarks is keeping our plants in like new condition.
This plant has had a few one off failures that are not commonly seen.
With each of these failures, we want to ensure that we fix the root cause of the issue.
Usually it takes a little additional time in understanding the failure and doing the engineering work to fix it properly, but will serve us well over the long term.
Supply chain issues have resulted in some extended downtime with these equipment repairs and replacements, which are reflected in this quarter's numbers.
Some of this downtime will extend into the coming quarter, but we feel confident that the plant will be more reliable when these investments to fix the root cause of the issue.
Let me close today with some comments on our ESG agenda, starting with environmental.
I have mentioned before that our biggest opportunity for moving the needle on our path to a net zero future is through the introduction marketing and acceptance of Portland limestone So Matt.
It is the best and quickest way for us to make our clinker go further.
Adoption requires approvals from state Dot's as well as some capital investment in our manufacturing plants.
Implementing plc at all locations will not be completed overnight as we face supply chain issues on the equipment side and approval timelines with state Dot's, but I'm happy to report we continue to make significant progress.
Last quarter I commented that almost 15% of our system wide cement sales were important limestone cement this.
This quarter that proportion grew to 25% with two plants shipping plc, and the 60% to 70% range.
We have set an internal goal to move all of our operations construction grade cement two 100% limestone cement production by 2025.
Meeting this goal will enable us to produce more cementitious product.
Which is of critical importance given we are in a sold out conditions.
But also very importantly, it will improve our carbon footprint at the cementitious level.
Shortly after the first of the year will be more formally updating our progress and we intend to make these goals and their implications more explicit as partner of a broader disclosure on the E <unk> as well as the S of.
The ESG.
With that let me turn it over to Craig for the financial review of our quarter.
Thank you Michael <unk>.
Second quarter revenue was a record $605 million, an increase of 19% from the prior year.
Excluding the recently acquired business in Northern Colorado revenue increased 16%.
The increase reflects higher cement and wallboard sales prices as well as increased wallboard sales volumes.
Second quarter diluted earnings per share were $3 72, a 51% increase.
Excluding the impact of our refinancing actions in the prior year, the EPS increase was 36%.
The increase was driven by improved earnings and reduced share count due to our buyback program.
Fully diluted shares are down 10% from the prior year.
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 this sector was up 14% driven by higher cement sales prices opt.
Operating earnings increased 10%, reflecting higher cement prices, which were partially offset by increased energy and maintenance cost.
Given the strong demand backdrop, we implemented a second round of cement price increases in early July across the majority of our markets.
Moving to the light materials on the next slide.
Revenue in our light materials sector increased 26%, reflecting higher wallboard prices and sales volume.
Operating earnings in the sector increased 42% to $95 million, reflecting higher net sales prices, which helped to offset higher input costs, namely freight energy and paper.
However, recycled fiber costs come down significantly in September and again in October .
Looking now at our cash flow, which remains strong.
During the first six months of our fiscal year operating cash flow improved 15% to $300 million and capital spending increased to $43 million.
As Michael mentioned during the quarter, we completed the acquisition of the cement distribution terminal and Nashville, Tennessee, where the purchase price of approximately $39 million.
We also repurchased 840000 shares of our common stock for $101 million.
And paid our quarterly dividend.
Year to date, we have repurchased approximately one 7 million shares or four 5% of our outstanding shares.
We also have nine 1 million shares remaining under our current repurchase authorization.
Finally, a look at our capital structure.
At September 32022, our net debt to cap ratio was 48%.
And our net debt to EBITDA leverage ratio was one five times.
We ended the quarter with $84 million of cash on hand.
Total committed liquidity at the end of the quarter was approximately $628 million and we have no meaningful near term debt maturities, giving us substantial financial flexibility.
Thank you for attending today's call, Jason We will now move to the question and answer session.
Thank you.
Now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Okay.
Our first question comes from Trey Grooms from Stephens. Please go ahead.
Hey, good morning, everyone congrats on the quarter.
Yes.
