Eagle Materials - Q2 2024

Transcript

Operator (participant)

Good day, everyone, and welcome to Eagle Materials' second quarter of fiscal 2024 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.

Michael Haack (President and CEO)

Thank you, MJ. Good morning. Welcome to Eagle Materials conference call for our second quarter of fiscal year 2024. This is Michael Haack. Joining me today are Craig Kesler, our Chief Financial Officer, and Alex Haddock, Vice President of Investor Relations, Strategy, and Corporate Development. There will be a slide presentation made in connection with this call. To access it, please go to eaglematerials.com and click on the link to the webcast. While you're accessing the slides, please note that the first slide covers our cautionary disclosure regarding forward-looking statements made during this call. These statements are subject to risks and uncertainties that could cause results to differ from those discussed during the call. For further information, please refer to this disclosure, which is also included at the end of our press release.

Let me start off by saying that I'm excited to highlight another quarter of record operating and financial performance for Eagle Materials. In the second quarter of fiscal 2024, Eagle generated record revenue of $622 million, up 3%. Eagle expanded gross margins to 33.6%, up 150 basis points, and we achieved record net earnings per diluted share of $4.26, up 15%. A key reason for our superior margin performance is our commitment to our long-term sustainability of our plants, our businesses, and our employees. On the employee front, I want to highlight an event that we conducted this past quarter, one that I always look forward to attending and participating in, our seventh annual Health, Safety and Environment Conference. This conference brings together our operations and HSE leaders from across all of Eagle.

We have an open and honest discussion about where Eagle is currently and where we will be going with regards to HSE. From the focus and dedication of our people, Eagle has been able to continue to be an industry leader in keeping our employees safe, as measured by our total recordable incident rate, reduce emissions through our focused implementation of PLC cement, reduce water usage through the redesign of our systems to ensure that they are closed loop, and focus our efforts through best practice sharing and leading indicators to eliminate more serious injuries, as demonstrated in our lost time injury rate. I'll now turn to more specifics on our operational and financial performance for this quarter, starting with the heavy materials businesses. Revenue increased 10% versus the prior year's second quarter. Within our footprint, public highway and infrastructure awards continue to outpace the national average.

Similarly, announced manufacturing construction projects of semiconductors, EV batteries, clean energy, and heavy industrial projects have been benefiting the markets we serve. These announced projects total almost $500 billion nationwide since 2021. On the supply side, U.S.-manufactured cement supply continues to be outpaced by demand. Total capacity has fallen since 2010, when further regulations were enacted, known as NESHAP, making new plant construction and capacity expansion challenging. This creates the ingredients for a strong pricing environment. Thus, we implemented a second round of cement price increases in early July across half our markets, and we have begun announcing the next round of increases for January of next year. This quarter, we also made meaningful progress in our conversion to Portland Limestone Cement, or PLC, surpassing 60% across our system.

PLC makes our clinker go further, and it is an important lever at our disposal for lowering the carbon intensity of our footprint. So we are excited about the opportunity these PLC provides us. I'd be remiss if I did not add a little color around Texas Lehigh JV operation, since it was mentioned in the last quarterly earnings call. I'm happy to say that we have made substantial progress on our kiln system, and the plant is performing much better. We still recognize that there is some more work to do, but I'm very pleased with the progress to date. In regards to the mid- and longer-term outlook for cement, concrete, and aggregates, we have multiyear visibility into demand, and the volume picture for cement remains robust across our end markets. Both public and private non-residential construction, particularly within manufacturing projects, continues to see strong spending.

With the layering of federal infrastructure dollars, there is a meaningful runway for construction projects for years to come. There is often a long tail of demand from these projects as well, as communities and other local infrastructure must be built out. Moving to the supply side outlook for the heavy side of our business, we have very stringent permitting requirements in our industry. Because of this, we do not foresee any significant new plant builds or expansions in our markets that would materially change the supply picture. Since we are so constrained on manufacturing capacity, the sold-out markets around the coastal areas will have to turn to imported cement in order to meet the demand.

