Q1 2024 Eagle Materials Inc Earnings Call
Good day, everyone and welcome to eco materials first quarter of fiscal 2024 earnings conference call.
This call is being recorded at this time I would like to turn the call over to Eagles, President and Chief Executive Officer, Mister Michael Heck Mister Heck. Please go ahead Sir.
Thank you.
Good morning, welcome to ego materials conference call for our first quarter of fiscal year 2024. This is Michael hack joining me today are Craig Kessler, our Chief Financial Officer, and Allostatic, Vice President of Investor Relations strategy and corporate development.
It'll be a slide presentation made in connection with this call to access it. Please go to Eagle material Dot com and click on the link to the web cast.
By your accessing the slides. Please note that the first side covers are cautionary disclosure regarding forward looking statements made during this call.
These statements are subject to risks and uncertainties that could cause results to differ from those discussed during this call.
For further information please refer to this disclosure, which is also included at the end of our press release.
Let me start by saying, how pleased I am to discuss another record quarter and a strong start to our fiscal year 2024.
This quarter, we generated record revenue and earnings expanded gross margin by 240 basis points.
Increase and just did E P S by 26 per cent and.
And returned $83 million to shareholders three share repurchases and dividends.
Our performance in the current economic environment.
More questions about the U S economy have dominated headlines for several quarters demonstrates however, a low cost producer position benefits us across a variety of market conditions.
You've heard me say many times that the ability to maintain a low cost producer position ultimately relies on the industry, leading execution by our people.
Therefore, I want to thank all of the Eagle employees for their time and dedication that waiting to achieving the results. We have had not only this quarter, but over the past years, you make a difference.
Safety is a fundamental part of the Eagle culture, I could best summarize our safety culture, as one where eagle employees care for and watch out for each other.
We have been successful and minimizing safety issues using our near Miss reporting system that identifies leading indicators to address safety issues before they happen.
I'm happy to report that Eagle continues to set the benchmark and industry safety, maintaining a total reportable incident rate well below the industry average.
Now, let me turn to more specifics on her performance this past quarter, starting with the heavy side.
Both are cement and concrete and aggregate businesses performed well growing revenue by 15% on a combined basis versus the prior year first quarter.
Our Internet business continues to benefit from robust demand and is outpacing industry supply and every plant an Eagles network remains in a near sold out position.
It should be noted that our western so that network did experience very wet weather over this fiscal quarter, which led to ask walk slower start to the construction season in these states.
As a reminder, wet weather means that the timing of a project is delayed or interrupted it does not generally implied demand destruction.
The supply demand dynamics has proved favorable a favorable pricing backdrop for hours in that business as well as we realized a 15% year over year price increase.
As we mentioned on our last call, we have announced a July 1st price increase in about half person that markets.
We continue to monitor market conditions over the coming quarters to determine if or when we implement additional price increases.
During the first quarter of fiscal 2024 or joint venture operation, Texas, Lehigh was negatively affected by an extended outage that addressed ongoing equipment issues at this facility over this past year.
And it added to resulted in increased maintenance costs and reduce production equipment.
[noise] equipment reliability improved in July , but additional work will need to be completed during our planned maintenance outage in physical 2025.
Which will again increase the average timeline at the joint venture facility.
Growing both our cement and aggregate businesses as a strategic priority for Eagle as previously announced we completed the purchase of our cement important terminal northern California, strengthening our competitive position in this market.
Environmental stewardship is another priority at Eagle materials to help minimize or C O two footprint.
We are exploring the increased use of alternative fuels at our cement plant and we are laser focused on transitioning our construction grades and that production to Portland limestone cement or P. L C.
T L C reduces the carbon intensity of our cement footprint and makes our clinker production go further supporting the are near sold out position across our network.
We are targeting to converting 100 per cent of our manufacturing construction grapes and that two P. L C or blended cement by 2025.
I'm extremely proud to say that this quarter, we passed the 50% Mark for P. L C for our network.
Network.
Now, let me turn to the performance last quarter on the right side.
Over this past year, the rapid rise in interest rates cause many to believe housing demand would drop dramatically along with wallboard demand. However, wallboard sales volume and pricing have remained resilient. This.
This is from several factors first let's look at the demand side.