Our first question is on the cement business you mentioned that you remain virtually sold out.
And as you look at your footprint geographically and kind of the relative health of those markets.
Can you talk about your expectations for the different end markets you're in there you know clearly we've seen you know what's going on with brands, but maybe how your markets are holding up there and maybe also just generally private construction.
As well as you know any outlook for the the infrastructure demand in those markets as we look kind of in into next year and the question really is around you know if we see softening do you think also that we should remain in this kind of sold out condition as we progress into 'twenty.
I guess calendar 'twenty three.
Okay got it.
I'll take that question with it. So you know when we look across we run our system a little bit differently than we did years ago and that we have a network of cement plants now and that's why you see some of the acquisitions we did.
With extending that network and making sure that network is reliable and resilient during good times and bad times with it. So you know this Nashville purchase was a was a a hallmark of that too that we extend our profitable distribution footprint down into the southeast region for some of our plan.
And we could hit that.
Through multiple areas.
We feel very comfortable as is my earnings common said, you know on where the infrastructure side of the business is the state dot budgets look very favorable.
Where we participate in our markets.
They are pretty shielded from imports get into those markets and overall you know there's there's nothing.
In my mind that doesn't think that you know.
That public construction spending will be higher over the.
The near and midterm of this with this infrastructure spending.
Your question on you know.
Individual markets itself in and that we really look at it as a network. We think that the cement overall is in a great position, it's in a sold out position today.
With some softening in one sub market or another market is going to be more could then consumed in another submarket with it Oh, we just think that our cement sitting in a very good position right now.
Perfect.
Great. Thank you for that micro and.
On a kind of sticking with cement on the cost front.
I know you guys are locked in on energy largely for the cement business for the year for the I guess the rest of the fiscal year.
And you know I guess when those reset I guess it would be in March from where we stand today and you know.
Any color on maybe early conversations you're having with the folks there on the energy front and any color on maybe what you're expecting there for for next year with that that next 12 month lock in.
Yeah. Thanks, Trey the on the cost side, you got it right and energy has been upward.
Word inflation in fiscal 'twenty, three I would tell you sequentially, we didn't see a lot of change there.
Are you locked in those energy prices largely at the beginning of the year, but as we're getting into the negotiations for next year. We are continuing to see a similar type of inflation. There as we go into FY 'twenty for look natural gas is down a little bit here recently, so that's been favorable and you can you can.
Change your fuel mix, a little bit but for more of a solid fuels, we will continue to see upward pressure.
And just as a follow on to that the price increase you you you have.
Announced for January across your footprint. There is the thought there that that's going to be enough to kind of cover that that step up that you're expecting or.
Any any color around that side of things with the with the margin outlook given the cost increase in the pricing. Yeah. You know we've been that's the definitely the intent on that side.
Trey with it you know we haven't finalized on the numbers with any we've announced the person the price increase and we're gonna be working with our customers on what that materializes on but you know, but yes, where we're going to recover any cost increases.
Okay, well, thanks, I'll pass it on and good luck for the rest of the year. Thank you.
The next question comes from Brent Thielman from D. A Davidson. Please go ahead.
Hey, great. Thank you good morning.
First question was just on a.
More of a near term question the issues on the Mississippi River, and whether that's having any direct or indirect impacts in your business thinking specifically submit.
No we're not on the Mississippi River, so that wouldn't impact us.
Okay, Yeah, I just didn't know if there's any indirect effects.
Okay, and then the the dive in and OCC prices recently.
Just wondering you should that have an effect on wallboard prices eventually there just that much more behind the strength in pricing here to consider.
No look I think the pricing strength, we've seen in wallboard has been largely around demand and supply.
And dynamics that are that have been going in our favor.
And in some of the raw material issues that we've talked about for others in the eastern part of the country.
But OCC prices being down is as I sort of talked about in my comments in September and then again in October .
Will will be a nice tailwind for the paper mill as well as the wallboard business. It takes a little bit of time for that to flow through to the wallboard business.
Couple of quarters, but but we will see some lower costs there.
