Eagle Materials Inc (EXP) 2023 Q1 法說會逐字稿

Good day, and welcome to the Eagle Materials First Quarter Fiscal 2023 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference call over to Eagle's President and Chief Executive Officer, Michael Haack. Mr. Haack, please go ahead, sir.

Good morning. Welcome to Eagle Materials Conference Call for our first quarter for fiscal 2023. This is Michael Haack. Joining me today are Craig Kesler, our Chief Financial Officer; and Bob Stewart, Executive Vice President of Strategy, Corporate Development and Communications. We are glad you could be with us today.

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.

First, I want to start off by saying we had a very good quarter. Business conditions remain favorable for Eagle. I am pleased to report we enjoyed record adjusted net earnings per share up 25% on record revenues. We were able to capitalize on very favorable market conditions for our products in our U.S. operating geographies.

We expanded gross margins by 30 basis points, bringing our gross margins to nearly 27% as we overcame inflationary cost headwinds to achieve this result. This illustrates once again that being a low-cost producer in a commodity industry has benefits in good times, not just in tough times.

We realized 24% price increases in Wallboard for the quarter, reflecting the strong prevailing market demand, and we realized 10% higher Cement -- prices for our Cement.

We are implementing a second round of price increases in Cement, starting this month, as we remain in the virtually sold-out position. We have some headroom left in Wallboard capacity, and our Wallboard volumes were up 5% for the quarter.

The question on many investors' minds now is what is ahead of this construction cycle. Some aspects of the outlook, I'm actually quite confident about, in others, I am less confident about.

The first thing I'm confident about is that Fed moves will eventually slow the economy. The question is, by how much and for how long? Much of our business strength is driven by infrastructure spend, which is less consumer dependent and more policy dependent.

On the infrastructure side, the outlook is very good. We are seeing a willingness to invest in infrastructure for both the federal and the state level. This investment is not only for renewing existing infrastructure but adding additional infrastructure.

In fact, as it relates to both need recognition and funding clarity, there is arguably more visibility than there has ever been before in this aspect of the outlook.

For the housing side, which represents the single most critical end use for our products, there is more uncertainty to the outlook. To answer -- the answer to how the housing side will play out this cycle, will depend heavily on the consumer.

So far, consumer spending has been remarkably resilient, bolstered in part by stronger household balance sheets and a sense of security about jobs and job prospects. My confidence about this year and the longer term is actually high because of our visibility on the drivers of demand for our products. The midterm is where I have more questions.

Short term, the rate of the outlay for federally aided highway funding and budget allocations for state funding have largely been set, and they will accelerate over the next 2 years. The momentum associated with a record pace of housing construction will see us through this year from a standpoint of building materials demand.

Single-family units under construction is at the highest level since November of 2006, and multifamily units under construction is at the highest level since 1974. Record home construction backlogs will support a [4] for product demand this year.

Regarding the long term, what gives me the most confidence about housing is demographics. The age 30 to 39 group is traditionally the most important home-buying cohort as it corresponds to when families are most frequently becoming established and inclined to buy homes.

This age group has been increasing and is expected to increase further through 2028. Midterm is where it's the greatest uncertainty. Will the Fed overshoot, undershoot or land the plane just right? What the Fed does is not under our control. Therefore, we will do, as we always have, and that is focus on operating our assets safely, efficiently and effectively.

In short, we will focus on what is entirely in our control to add value to our shareholders. We are well positioned and well prepared for the midterm eventualities. Our track record through the cycles is arguably unrivaled in our industry, margins, returns, EBA, safety, customer satisfaction, environmental stewardship, you name it.

I'm confident we will meet any challenges that may be served up in the midterm with the same steadfastness in both strategy and execution that has led to the results we are sharing with you today. We are well positioned, well prepared and cycle experienced.

We also continue to hold steadfast to our investment priorities and disciplines. Our first priority remains growth in improvement investments. We remain highly disciplined about our strategic focus and return criteria.

We will not compromise either aspect in pursuit of growth for growth's sake. Having said that, we continue to find acquisitions that do meet our criteria. At this time, these are smaller and are directed at extending our network of Cement terminals, expanding our aggregate operations or improving our low-cost producer positions.

One such acquisition that we were able to close in the quarter was a Concrete and Aggregate producer north of Denver. This acquisition gives us multiple decades of aggregates in a market where we participate in today.

Our free cash flows are strong. And when we do not find growth investments that meet our criteria, we have a strong track record of returning cash to shareholders, especially through share repurchases.