Our place are located in the Sun belt, which is the largest most stable residential construction region in the U S and continues to be strong.
Inventory of existing homes for sale or.
At near all time lows, which result in increased demand for new home construction.
This has been reflected in an uptick in single family permits recently.
As for the supply side, the reduction of synthetic gypsum supply from the retirement of U S coal fired power plants and the cost of accessing natural gypsum by importing it from abroad is having a significant effect on the industry by increasing the cost curve and capping effective supply for east coast.
Wallboard producers.
Looking at the cost structure of Eagle and are low cost producer position, where advantaged in several aspects.
Eagle owns or controls many decades of reserves in close proximity of all of our wallboard plants, which means we can cost effectively access our raw material.
The one plant that will utilize synthetic gypsum as many decades contract for material supply.
Our main cost Oh, see see freight and energy came down sequentially, providing a tailwind.
Now, let me turn to some thoughts on the balance of the year starting on the heavy side.
Demand fundamentals are in place to provide multiyear visibility and cement and concrete and aggregates. We expect demand for both businesses to remain steady driven by infrastructure spending and heavy industrial and manufacturing construction activity.
Infrastructure awards are reaching multi decade highs and our cement business is poised to benefit from the federal overlay to robust state and local government spending.
The state's Eagle operates in our well ahead of the national average on growth and the infrastructure contract awards proving that geography matters.
Nonresidential spending is benefiting from elevated levels of activity as well.
As it is being sustained by unprecedented spending and manufacturing projects.
On the wallboard side of the business. We stayed in the past that the near term outlook is more unclear than on the heavy side.
But in some respects that is still true.
That being said a few things have become clear over the past quarter and the first half of calendar year 2023.
First is the supply chain driven backlogs in homebuilding construction continued to support activity.
This is evidenced in the fact that multifamily units under construction in June that an all time record and total units under construction just 28000 short of an all time record.
The second factor, that's becoming clear is the effect of housing supply shortages on new homebuilding.
The lack of existing inventory to support homebuyer demand means new home construction is needed to prop up overall inventory levels.
While the outlets here is still difficult to predict we have increasing confidence in the supply demand scenario for wallboard over the mid and long term.
In summary, I am most encouraged about this year ahead because of the Eagles proven track record where it matters.
First we know how to manage through economic cycles are current results show that we can execute when and where it counts across dynamic market conditions.
Second our business generates and pets impressive cash flows and we are responsible stewards of that cash.
[noise] focus has been and always will be on how to sustain the cash flow generation capability of our businesses and making the best use of that cash flow.
R capital allocation policies have been and will continue to be centralized around growing our core business.
This includes investing in our plans to keep them in like new condition.
Growing through acquisitions, when they meet our strategic and financial goals.
Returning cash to shareholders through stock purchases or dividends.
With that I'll turn it over to Craig for the financial review of our quarter.
Michael.
As mentioned first quarter revenue was a record $602 million, an increase of 7% from the prior year.
Excluding the recently acquired Smith terminal in Northern California revenue was up 6%.
The increase reflects higher wallboard and cement sales prices.
The strong performance in boats cement and wallboard contributed to record EPS during the quarter.
First quarter earnings per share was $3.40 or 24% increase from the prior year.
Increase was driven by improved earnings and a 7% reduction and fully diluted shares do door buyback program.
Excluding the Nonroutine items highlighted the earnings release first quarter, adjusted EPS was up 26% to $3.55.
Turning now to segment performance highlight on the next slide.
And are heavy materials sector, which includes our cement and concrete and aggregates segments revenue increased 15% driven by the increase in cement sales prices implemented earlier this year.
And the contribution from the recently acquired terminal in Northern California.
Operating earnings were up 19%, primarily because of increased cement prices, which were partially offset by higher maintenance costs during the quarter.
The increase of maintenance costs was due to our decision to pull forward maintenance programs to a horseman facilities and.
It is Michael mentioned, we also took an extended maintenance outage at our joint venture in Texas, which increase maintenance costs and reduced production.
Given the strong demand backdrop, we implemented a second round of cement price increases in early July in approximately half of our markets.
And within the concrete and aggregate segment revenue increased 9% and operating earnings improve twenty-three per cent on higher pricing and higher aggregate sales volume.