To this extent, we have continued the integration of our recently acquired cement import terminal in Northern California to supplement our supply chain on the West Coast. Our manufactured cement footprint is made up of U.S. Heartland network that will remain largely insulated from imports, given the high delivered cost to our markets. Because of these dynamics, we are optimistic about our short, mid, and long-term outlook for our heavy side businesses. Now let me turn to our quarterly performance on the light side. For Gypsum Wallboard, sales volumes declined 6%, while the average Gypsum Wallboard net sales price was flat with the prior year. It has been encouraging to see shipments, orders, and pricing maintain their resiliency to date.

Since housing is the most critical end market for us, we recognize the rise in interest rates and unclear path of consumer spending may mean the environment stays choppy in the short term. Looking at the mid and long-term demand outlook for Gypsum Wallboard business, we operate in markets in the Sun Belt in the South. In this market, single-family housing starts have held up relatively well. Similarly, single-family permits in the South, coinciding with home builder orders, given the limited supply of existing homes for sale, should translate into wallboard consumption in 2024. Looking longer term, we see the structural underbuild of housing in the U.S. getting worse before it gets better, as rate lock-ins keep people in their current homes for longer, creating a tailwind for our businesses as new homes are built or existing homes undergo repair and remodel projects.

With regard to the mid- and long-term supply outlook for our light-side businesses, we have spoken many times of the effect of the lack of synthetic gypsum is having on the ability to add capacity to the industry. Let me provide an example, looking at the prior two cycles. 1995 through 2000 and 2000 through 2008 represented two significant housing demand cycles in the U.S. In both those periods, the wallboard industry added significant new capacity through the cycle and beyond the demand peak. This cycle has played out much differently. The industry has added no new capacity in over a decade, even as pricing has reached record levels. This is indicative of the effect raw material shortages are having on the broader industry. It needs to be noted that about half the industry supply is designed to utilize synthetic gypsum.

Because of this, the effective economic viability of the industry capacity is likely lower than nameplate figures imply. Eagle Materials benefits from the security of raw material supply for all of our wallboard plants, insulating us from the cost curve and the capacity pressures facing much of the wallboard industry. In fact, the demand/supply dynamics benefiting our wallboard businesses resemble many of the qualities that make our cement and aggregates businesses so attractive as well. Closing out on our business performance through the first half of our fiscal year, I'd like to mention how well we continue to execute our capital allocation playbook. Eagle Materials' cash flow generation is a key reason why the businesses is so attractive through cycles. Given our businesses are in a cyclical industries, we focus on cycle management and on maintaining financial flexibility to create long-term value for our shareholders.

Our priorities remain the same: to continue to grow our businesses and improve our low-cost, competitive positions through acquisitions and organic investments that meet our strict strategic and financial return criteria. When those opportunities don't materialize, we use our share repurchase program to return cash to shareholders in a meaningful way. Last quarter, we returned $86 million of cash to shareholders through share repurchases and dividends. We also used our strong cash flow to strengthen our balance sheet. Our leverage ratio ended the quarter at 1.3x. With that, I'll turn it over to Craig to go through our financial results in more detail.

Craig Kesler (CFO)

Thank you, Michael. Second quarter revenue was a record $622 million, an increase of 3% from the prior year. The increase reflects higher cement sales prices and contribution from the recently acquired cement import terminal in Stockton, California, partially offset by lower wallboard and paperboard sales volume. Excluding the Stockton acquisition, revenue was up 1%. Again, this past quarter, we generated record earnings per share. Second quarter earnings per share was $4.26, a 15% increase from the prior year. The increase was driven by higher earnings at a 5% reduction in fully diluted shares due to our share buyback program. Turning now to our segment performance, highlighted on the next slide.

In our heavy materials sector, which includes our cement and concrete and aggregate segments, revenue increased 10%, driven primarily by the increase in cement sales prices implemented earlier this year and the contribution from the recently acquired cement import terminal in Northern California. Operating earnings were up 19%, primarily because of increased cement prices. Given the strong market conditions that Michael discussed, we implemented a second round of cement price increases in early July, and our average cement price increased approximately $5 per ton or 3% sequentially. We've also recently announced cement price increases in most of our markets, effective January 1, 2024.... Moving to the light materials sector on the next slide. Revenue in our light materials sector decreased 8%, reflecting lower wallboard and recycled paperboard sales volume, while wallboard sales prices were flat.