This quarter was no exception. I'm pleased to say, we invested $110 million to repurchase 884,000 shares this quarter. Another critical priority for us is advancing our environmental and social agenda. It is a company priority and a personal one.

We continue making progress on the rollout of our Limestone Cement initiative, which will make our finite clinker production go further and reduce the carbon footprint of concrete in use on a per yard basis.

Specifically, I'm pleased to report that over half of the sales at one of our largest Cement plants this quarter was our new Portland Limestone Cement. This is a major milestone for us.

Across our system, nearly 15% of our Cement sales for the quarter were Limestone Cement, a major accomplishment, but only a start. I might add that these sales were at price equivalents with our traditional product.

In summary and conclusion, I cannot help but feel optimistic about the prospects for the company and the economy when business is as good as it is today. We remain confident about the short term and the long term and recognize the midterm introduces a more than usual amount of uncertainty as the Fed rebalances employment and inflation goals.

I assure you that we are well prepared and well positioned to capture the opportunities that are presenting themselves today and to meet the challenges of any eventuality ahead.

Now let me turn it over to Craig to discuss the financials for the quarter.

Thank you, Michael. As mentioned, first quarter revenue was a record $561 million, an increase of 18% from the prior year. Excluding the recently acquired business, revenue increased 16%. The increase reflects higher Wallboard and Cement sales prices as well as increased Wallboard sales volume.

First quarter earnings per share was $2.75. That's a 22% increase from the prior year. The increase is driven by improved earnings and our reduced share count due to our buyback program. Fully diluted shares are down 10% from the prior year. Excluding nonroutine items highlighted in the earnings release, first quarter adjusted EPS was up 25%.

Turning now to segment performance. This next slide shows the results in our Heavy Materials sector, which includes our Cement and Concrete and Aggregate segments.

Revenue in the sector increased 10%, driven primarily by the increase in Cement sales prices implemented earlier this year. These increases were partially offset by lower Cement sales volume. And operating earnings were essentially flat as increased Cement sales prices were partially offset by higher energy and maintenance costs during the quarter.

Given the strong demand backdrop, we did implement a second round of Cement price increases in early July. Within the Concrete and Aggregates segment, on a like-for-like basis, our Concrete sales volume improved 2% and our Aggregate sales volume improved 31%.

Moving to the Light Materials sector on the next slide. Revenue in our Light Materials sector increased 30%, reflecting higher Wallboard sales volume and prices.

Operating earnings in the sector increased 32% to $88 million, reflecting higher net sales prices, partially offset by higher input costs for recycled fiber and energy. And while energy costs remain elevated, we recently increased our forward purchases for natural gas to 40% of company-wide needs at $4.78 per MMBtu.

Looking now at our cash flow, which remains strong. In the first quarter, operating cash flow increased 13% to $125 million, reflecting improved earnings and working capital management. Capital spending increased to $15 million.

As Michael mentioned, during the quarter, we completed the acquisition of an aggregates-led business in Northern Colorado with a purchase price of $121 million. We also repurchased 884,000 shares for common stock for $110 million and paid our quarterly dividend. Between the share repurchases and dividends, we returned $119 million to shareholders this quarter.

Finally, a look at our capital structure. At June 30, our net debt-to-cap ratio was 49%, and our net debt-to-EBITDA leverage ratio was 1.6x. We ended the quarter with $68 million of cash on hand, bringing total committed liquidity at the end of the quarter to approximately $631 million, and we have no meaningful near-term debt maturity giving us substantial financial flexibility.

Thank you for attending today's call. We'll now move to the question-and-answer session. Mike, I'll turn it back over to you.

(Operator Instructions) And the first question we have will come from Trey Grooms of Stephens.

Nice work in the quarter, and thank you all for the comments and on your outlook there, especially. And understandably, there's less visibility on the medium term around housing, as you mentioned.

But Michael, you touched on it briefly, but could you go into more detail about any changes that you would make to -- and how you run the business in a softer demand environment and controlling what you can control as you said there? But just again, you touched on it, but a little more detail on that would be great.

Yes. Trey, what we do is we've historically done with any cycle. As you know, we monitor our demand profile, which right now our demands are strong across both businesses, but we monitor those demand profiles and we could shift with those demand profiles to make sure we continue to operate the operations effectively.

A lot of our businesses, especially on the Wallboard side, are more people dependent than anything else. And we do not tend to overstaff during the heavy times versus the light times with it.