The prior year also included approximately $1.2 million of costs associated with the step up an inventory values related to the acquisition of the aggregates business Northern Colorado.
Moving to the light materials sector on the next slide.
Revenue decreased 2%, reflecting lowered say wallboard sales volume, partially offset by higher wallboard sales prices.
Operating earnings in the sector increased 12% to $98 million, reflecting higher net sales prices and lower input costs for recycled fibre freight and energy.
Okay, now what our cash flow.
We continued to generate very strong cash flow and allocate capital in a disciplined way.
The first quarter operating cash flow increased 12% to $140 million, reflecting improved earnings and working capital management.
And capital spending increase to $36 million.
During the quarter, we completed the acquisition of the cement important terminal in Stockton, California, where the purchase price of $55 million and we also repurchase 484000 shares of common stock for $74 million and paid our quarterly dividend.
Returning $83 million to shareholders.
We have 7.3 million shares remaining under our current repurchase authorization.
Finally, a look at our capital structure.
Which continues to give us significant financial flexibility.
June 30th or net debt to cap ratio was 47% at.
That the EBITDA leverage ratio remains at 1.4 times.
We ended the quarter with $53 million of cash on hand.
Total committed liquidity at the end of the quarter was approximately $573 million.
And we have no meaningful near term debt maturities.
Thank you for attending today's call will now move to the question and answer session Ah Betsy alternative over to you.
We will now begin the question and answer session.
To ask a question you May press star one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then too.
At this time, we'll pause momentarily to assemble our roster.
The first question today comes from a trach rooms with please.
Please go ahead.
When Greg.
Good morning, a person I wanted to touch on a wallboard. So you know volume.
[noise] held in there, especially well you know, especially in this corner I mean down 4% is there still some benefit from you know the backlog of maybe unfinished homes or you know what kind of driving that outperformance in the corner and then maybe if you could kind of touch on how that wallboard volume out of progressed.
Through the corner I mean was it fairly stable that that is the corner average or did you see it a waiver from that at all and then Ah Michael understand that it's murky, but.
Given the uptake or maybe at least the bottoming, we've seen and starts and the optimism we're hearing from the homebuilders.
Given that lag there between Ah Ah starting when wallboard goes into the process. What do you think in on kind of the Ah timing as far as maybe a rebound we may see an wallboard volume.
Yeah true good good questions look as we said in last quarter and into this quarter volume sales volume.
Very resilient and a lot of that was the backlog of activity as as the home construction site.
Cycle elongated.
I'd also point out geographically, where we're positioned as the the most robust market in the U S and that's sunbelt area generally in the southern half of the U S. A so we'd benefit from a reasonable position, but as you pointed out you have also started to see some really good order growth at the homebuilder level that does too.
We're into wallboard consumption. Shortly thereafter, so yeah resilient in the near term Ah with Ah and improving outlook from the homebuilders on their order intake sets up for for for a pretty piece of wallboard environment.
Yeah, Okay understood and and then I guess, just as a you know switching gears here too to cement just so we can get some understanding around the maintenance cause she pointed out Craig you know what on wholly owned you saw you know the the costs were up there and I think you talked about two <unk>.
<unk>, they're seeing more maintenance is there any way to quantify this and it is that gonna continue kinda as we go into the the next corner or is that behind us. So.
So this is the quarter that we do the bulk of our maintenance a crossover the network. So it's contained this sometimes those maintenance outages bowl between a quarter of March or April and and this quarter at all or this year at all fell into the April may timeframe. So.
So that you you don't have those costs in subsequent quarters and it's the right thing to do maintenance, maintaining these assets and keeping them at their it sold out conditions is Michaels highlighted you know, making sure that we can operated at full utilization levels through the construction season.
Okay, well I'll stop there and pass it on thanks, a lot guys and congrats on the good work in the corner.
Thanks.
The next question comes from France, Killman with da Davidson. Please go ahead.
Hey, great. Thanks, good morning.
Just just the question again on the the GB just to what degree we should be thinking about because this impact in the future quarters. I think you mentioned you needed to do some more work in fiscal 2025 against my question is is your.
The ramp in that facility backup is there any reason to think that asset.
Can't produce it levels and historically has until you can get more of this work done.