Operating earnings in the sector declined 2% to $93 million, reflecting lower wallboard sales volume, partially offset by reduced input costs, primarily for recycled fiber and energy. Looking now at our cash flow. We continue to generate strong cash flow and allocate capital in a disciplined way. During the first six months of our fiscal year, operating cash flow improved 4% to $313 million, while capital spending increased to $66 million, and we acquired the cement import terminal in Stockton for $55 million. We also repurchased a total of 917,000 shares, or 2.5% of our outstanding, for $151 million, in addition to paying our quarterly dividends, returning a total of $169 million to shareholders during the first half of our fiscal year.

We have approximately 6.8 million shares remaining under our current repurchase authorization. Finally, we used our strong cash flow to strengthen our balance sheet. Let's look at our capital structure. At September 30th, 2023, our net debt to cap ratio was 45%, and our net debt to EBITDA leverage ratio was 1.3x. We ended the quarter with $47 million of cash on hand. Total committed liquidity at the end of the quarter was approximately $627 million, and we have no meaningful near-term debt maturities, giving us substantial financial flexibility. Thank you for attending today's call. MJ, we're ready to move to the question and answer session.

Operator (participant)

Thank you, Mr. Kesler. We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you are 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. Today's first question comes from Trey Grooms with Stephens. Please go ahead.

Trey Grooms (Equity Research Analyst)

Hey, good morning, and thanks for taking my question. So, we've seen volume down in wallboard now for, I guess, the last two quarters, and no surprise, and I think it's, you know, actually holding in better than most would have thought. And Michael, you gave a little color on the demand outlook there, but, you know, understandably, with the backdrop of higher rates, you know, this clearly creates more uncertainty at least around the residential backdrop here. But, you know, given what we've seen from starts and completions on the residential side, to the extent that you can talk about it, how are you thinking about, you know, the wallboard volume outlook in the near term? And then at what point do you expect that we could start to see some stabilization there?

Craig Kesler (CFO)

Yeah, Trey, you bring up a lot of interesting points. You know, look, the higher interest rate environment, it will navigate through. And there's factors on the other side, you know, most notably, a shortage of homes, in many markets across the U.S. of existing homes, which is a very different environment than we've seen in prior cycles. It's also important to note where we operate in the southern part of the U.S., where activity has been more robust than other parts of the country. And I think, you know, that's our core market. You know, and look, we continue to have, you know, homeowners, requiring to live somewhere.

So there are a lot of factors, and you've seen homebuilder orders improved this quarter, and again, last quarter as well. So it's hard to predict right now, but we think we're positioned pretty well.

Trey Grooms (Equity Research Analyst)

Okay. And I guess, you know, with that, just kind of sticking with the demand picture, on the cement side, you know, granted, there's maybe some more, or quite a bit more visibility there, into the demand picture, which sounds like it's still pretty good. But, you know, as we look into maybe the calendar 2024, you know, with this kind of increased uncertainty, again, that's created by the rate situation, is it your expectation that we should continue to stay in, you know, what is a kind of a sold-out position or at least nearly sold-out position as we kind of look over the foreseeable future?

Craig Kesler (CFO)

Yeah. You know, as opposed to the wallboard industry, which is more residentially oriented, cement and aggregates demand is more driven by infrastructure spending. And obviously, with the multiyear highway bill, those funds are starting to really benefit highway awards and that activity. You know, that should more than offset the residential impact on the heavy side. Not to mention, and Michael pointed it out, several large kind of manufacturing/industrial type projects for battery plants, semiconductor facilities. You know, that activity is at a multi-decade high. So, that's what gives us some confidence around the outlook for the heavy side demand, not just for 2024, but beyond that, given those projects are multi-year in nature.