So we run very lean. The other thing that we're doing that Craig mentioned briefly in his comments was looking out at our fuels and some hedging opportunities and everything else to control some of our heavier cost input areas.

What also should be remembered is we control our raw material input on the side. So we are not up for those swings if those prices do change. So we monitor the whole supply chain, and we monitor how we operate those facilities, and we have mechanisms in place if there was a demand change. But right now, we're seeing strong demand, as we said.

Right. Okay. And that kind of leads into a follow-up there is the -- on the Wallboard business, you mentioned the backlog there -- the backlog at the homebuilders, the construction and the catch-up. You expect that to kind of hold the volume or the demand up for Wallboard here through this year.

So is that to say what we've seen recently kind of low to mid on the volume is kind of the expectation as we look through the balance of the calendar year, given that backlog?

How I look at it, Trey, the backlog is there on the homebuilding side. And as long as the demand profiles on the house building and everything stay, that should support us through this year at kind of our run rate we're seeing today.

Perfect. Fair enough. And last one for me is on the energy side, and Craig, you touched on some things you're doing there. But the nat gas prices have been extremely violent. And obviously, that's a headwind.

But can you talk about that? What we've seen in that gas prices combined with some of the locked-in portion of your nat gas needs? Also kind of taken into consideration some of the pricing actions you have in place, how we should be thinking about margins in the kind of near term, maybe even medium term, given this backdrop?

Yes. And Trey, just to clarify, right. Natural gas is the predominant fuel in Wallboard and Paper. Whereas on the Cement side, it's generally a solid fuel consumption, coal, pet coke, things like that.

So on the Wallboard and Paper side with nat gas, as I mentioned, we've got about 40% of our needs hedged at under $5 for the remainder of the year. And importantly, that is sustained through the winter at that level, where you could see some different changes in nat gas prices.

But as we've -- and on the Cement side, our solid fuel is generally locked in for the remainder of the year. That's generally how we do these annual contracts in Cement.

I will tell you as we look out into calendar '23 year, for us, it would be fiscal '24, we do see continued elevation in fuel prices for the Cement business.

A little too early to quantify that, but it is something that we are monitoring. But take all of that against the environment that we're operating in, where we've been able to achieve good price increases across all these businesses, and certainly, the demand environment is very supportive of that with very high utilization rates across the network.

But there's no doubt, a portion of those are also associated with these inflation costs around energy. And so as we pointed out this quarter, we've been able to raise prices ahead of this inflation this year-to-date.

And we've got additional price increases slated for this summer in both Cement and Wallboard. So at this point, we've been able to manage and keep up with inflation.

Next with Brent Thielman of D.A. Davidson.

Great. Michael, Craig, the strength and resiliency of Wallboard pricing, especially in that downbeat environment is pretty notable. I guess, any future plans or announcements you can share?

And then, I'd just be curious to your thoughts on how you think about the industry sort of maintaining these higher levels in terms of pricing and sort of a softer landing housing scenario?

Yes. It's a good question with it. As I said in my opening comments, with the backlog out there, we see kind of a floor through the short-term area with it. We were able to actually -- we've announced the price increase on the Wallboard side. We're working through with our customers right now.

So the demand profile is still supportive. And we're not seeing -- we're still on a high demand cycle right now on our Wallboard operations. And like I said, we see that with a [4] established for the backlog there.

Yes. Brent, what I would also add to that is -- a couple of thoughts. One is certainly, think about our markets. We're in some of the stronger markets across the U.S., generally in the southern half of the U.S., where demographic trends and construction activity is stronger.

There are, and we've talked about it a lot over the years, some of the raw material inputs that are diminishing in the eastern half of the U.S., specifically around synthetic gypsum, continue to be a cost pressure for many, not for us. We're generally in natural gas- or natural gypsum-oriented business.

But those are all things that you think about through a cycle. And how that plays out in the Wallboard business with limited supply expected in the future to come on, you're going to have higher utilizations throughout the cycle, which is something that is very different than what we've seen in the previous 2 cycles.

It gives us -- we think this business is much more sustainable, much more resilient than what we've seen in past cycles.

And maybe to add to that, Michael, Craig, I guess, just that you think about the competitive landscape, the evolution that's happened there, the last time we went through a rising rate environment and housing down cycle. Does that -- and any thoughts on that and how that might affect your [approached] pricing?

Yes. Look, we generally don't talk about competitors. I just would say, if you think about the last 2 cycles in Wallboard, you're talking about the late '90s, early 2000s and then mid-2000s. In both of those cases, we saw a significant amount of new supply being added to the Wallboard business with the increasing supply of synthetic gypsum.