You know as we as we get into the winter.
Okay, and then your comment on.
All your facilities effectively being able that.
Yeah, Sal plc by 2025, it is the governor on that whether or not all the D. O T. He says you know effective we will taken plc I'm just wondering if you're seeing that already where they're already accepting plc for all the dot's yard Easter or no other factors kind of play into that.
Yeah. It really is a mixture of two things you know with the D. O Ts, we're pretty far along with approval status with that's why you see some of the plants in the 60% to 70% range and you know my comments over 100% to it you know we expect to keep expanding significantly on that side, we do have some supply chain issues on some.
Material that we need to order in order to convert some plants to 100% plc. So some plants will be able to get partially there, but then we got to wait for the equipment delivery and installation to get to the final.
Be it 30, 40% at some of these plants.
With additional either grinding capacity or different different parts that we need for the plant to be 100% compliant.
Okay, great. Thanks, guys.
Okay.
The next question comes from Anthony Pettinari from Citigroup. Please go ahead.
Hi, This is Asher San Fran Astro signing on for Anthony Thanks for taking my question.
Just on the January hike that you communicated to customers understanding that those conversations are ongoing can you size that roughly.
Are we talking about another double digit increase maybe and then.
Now as you communicated January hike to customers you know rather than normal April is the sort of implied message that customers should expect another mid year hike or is generating just sort of at a new normal.
So so we will continue to have those discussions with our customers and will report out where we ended up the next.
Next quarter with it you know we expect a similar cadence to what we've had in the past is I'll I'll I'll leave with.
The dollar amount with it as for future price increases I don't want to speculate on those you know we will monitor the market and we'll see where the market stands and then will determine our pricing strategy going forward with that we did.
We've opened in and in our note, saying that we will continue to evaluate the market and we will see what happens in the second half of the year.
Great and then.
Looking to the wallboard and you talked about pricing remaining strong and the medium term, but some of the homebuilders me cover talk about working with material producers to reduce their costs as you know their home prices come down. So I'm just wondering if you've started to see any sort of that pressure from builders on the wallboard side or having any sort of conversations to that effect.
Yes.
Had a mid.
Mid quarter price increase in wallboard. It was in August as you can see our prices were up sequentially.
Understand that there are.
<unk> is about the 12.
12 to 18 months from now but in the meantime, we were largely able to achieve a price increase across our footprint.
Alright, Thanks, I'll turn it over.
Yeah.
Yeah.
Okay.
The next question comes from Jerry Revich from Goldman Sachs. Please go ahead.
Yes, hi, good morning, everyone.
We're very.
Craig I'm I'm wondering if you could just talk about in the cement business the cadence of inflation over the course of the quarter are any meaningful changes in you know obviously a lot of commodities, we see but what about things.
Things like contracted labor or anything like that.
Any services that come up et cetera can you just talk about.
Other inflation is at least stabilizing for some of those miscellaneous miscellaneous repairing similar items.
Yeah. The two things that I pointed out were energy and maintenance energy being the larger component of the year over year cost increase as I mentioned earlier the sequential change in energy prices wasn't a significant you know as we said we locked in those cost generally for the year.
Here, we will see some inflation into FY 'twenty, four but sequentially not a lot of major changes.
You know again, the labor component within these businesses is generally not significant we do see inflation on some of the parks that we consume and things like that but that's that's kind of been ongoing and as a part of that maintenance bucket as well.
Yes.
What have you.
Sorry. Please go ahead.
So I would say freight seems to have also flat lined here plateaued from where we were in the prior year. That's that's more of a cost within the wallboard business, but you know some of them. Some of them are kind of flat line here and in OCC prices as we mentioned earlier have come down significantly in September and then again in October .
Just post the quarter.
And you know with a big robust price increases in cement, yeah, they've essentially been necessary to maintain.
Maintain our strong profitability.
Yeah.
So percent margins are very similar today.
A year ago.
Do you see an opportunity with the January price increase that you spoke about could <unk>.