Fiscal year.
Oh, Great question I appreciate it you know.
I'll walk through a little bit on on kind of Texas, Lehigh and what we did you know if you look at.
You know the past year, we kind of struggled a little bit with the equivalent reliability at Texas, Lehigh and what we have is we have the opportunity really once a year to go into some of our kill them areas in some of our other manufacturing areas because we don't take outages.
AD hoc, we usually do one outage once a year.
So when we did that this the past year, we identified some equipment issues, we had to take care of and when we went into the outage. This year. We knew we were going to have to address those those took a little longer to address and we're expecting also during that time, though we look at what needs to happen in the next outage. So we're prepared on.
Planning with that we have identified a few things we have to do in the next year that will extend the outage I don't have a specific timing on how long the outage will be extended until we really do all of our engineering work, but what I am a very happy about is you know coming out of the outage it took a little while for.
The new system, because as you change a system it takes a little while to get it operating exactly how we want to to the first half of July was a little tougher second half of July we been producing at the levels. We we expect out of that facility. So while we we know what we have to do in the coming outage planning, we feel very come.
Well on where we stand with that facility for producing through this year.
[noise] Okay. Thanks, Michael that's that's really helpful.
Maybe just done.
Wallboard.
Compare kind of your reported price to the fourth quarter, I guess any sort of thoughts on.
Mixed impacts or other variables that kind of consider is it is it apples to apples and just reflective of overall market pricing any color there would be helpful.
Yeah, Brent you know our our prices is down just a scotia I think 1% a couple of dollars, so getting very resilient wallboard pricing environment.
For for US this past quarter.
[noise] okay.
And then.
Craig or Michael I guess, just lastly on paperboard I I was thinking you know lower Nat gas. So C C prices might be a bigger tailwind to the to the business of margins and then maybe you saw in the quarter. It anything else to consider as you think about the profitability of that.
Business line kind of looking forward.
Profitability was up significantly year over year and as you said a lot of that was a contribution from lower OCC prices and lower energy.
Cause you know we pass we we adjust the price that we charge underneath those long term supply agreements based on the input costs of of raw materials and energy and so the the.
Pricing will adjust quarterly, but happy with how that facilities operating and and we've got some nice tailwinds on the energy side.
Okay, great. Thank you.
The next question comes from Anthony Pettinari with Citigroup. Please go ahead.
Hi, This is after stone and on for Anthony Thanks for taking my question.
Talked about wet weather delaying but not destroying demand, but just how should we think about the cadence of those delayed shipment now they largely pushed into the the next quarter or maybe they're spread out over the next couple of quarters.
Yeah.
The.
Really talking about a lot of the mountain region.
Colorado the the month of June was either the weather second wettest month on record depending upon the read but.
Yeah, those jobs, whose get pushed and and it's hard to say is it in the next quarter is over a couple of quarters, but that more continued continues to be very robust.
Right and then just switching is I think lost card. According to talk about you know some cough inflation may be moderating in 2024.
Are you able to roughly size the ninth.
<unk> cost inflation, you're expecting in 20, 2049, but this and that and the wallboard side, you know and can pack and trust that with you know what you saw last year lots of player.
Yeah. So on the wallboard side Ah Ah with O C C and a natural gas coming down Yeah. That's and then we said it in our prepared comments sequentially. We saw a benefit on on those input costs and freight sequentially also came down and it was down year over year. So.
You know actually somewhat costs lowers the.
[noise] wallboard business.
On the cement side as we've been saying for our physical 24.
You know those energy prices were largely locked into during the late fall winter timeframe, but certainly less inflationary and and you you'll see we saw that experience that this quarter, a little bit of an uptick but nothing like what we saw in physical twenty-three.
As you start to look forward into physical 25, you know it wouldn't be unreasonable to start thinking about energy prices, maybe coming deflationary.
You know with some of the input costs for for pet Coke another other fuels that we burn Ah.
Turning the other way and going and going down.
Think that's super helpful I'll turn it over.
The next question comes been with Goldman Sachs. Please go ahead.
Good morning, everyone. This is jumping hung on behalf of Jedi damage can you update us on your M&A pipeline and at what point would you consider accent anything the bipod, giving your old gas generation on leverage profile.