We sit in a very different spot today with synthetic gypsum diminishing in availability as coal-fired power plant production has gone down. And so we don't see any significant new supply coming on in the market over the next several years. That is a very different environment than what we've operated in prior cycles. That should have a different outcome.

And look, I think it's a little too early to make any decisions or confirmations around the demand profile for this cycle, there's still a lot of moving parts here.

Yes. Fair enough. I appreciate that. Just on Cement, maybe a refresh of the magnitude of the price increases this month and whether that's across the entire footprint?

Yes, it's across nearly the entire footprint, not every market for us but the most markets. And it's again, it's another double-digit price increase that was slated for early July.

The next question we have will come from Anthony Pettinari of Citigroup.

This is [Asher Stone] on for Anthony. You talked about PLC in your prepared remarks, but can you just update us sort of on the path to getting towards the full use out of plc. Where are you on that? And then maybe, is the bottleneck still sort of states recognizing that they can get sort of allowing that to?

Yes, I could give you a little color around that. Kind of when you look at PLC, there's multiple aspects to deploying PLC.

One of them is with states and DOTs and everything, we're really far along on that with almost all of our businesses having approved PLC with state DOTs in their areas. The second part really is there is a change to the manufacturing process of where you got to introduce a limestone into a grinding circuit with it.

So there's some capital outlay that we've been doing. And each plant will have kind of a different timeline to become 100% PLC compliant. We're actually ahead of schedule for what we've been talking about before with 15% of our market or our sales this quarter being PLC.

I do see that accelerating getting to the 100% PLC, will be more dependent on supply chain delivery of products, but we will make substantial progress to get there in the near term. And then in the midterm, we should have everybody converted over as those projects come online.

Great. And then separately, you guys talked about infrastructure spending, is sort of largely set for the next couple of years, which was encouraging. But is that largely locked in, in terms of dollars of spending or maybe projects in the pipeline?

Because if it's the former, then -- if you see no sort of price inflation persisting at these strong levels, could some of that rising price maybe erode the volumes that would have been implied in those spending budgets?

Yes. No, it's not exactly how we think about it. There's lots of inputs into these construction jobs, and this is a multiyear bill that is in addition to state and local spending on infrastructure projects. So based on the lettings that we're seeing from the markets that we're in, we are expecting to see good momentum and good demand from that bill and playing out for several years.

And the next question we have will come from Jerry Revich of Goldman Sachs.

I'm wondering if you could talk about your expectations of price realization in Cement relative to the double-digit numbers that you spoke about, Craig? I think, in the past, you folks have essentially gotten 70% of what you've asked for. And I'm wondering, to what extent could that be moving higher in this environment, given the inflationary pressures that everybody is facing and a 15% price increase that was just reported by one of your competitors this morning?

Yes, when we look at it, it's too early to tell right now with that. We're working through with our customers right now. But how to answer that question more is, if you look at the demand profile for our products, we're in a near sold-out position really, at a sold-out position with a lot of our plants. So the demand profile is very supportive of this price increase. So I won't give you a specific number on that, but we have expectations with the demand profile of where we'll land.

Okay. And can we talk about in Wallboard, when we look at the last available financials for your biggest competitor, you folks had enjoyed about a 20-point margin gap 5 years ago because of the co-located strategy. And given the transportation cost moves over the past 5 years, that gap looks to be about 25% today.

I'm wondering what is your benchmarking analysis show relative to the cost structure because, obviously, when people look at the margins that you folks are putting up in Wallboard, there's a question of what the next trough might look like. So any comments you can make on the cost structure advantages do you see it now, would be helpful.

Yes, Jerry, it's all aspects of the operations where we see an advantage. And it starts with pulling the rock out of the ground, right? We largely own or control our primary raw material gypsum in this case, close to our facilities with 40, 50 years of supply of those raw materials.

So it starts there, but energy consumption. We talk about the hedging that we've done. But in reality, the best hedge is just not to use the natural gas. And we've taken energy consumption out of the business over the last 5 years, the last 10 years, so that we're more efficient on energy consumption.

The paper mill, we've talked about that a lot. That is -- continues to be a strategic advantage for us, providing a lower-cost paper but a better paper for our Wallboard plant. So we think as you think through the entire operating system, we've continued to improve our low-cost operations.

Again, try not to compare ourselves directly to competitors.