<unk> actually outpace inflation, so we see you.
Year over year margin expansion potentially or how are you thinking about the price cost balance.
Into January yes.
It looked your you know we were able to expand our wholly owned margins over 100 basis points. This past quarter. So the pricing that we achieved in January of this year and again in July has been margin accretive and given where the supply demand dynamics are and where our production facilities are operated.
High utilization rate.
Michael mentioned those those price increases should more than offset some of these inflationary pressures that we're seeing.
It didn't meet the short change you on the on the improvement with the.
But.
Okay can I ask you you folks are very deliberate in your capital deployment program, you know big stock buybacks year to date and you spoke about all the signs that we're all looking for for residential construction to slow halt.
It's out so can you just talk about the confidence you have in the wallboard margin profile in your business given the cost increases for the industry. It feels like behind your stock buyback.
His confidence on.
Better than historical.
Trough margins in wallboard, but maybe I can get you to expand on that.
Yeah, Gerry it's a great point I'll tell you my confidence is more around the cash flow generation capabilities of these assets throughout the cycle to.
To me that that is what these assets are all about.
And we've positioned the capital structure and us.
<unk>, where leverages manageable, whether that is for opportunities to continue to grow the company whether that is to manage cycles. That's always been a hallmark of how we position our capital structure and so the free cash flow can then be used to either continue to expand our geographic footprint if the strategic.
Criteria are met and the financial criteria are met.
And to the extent, we have additional free cash flow, we return that to shareholders and we know how to do that pretty well through our share repurchase program. So I think it's just the confidence in the cash flow management and generation of these assets more than anything and as you point out.
The position of our company.
Relative to where we were in prior cycles.
Dramatically more resilient.
Given the geographic footprint that we have and given the position of our wallboard business relative to where we were 15 years ago.
Okay I appreciate the discussion thanks.
Yeah.
The next question comes from Stanley Elliott from Stifel. Please go ahead.
Hey, good morning, guys. Thank you for taking the call.
Quick question I know, it's probably held very hard to do is there a way to size kind of what the industry typically sees from these major hurricanes both for cement and then well I guess more for wallboard for you just from a retail standpoint.
Stanley It's a good question.
Here's what I would tell you. This our experience with Hurricanes is that there is an initial surge for the cleanup of of an event like that isn't very unfortunate event.
Rebuild effort happens over such a broad time period that it's hard to parse out what's hurricane rebuild versus what's new construction, we just know that the fighting with insurance companies and everything else that happens just happens over such a broad time period.
And then as it relates to the JV and some of the equipment equipment issues I mean.
Do we think that did this or is this basically pulling ahead capital spend on maintenance Capex. However, you want to think about it for next year into this year. So that he obesity, you're actually looking at lower capital maintenance spend across the system or just kind of trying to parse out a little bit more what exactly is going on at the JV.
Yeah, No you know you could yeah you know.
Just assume that the capital spend is going to be the same we're going to do the same type of outage work with it you know we had some issues were really one off failures than they were.
Items that.
Don't typically fail with with us and so we didn't have.
Necessarily all of the.
Spare parts onsite with it.
So the supply chain.
Of ordering these specialty parts did took a little longer but I would assume the same cadence and spend on an outage, we take our plants down we usually we go through all of the plants and we make sure they're in like new condition, and we will we spend to make sure. They they operate. These this was just one off occurrences so.
Perfect guys. That's it for me, Thanks, and best of luck.
Exactly.
The next question comes from Adam Thalheimer from Thompson Davis. Please go ahead.
Hey, good morning, guys nice quarter.
I wanted to ask first about cement and wallboard margins both of which are really good in Q2.
What are you what are your thoughts on the sustainability of that in the back half.
Kind of year over year margin improvement.
Yeah look the wallboard.
We have seen as I mentioned freights kind of plateaued. So if you think about the different pieces and we had good price realization in the quarter OCC prices are coming down gas prices have come down here in the last couple of weeks. So that's all been positive for the wallboard business on the cement side.