Trey Grooms (Equity Research Analyst)

... Okay, and I've got to sneak one more in here, if I could. You mentioned, you know, you went out with a cement pricing announcement for early January. Any additional color you could give us on maybe magnitude or maybe how widespread these announcements are?

Craig Kesler (CFO)

Yeah, it's across most of our markets, January first. Still evaluating all of our markets, but the announcements have ranged between $10-$15 a ton.

Trey Grooms (Equity Research Analyst)

Perfect. Thanks for all the color. I'll turn it over. Good luck.

Operator (participant)

Thank you. The next question comes from Stanley Elliott with Stifel. Please go ahead.

Stanley Elliott (Managing Director)

Hey, good morning, guys. Thank you all for the question, and congratulations. I was just curious, when we talk about the wallboard pricing has been so resilient, is there a way to quantify kind of the differences that you're seeing in the East and the West? And you spoke a little bit about some of the synthetic piece, and I was curious to what that might be having an impact on it.

Craig Kesler (CFO)

Yeah, Stanley, look, you know, Michael mentioned it. It's such a different environment this cycle than what we've seen in prior cycles, where not only were you facing demand pressures, but there had been a significant amount of new supply being added, and most of that was centered around the availability of synthetic gypsum. As the source of gypsum has declined significantly, as we've reduced the power generation via coal, that's reduced that raw material. And it's more predominant in the eastern half of the U.S., no doubt. But again, the Western and Southern part of the country is where a lot of the construction activity has been more robust.So it's a balance, and and I'd say pricing, you know, is kind of held in pretty, pretty well nationally and, you know, different factors across the country for sure.

Stanley Elliott (Managing Director)

You talked a little bit about the balance sheet, kind of 1.3x. You should be generating a bunch of cash on a go-forward basis. You know, help us again with kind of what's happening with the M&A pipeline. You've been active buying shares. Just curious a little, if we could get a little more color on plans around that, or should we see leverage continue to tick down with the, you know, the thought of maybe something larger coming down the pipe? Just really more curious than anything.

Craig Kesler (CFO)

Yeah, you know, Stanley, it's a great question. The capital allocation is an area where we spend a lot of time and focus, because we are generating a high level of free cash flow. And as we've always said, you know, maintaining the assets is paramount and a bedrock function of Eagle, as is the capital structure management, which we put ourselves in a good position in both of those fronts. And so the next use is to continue to grow the enterprise. As you know, we have very high strict criteria, both financially and strategically, for that investment. And when those investments don't meet that criteria, we're happy to continue to return cash to shareholders.

We obviously saw value in the shares this past quarter and, you know, continue to balance that capital allocation between those two opportunities, and it's dependent upon, you know, the balance of whether the investment in front of us meets those criteria or not, and that's kind of the way we've operated for a long time.

Stanley Elliott (Managing Director)

Perfect. Thanks so much. Best of luck.

Operator (participant)

Thank you. The next question comes from Brent Thielman with D.A. Davidson. Please go ahead.

Brent Thielman (Managing Director and Senior Research Analyst)

Hey, thanks. Good morning. Just wanted to come back to wallboard. I guess I'd just be curious with what you've seen sort of fiscal year to date, considering your sort of conversations with customers, what you see around your regions, and then we have these prevailing mortgage rates. I mean, does this still feel like sort of a down mid-single digit environment for volume over the short term, or are you actually more optimistic than that?

Craig Kesler (CFO)

Yeah, Brent, as we said in our prepared comments, you know, look, I think you got to recognize the recent increase in interest rates, and traditionally, what that impact, how that would impact home building. There's just some other factors today that are in place that are very different, and as we pointed them out, the shortage of homes, existing homes, that are at very, very low levels across the country. And you have this idea where you've got a significant amount of the mortgages that are outstanding that are, you know, sub 4%, and so, folks just aren't moving like they once were, and you know, which just puts more pressure on the need to build new homes. And so it's hard to predict.

You know, we've kind of been running in this down mid-single digit. It wouldn't surprise me that you're in that range for a little while. But again, you know, it's not. It's very different than what we've seen in prior cycles.