But we know what we've done to our business to make it more resilient, more sustainable through a cycle, the Georgetown plant, we didn't operate in prior cycles out in the Southeast. That plant is one of our -- is our lowest-cost plant, and that's putting into a network that was already low cost.

So again, we think we've actually -- and then you just think about some of the other pressures we've talked about, synthetic gypsum, quite a bit. And our exposure to that is relatively limited. So you just think about the cost curve and where we sit on it, we think we've actually improved our position.

And Craig, is it possible to quantify that, based on the qualitative discussion? It sounds like it's higher than that 5-point gap that your transportation element would suggest, is that fair?

Yes. Look, not willing to quantify it for this purpose, but we know where we sit on the curve, and we continue to expand our competitive position.

Okay. Super. And lastly, in the press release, you folks spoke about a project delay. Can you just give us a bit more context on where that is and a bit more color on the drivers?

Yes. Just in the central part of the U.S., I think you're hearing it from a number of people this cycle, where there were some rain and weather events in the central part of the U.S. for us. That's Missouri, Kansas, Illinois, that area -- just pushes projects out, and we see that from time to time.

The next question we have will come from Phil Ng of Jefferies.

This is actually Collin on for Phil. Just starting in Cement, with the IIJA funding coming through next year and a potential slowdown in housing, I guess, how are you looking out to maybe calendar year 2023 and Cement volumes holding up in that type of backdrop?

Yes. I think we would tell you we expect to continue to see very good demand, strong demand for cement and continued very high utilization rates across our [network], given all of those things that you just commented on. And look, I'll add to that the private non-res sector, which has continued to see improving numbers across the board.

Okay. And just following up on the non-res comment you just made there. I guess, is there any particular sectors that are seeing strength versus others that are seeing weakness that you would call out?

Yes. Look, I think if you look across the ABI, you look across the Dodge Index, those numbers have continued to improve and are operating above expansion periods. And look, data warehouses, those type of activities are very, very strong. But even their strength across some of the other sectors, that had been weak during the COVID period.

Great. And then my last question is just on the August Wallboard price increase. Just given the move in the natural gas prices, do you need the August Wallboard increase to keep margins [intact]? Or would that provide some opportunity for margin expansion through the rest of the fiscal year?

Yes. Look, the recent move in natural gas has certainly continued to put some upward pressure on our cost structure. And so it's a balance of -- and OCC is still at relatively high levels. So we're going into the expectation that we should achieve a decent amount of it, and we'll see where it all lands.

Next, we have Paul Roger of BNP.

This is actually George Speak on behalf of Paul. So I'll just ask a quick question on demand. So you've touched on the kind of macro headwinds and potential slowdown on the residential side. I appreciate long backlogs, mean that you're not necessarily sort of experiencing all of that just yet.

But are you seeing any early signs of a slowdown, maybe some sort of cancellations in projects or postponements or any just sort of incrementally more negative conversations with customers?

No. Our -- I'll answer that is -- I'm not going to speculate on some of the future stuff with it, as I said in my comments. During this short-term area, with the demand profile looks strong -- as he stated, we got some inflationary pressures, and we're putting out our price increase with it.

We expect to realize that because of the demand profile, the midterm is really still the midterm in my comments, as I said. That's one that the consumer is going to define in the midterm more than anything. So we feel comfortable in the short-term and the long-term outlook. And there's a little murkiness in the midterm, and we'll handle that as it comes.

Okay. And then sort of a similar theme as it relates to M&A. So there's sort of the uncertainty in the midterm affects on your M&A pipeline or is there -- are there deals you're exploring at the moment? Maybe just a bit of color on what that pipeline looks like?

Yes. So we're always active in the M&A market. We look at a lot of opportunities with it. We have strict objectives with that and criteria on when we do an M&A. We're not going to grow for growth's sake. We're going to look at deals that make sense for us to extend our reach, our markets and grow our business on the heavy side of the business.

If one of those was to come available today, we'd be interested in those. It's just, we're active in that market, and we will remain active in that market as long as it meets our strategic criteria.

Well, no further questions at this time. We will go ahead and conclude our question-and-answer session. I would now like to turn the conference call back over to Mr. Michael Haack for any closing remarks. Sir?

Thank you for joining us today for the call, and we look forward to talking to you at the end of next quarter in November.

All right. And we thank you, sir, to the rest of the management team for your time, also, today. The conference call has now concluded. At this time, you may disconnect your lines. Thank you. Take care, and have a wonderful [rest of the] day, everyone.