Again, the July price increase was was realized across majority of our markets and in good shape and.
I will tell you on the cement side, it's all about Windows Winter show up in the December quarter, especially for some of those more northern climates, but the other businesses are in a good spot the maintenance programs are largely done.
And and we have a good margin profile.
And then similar question, but as it relates to the <unk>.
C C price declines to what extent have you been eating the higher OCC prices.
At the Paperboard segment.
Yeah. So we don't have a lot of inventory on hand of recycled fiber. So you see that benefit within the paper business pretty quickly, especially when prices fall like they have here in the last two months or so.
The paperboard margins used to be in.
Gross operating.
Operating margins in the 30% range could they snapped back to that range that quickly with OCC down or does it take more than that yes.
Yeah look it's certainly we saw nice margin improvement both year over year and sequentially in the paper business. This quarter I would tell you relative to call. It four or five years ago energy prices are still higher for that business freight costs are still higher for that business. So that will impact the ability for margins to get back to those levels.
But we have seen nice improvement here.
Okay.
Last one on Texas cement.
The price spiked a lot sequentially is that sustainable or was that kind of a one off related to the production issues.
Oh, that's that's sustainable that's our pricing in that market that market is.
It's a very consolidated and the demand supply demand profile in that market is very very extreme right now.
Great for you guys [laughter], Thanks, a lot.
The next question comes from Phil <unk> from Jefferies. Please go ahead.
Hey, good morning, this is actually calling on for Phil.
Just wanted to touch on your prepared remarks, you talked about <unk> being well positioned and its principal markets for the second half of the fiscal year here. Despite the increase in interest rates can you just elaborate on what you're seeing in your markets and what this implies for wallboard volumes in the back half of the year and then just as you start to look out into calendar year 'twenty three any preliminary.
Any thoughts on what wallboard volumes might look like for you guys.
Yeah Colin good good question as we said you know things are orders or shipments in wallboard have remained steady throughout the quarter.
And a lot of that is because of the.
Construction cycle for building a home elongated there is a quote unquote backlog of construction activity as those homes need to be completed.
I think it's a little too early to speculate on 2023 volumes quite yet.
We're all trying to figure out what is the recent rise in interest rates.
Due to the the the homebuilding industry certainly there is still a significant demand for homes here in the U S whether that be single family or multifamily.
I'd also say you know again, we operate in the southern half of the U S. Generally those markets have been much more resilient than the national average you saw this past quarter. So we think we're well positioned from that perspective as well.
Okay. That's helpful color.
And then in your prepared remarks, you also talked about some constraints from the supply side and capacity additions for wallboard can you just dive into those constraints a little bit more and then just given these dynamics how are you thinking about the resilience of wallboard pricing going forward.
Especially if we start to see volumes decline given that interest rates spike.
Yes, all of those those constraints are for the eastern half of the U S generally where synthetic gypsum was the predominant raw material that was expected to be used to produce wallboard. You know that was a lot of the new capacity that was added 15 years ago 20 years ago was designed to utilize.
Synthetic gypsum, which is generated from coal fired power plants.
As that has reduced.
We've generated less power vehicle the availability of that gypsum is diminished and you know that that's a material amount of the capacity in the U S.
We wanted to use that material so.
That's going to be a major constraint. The alternative is generally to go overseas, which is expensive and.
Difficult to arrange so.
A large part is why the wallboard.
Cycle could be very different this go around versus prior cycles, where we were actually adding capacity in advance of a demand pressure. This cycle. The oh, we're not we're not seeing much new capacity. So that's that's why we think this cycle could shape up to be very different.
Than prior cycles.
Great. Thank you for the color.
This concludes our question and answer session I would like to turn the conference back over to Michael Hecht for any closing remarks.
Thanks, Josh Thank you for joining the call today, and we look forward to talking to you next call early next year. Thanks.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Okay.
Yeah.
Okay.
[music].
Hum.
Hmm.
[music].
Yeah.
Okay.
[music].
Okay.
[music].
Yes.
[music].