Brent Thielman (Managing Director and Senior Research Analyst)

Understood. And Craig, the wallboard margins, I mean, considering some top-line pressure in the business, were, you know, comparably strong or, you know, a little better than last year. I wonder if you just sort of flesh out a few of the variables there that are allowing you to keep margins up?

Craig Kesler (CFO)

Yeah, you know, look, the, you know, again, it's, it's not a, a big volume-oriented business. It's not a high fixed-cost business. Down volumes doesn't hurt as much. And, you know, paper prices, which is a large input, are down year-over-year. That continued to be a benefit, a nice tailwind, as is energy. So energy is down a couple of dollars a million versus where we were last year, and seems to be continuing to track that direction. So what had been tailwind or headwinds a year ago have kind of turned around and helped keep margins pretty flat...

Brent Thielman (Managing Director and Senior Research Analyst)

Okay, great. Thank you.

Operator (participant)

Thank you. The next question comes from Anthony Pettinari with Citi. Please go ahead.

Anthony Pettinari (Research Analyst)

Good morning. Can you talk a little bit more about the rationale for the Stockton terminal acquisition? You know, what was attractive about that asset and how it supplements your system? And then just following up on Stanley's question on M&A, you know, you had a lot of success with the Kosmos acquisition. Are there heavy side assets out there that could potentially be attractive, or are those just kind of so scarce that kind of once in a blue moon?

Michael Haack (President and CEO)

Yeah. So this is Michael. Appreciate the question. Yeah, when we look at—First, I'll take your second question first. You know, we're always involved if any acquisition work come to light. We evaluate a bunch of stuff, but as, as Craig and I both mentioned, you know, we have some strict financial performance criteria. They're there, you know, but again, if anything were to come to light, we'd, we'd be interested in it. One of our cash allocation criteria is to keep our existing assets in like-new condition and grow through, through acquisition if something were to come available. We look at a lot of different, different businesses out there, and we only select the ones that really fit our network the best.

As for Stockton, you know, if you look at the West Coast and everything where we stand, we have a business on that side. That import terminal really supports our business as we grow with our Nevada Cement opportunity. We were already bringing cement into California from Nevada. And, you know, as Nevada continues to grow and some of the surrounding areas there continue to grow, we're finding we're a little light on supporting our customers. So we saw this as a great opportunity to bring in a product, support our customers, and continue to grow in that market that supports one of our cement facilities there.

Anthony Pettinari (Research Analyst)

Okay. That's very helpful. Turn it over.

Operator (participant)

Thank you. The next question comes from Jerry Revich with Goldman Sachs. Please go ahead.

Jatin Khanna (VP of Equity Research)

Hi, good morning, everyone. This is Jatin Khanna on behalf of Jerry Revich. How are you thinking about cement pricing for 2024 in light of the extreme volatility in diesel prices and overall inflation?

Craig Kesler (CFO)

Just to be clear, diesel prices don't have as much of an impact on us in our cement business. And so we have announced price increases in cement for early January, as we said earlier, kind of between $10-$15 a ton, depending upon the market. And that, that's our announced plans at this point.

Jatin Khanna (VP of Equity Research)

Right. Thanks a lot.

Operator (participant)

Thank you. The next question comes from Adam Thalhimer with Thompson Davis. Please go ahead.

Adam Thalhimer (Director of Research)

Hey, good morning, guys. Nice quarter.

Craig Kesler (CFO)

Thanks.

Adam Thalhimer (Director of Research)

Craig, what was the exit price in wallboard for Q2?

Craig Kesler (CFO)

It was pretty consistent with the quarterly average.

Adam Thalhimer (Director of Research)

Got it. And then, cement volumes down 1% year-over-year. You cited weather. How are you thinking about the December quarter? You have an easy comp. You were down 13% last year. I don't even remember what that was, probably weather. But how are you thinking about that comp and then, kind of early 2024 cement volumes?