Great question again, that's what really matters at Eagle is we generate a significant amount of cash balance sheet is in very good position.
And so how do we continue to allocate that capital of the discipline way the M&A pipeline.
Remains robust there's lots of opportunities we do have very strict.
Criteria around the financial return and strategic criteria for those investments we've been able to over the last couple of years find investments that have met those requirements are.
And and they've been very good return projects for US most recently the important terminal one in northern California. So we continue to look for those opportunities, but but we also know you know that we've passed on a number of other investments that didn't meet our hurdle rates and so then we turn and give that cashback.
Shareholders, we generally do that through our share repurchase program and we've been very active in our share repurchase program over the last several years.
Thank you very much on basketball.
The next question comes from Stanley.
Elliot Stifel. Please go ahead.
Good morning, everyone. Thank you guys for the question Michael.
She talked more about you had a bet you'll shifting some of the the fuel sources to more of an alternate fuel sources is that gonna be a larger capital increase or is that kind of normal maintenance sort of capital and then kind of along those lines and what would the expectation to be in terms of of you know the energy costs you wanted to come out on the other side.
All of that.
No. It's a great question you know we're looking at this for we've been looking at this for a long time, we were out in several of our plants with alternative fuels. Currently today. So what we're doing is looking at really adding a few to the system of alternative fuels and then tweaking what we do with Ah to increase the use of alternative fuels, how we <unk>.
Look at the alternative fuels Israelis or some with a C. O two reduction but also we look at it that Ah at times as alternative fuels are actually very good financially to as a hedge against colon Coke at times.
So these investments are not major investments with it they're.
They're really just a minor investment that we've been working on over the past year and we will continue to maximize the use of alternative fuels, where it makes sense for us.
[laughter].
I'll follow up on that comment just we've talked about it last quarter with capital spending you saw it up but what about $36 million. This quarter. So we we are anticipating capital spending up this year in the range of 145 $165 million a lot of some of that is these alternative fuel investments and then.
We continue to invest in the facilities around P. L C and some of the investments there as Michael pointed out in his opening remarks, we've made significant progress this quarter to be over 50% a P. L C and we will make some more investments so that as we exit this year. So we can continue to increase that.
Yeah, the the jury and she said it would you know with these investments not being kind of larger nature over an extended period of time, then that probably you should help from the casual perspective, maybe even beyond that.
Yeah in that one.
Just a question second on.
The Smith price.
Oh, the submit markets in general and heavy side as a whole have been very good about the second round of increases and it's hard to say.
You know for for really kind of looking at it a paradigm shift and and kind of how the the pricing comes to market.
But with demand being sold out effectively.
Lot of good demand drivers coming on how do you think about the industry evolution to a second round increase you know we.
Take on a go forward basis.
It's a good question and we don't like to speculate too much on pricing, but but you pointed out you know demand continues to be strong with the federal Highway Bill funding just starting to really benefit the business is really not quite even impacting the business. So.
That gives you a lot of confidence around multi multi year visibility of the strong demand environment as we said around even the residential you're starting to see some pick up and housing starts are in the housing orders that the homebuilder level. So.
So all of that points to a good strong demand environment and that's against the backdrop of very limited supply response, whether that's because of alternative of.
Products diminishing in availability or just the inability dad meaningful new capacity utilization rate should remain high for longer and and that's generally the formula for pricing you know the exact cadence, we can't predict but but it would tell you a good pricing environment for for quite a while.
[noise] perfect guys. Thanks, so much and best of luck.
The next question comes from Adam Dahlheimer, Wisconsin date. Please go ahead.
Hey, good morning, guys nice folder.
It makes it.
So.
I'm curious on and it has a diamond late sorry, if I missed this but the Senate volumes. It was the first growth in five or six quarters, just curious kind of what what drove that in your opinion and with the outlook is.
Fill it because we just said the outlook for demand continues to be robust in the cement market with infrastructure spending improving I mentioned residential but even on the large manufacturing industrial facilities are there continues to be a meaningful part of the demand environment.
And as we've said the last couple of quarters were sold out so some of those down quarters were simply either unusual weather events or it's just very difficult year over year comps.