Craig Kesler (CFO)

You know, Adam, yeah, look, there's always weather in different quarters. But, you know, look, the underlying fundamental demands for cement continue to, to go in the right direction, you know, whether that's infrastructure, the highway awards that continue to grow, these, large industrial facilities. It's hard to predict quarter to quarter, depending upon when certain things happen, you know, or project delays or whatnot. But we continue to see an environment where, utilization rates should remain high across, across our network, and, there's, there's a good demand backdrop for us.

Adam Thalhimer (Director of Research)

Do you see, do you see any more variability than normal, geographically?

Craig Kesler (CFO)

No, I, I don't, I don't think so. You know, there's you know, we you know, again, for us, it's interesting if you were to think through the prior cycle, we're nearly three times the size that we were back then. We've got exposure from Northern California, East Ohio, South Texas. So you know, we very much more represent a national average today versus where we were a decade or so ago, where we were kind of a very you know, smallish regional player. So you know, we we just operate more markets today than we ever have before.

Adam Thalhimer (Director of Research)

Got it. And then I'm trying to back into, because the cement margins, the cement margins remain exceptional. But I'm wondering, how do you have any thoughts on cement cost per ton in the back half of the year?

Craig Kesler (CFO)

Yes. So, yeah, and as you pointed out, our margin profile continues to do very well in that business. And as we've said, you know, what the tailwinds a year ago were around energy, specifically fuel. Those have abated, certainly here in FY 2024. As you start looking beyond FY 2024, you know, certainly fuel costs, which for us is today predominantly solid fuels, have trended lower. So you should see some benefit there. You know, maintenance costs, we've seen, you know, inflation, across parts and services. I would hope, that that might start to turn and go the other direction or at least become less inflationary. So it should be a reasonable environment for us.

Adam Thalhimer (Director of Research)

Good news. Thanks, Craig.

Operator (participant)

Thank you. The next question comes from Phil Ng with Jefferies. Please go ahead.

Collin Verron (VP of Equity Research)

Hey, good morning. This is actually, Collin on for Phil. I just wanted to touch on the Stockton terminal really quickly. It was a nice contributor to the cement segment this quarter. Can you just help us think about the volume contribution from that plant going forward? Does it have the ability to ramp up from its fiscal 2Q contribution, or is it at capacity at this point? And then any color as to how those margins look versus, your wholly owned margins?

Craig Kesler (CFO)

Yeah, look, imported margins are going to be lower than your normal manufacturing margins. Just a function of it's a distribution business versus a, versus a manufacturing business. But it is operating with a good margin profile, and, and as we had expected, we pointed out in the earnings release, there's some, kind of purchase price allocation still flowing through there this quarter, but that's largely behind us, and, and a good amount of depreciation. But, in terms of the volume profile, I expect it to remain in this level, in the, in the immediate term. And there are some opportunities to expand that, that, that we are exploring, but, but we've not made any decisions on that quite yet.

Collin Verron (VP of Equity Research)

Great, that's helpful. Then, just going to the wallboard side of the business, you've seen wallboard EBITDA margins north of 40% for the fifth consecutive quarter now. I guess, how sustainable is this level of margin, just given the uncertain macro backdrop that we're in?

Craig Kesler (CFO)

You know, Collin, look, it's a function of, of price and cost, and price, as we've said, has been much more resilient, you know, pretty much flat and almost exactly flat year-over-year. And, again, we just don't face some of the other, uncertainties, that we had in prior cycles. So not surprised to see pricing, more resilient here. And then on the cost side, you know, as we pointed out, paper prices have stabilized here, at least sequentially. Gas prices, for us, natural gas, has remained pretty stable here, $3 or a little below that, on the MMBtu basis. And, you know, those are the primary inputs, into the manufacturing of wallboard, and, don't see any significant changes on the horizon as we sit here today. So, you know, those are the biggest factors, and they've been very supportive so far.

Collin Verron (VP of Equity Research)

Great. I appreciate the color. Thank you.

Operator (participant)

Thank you. This concludes our question and answer session. I would now like to hand the call back over to Mr. Michael Haack for closing remarks.

Michael Haack (President and CEO)

Thank you, MJ. Just want to say I appreciate everybody joining us for the call today, and we will talk to you in early 2024.

Operator (participant)

The conference has now concluded.