Cause of inventory levels that existed a couple of years ago that simply just aren't there today. So I think I think you're kind of in this range for for demand plc will give us some upside the opportunity there and then obviously the the new important terminal that we purchased in northern California gives us some so I'm in organic growth opera.
[noise] disease, but this isn't a surprise to us.
And then on the Wall Board side.
You just talked about to pick up and starts and permits which we've seen as well.
Jim was the first down volume corridor, how long do you think the air pocket lasts for you guys.
Look again as we said demand continues to be resilient you know I don't know that I'd call in Air Park pocket as much as in my call, a low, but but things and again some of it's because of where we're located in the southern half of the U S. But things have been resilient and Ah you know with the orders improving that that's that's.
For a better environment for wallboard down the road.
Okay, and and aggregates volume's lastly, we're way above.
I'm just curious if that was a specific project or is that a good level to use going forward.
Yeah, we had a really unique opportunity. So some of that is an organic if I were we opened up or began operating our quarry and Ah Ah, Kentucky and starting to sell a construction great aggregates out of that hit it historically was just feeding the cement plant in Kentucky, but where we are now.
Selling aggregates out of that pit and but even if I were to to kind of same store sales were up 18%, but we had a really good opportunity there that the teams done a good job with.
Okay.
Great. Thanks, so much.
The next question comes from.
Jeffrey Please go ahead.
Good morning, this is actually calling on for Phil. Thank you for taking our questions I just wanted to start on the cement business you definitely.
Definitely made clear that you're sold out some volume growth might be a little bit difficult, but can you just talk about the additional volume opportunities from P. L C and that new important terminal kind of what the new Mac cement shipman capacity could look like after you have both of those things fully ramped and sort of the timing of getting there.
Yeah P. L C as as one opportunity kind of a mid single digits type of growth opportunity over the next year or two as you've seen we've made significant progress. This year is improving and expanding the production of plc that will continue into a into 24 as well.
Well.
As we make some of these investments that are necessary and then on the important terminal. We've owned it for just a couple of months customer has been very happy.
As we've moved into that business and it's fit very very well very strategic with our northern Nevada cement manufacturing footprint.
Little too early to give a whole lot of guidance on those volumes quite yet, but we've been very very happy with the performance to date.
Okay. That's almost color and then just on the July some men price increase can you just remind us the magnitude that you put the pricing letters out for and maybe talk about how implementation is going to I think it was for for early July .
Yeah, you know it was another double digit increase and as we said, it's about half or markets.
Not surprisingly as you think and we talked a little bit about today some of our western markets experienced you know a.
Very unusual late winter early spring snow and rain that has continued in some of those markets. So it just pushed the start of the construction season back a little bit. So those are the markets that generally didn't see the second round and again not not surprising there, but look conditions remain sold out and and happy with how with how the <unk>.
Kissing is progressing.
Green and my last question is just on wallboard Precis and I know you talked about minimum slippage from corner to corner, but any comment on pricing trended within the quarter, maybe where you exited versus the average and just how you're thinking about pricing for the rest of the year.
Yeah.
The the exit price is pretty close to the quarterly average and.
We'll continue to monitor that but we don't have any pricing actions for the rest of the year at this point.
Alright, Thank you very much of the caller.
[noise]. The next question comes from Jonathan.
With two iced. Please go ahead.
Hey, Thanks for taking my question I'm on for T. T. As this morning I was wondering if if you wouldn't mind going into a little bit more detail geographically about where exactly you see maybe the best infrastructure demanded equal heavy markets.
Jonathan I would tell you, it's pretty broad based across our footprint you know I.
Don't know that I'd highlight one area or the other that's much stronger they're they're all doing very well.
And I would say our markets in general are outpacing the national average.
Great. Thanks for that and then you know in in these these things you know that had been cut.
Quicker to pick out some of the spin and you you you're kind of expecting to see more demand growth as the infrastructure Bill funding continues to be realized right now I'm reading that correctly.
Yes, that's right.
Perfect. Thank you.
This concludes that question and answer session I would like to turn the conference back over to Michael Heck for any closing remarks.
Thank you.
Thank you Betsy. Thank you for joining us today, and we look forward to talking to you in the fall.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[noise] [noise] [noise].
[noise] [music].
Uh-huh.