Eagle Materials Inc (EXP) 2022 Q2 法說會逐字稿

Good day, everyone, and welcome to Eagle Materials Second Quarter of Fiscal 2022 Earnings Conference Call. This call is being recorded. At this time, I would like to turn the call over to Eagle's President and Chief Executive Officer, Mr. Michael Haack. Mr. Haack, please go ahead, sir.

Thank you. Good morning. Welcome to Eagle Materials conference call for our second quarter fiscal 2022. 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.

Let me start my comments today by stating that this was another very good quarter for Eagle Materials. From a market perspective, we are well-positioned U.S. Heartland cementitious materials producer, and we are a national scale U.S. Gypsum Wallboard producer. From the people perspective, we have a talented team that understands their markets and make great decisions.

Simply put, this is a very good time to be in each of our businesses. This is not just due to current conditions, but because the outlook for both businesses looks favorable. I'll spend some time today on the macro backdrop as it provides some context to our favorable outlook. COVID vaccination hesitancy, lingering supply chain issues and federal budget uncertainties and have weighed on economic momentum.

Offsetting these issues are job growth and consumer spending. In 2021, we are seeing some of the strongest job creation in U.S. history and strong consumer spending growth. Supply side headwinds are likely to pose less of a challenge in 2022, allowing for healthy industrial production growth as a monumental backlog of orders are gradually cleared. Housing construction, which is an important driver for both of our businesses, and especially for Wallboard, continues to enjoy strong demand. With healthy household balance sheets, low interest rates and relative affordability by historical standards, we see good headroom for continued trend growth. In this regard, it should be noted that housing activity is especially strong in the Southern U.S.

This is important for Eagle as this is where most of our plants reside, and this region represents more housing starts than all other regions in the U.S. combined over this past year. There is a positive knock-on effect from robust housing demand for repair and remodeling, which we expect will continue to grow at a mid- to high single-digit pace through 2022.

In Cement, the key wildcard remains infrastructure spend. Most of the funding today comes from the states. The states in our footprint generally have healthy balance sheets, driven by increased receipts from property and sales taxes. The national discussion has focused on federal infrastructure spend. Federal infrastructure funding will happen someday and is certainly necessary. When it does happen, it will intensify the supply-demand dynamics of Cement.

Commercial construction activity looks promising for pickup. And again, regional strength in leading indicators favor the Midwest in the South, aligned with our U.S. Heartland footprint. It is also worth noting that the U.S. shift towards renewables is very constructive for Eagle. Wind farm construction is concrete intensive. If you look at the map of planned wind projects and advanced development for projects under construction, it aligns well with our Cement plants.

Cement imports will be increasingly required this cycle to meet demand as strong market conditions are leading to very high effective rates of capacity utilization in domestic plants. These imports will come at a cost in both our higher intensity carbon footprint and in price as the Baltic Dry Index is up 135% from a year ago and is at a 10-year high.

Now let me speak to volume, pricing and cost trends for each of our 2 businesses. First, let's discuss volume. Fortunately, we still have some capacity headroom in Wallboard. However, the recent supply chain disruptions experienced by homebuilders is no doubt delaying the construction of some homes and pushing the demand up to the right. Once these log jams clear, we expect to be even busier.

Our high cement utilization has been well chronicled. We are virtually sold out and operating full tilt. We are working closely with customers to meet their needs. As demand increases, there are limits to how much more volume growth we can squeeze out of our cement system, unless, of course, we could expand our system through acquisitions.

Quality U.S. cement plants that meet our strategic criteria are admittedly hard to come by, and we are patient investors, which is why a balanced approach to share repurchases when quality assets are not available makes so much sense for a company like Eagle.

You can see in this quarter, we purchased approximately $185 million of Eagle stock. We know our assets and know their value. To reduce our carbon intensity at the cementitious product level and to service our customers with additional volume, it is our ambition to ramp up our limestone cement product offerings. Over time, this has the potential of literally creating another cement plant worth of product for sale for us, when fully implemented across our system.

Some aspects in realizing this ambition are not within our control, such as DOT approvals, but we are seeing good progress here and are encouraged. Over the next 3 years, we expect to move the needle meaningfully on this initiative. Moving on to pricing. Cement prices have not yet recovered as much as most of other building materials in this cycle.

We have announced double-digit cement price increases effective January 1 across the majority of our network. As for Wallboard, pricing is most strongly driven by demand, and demand has been strong as evidenced by our 33% year-on-year increase in Wallboard prices.

I suspect it may raise the question in some people's minds as to whether we are nearing the peak for this cycle. If our demand outlook is correct, I think we are not. Now to costs. There has been a lot of discussion about cost headwinds, in many cases, exaggerated by supply chain disruption.

Let me put this in perspective for Eagle. We own and control virtually all of our raw materials. In some sense, one might say we already purchased the raw material with our investments and reserves decades ago, and by doing so, have mitigated a supply chain issue concerning raw material.

Energy inputs are important. We often get asked about hedging. We are currently hedged for approximately 50% of our natural gas needs through the remainder of our fiscal year at slightly under [$4 per million], which should help us manage our cost swings. Natural gas is the primary fuel used in our Wallboard business.

The spike in OCC costs this summer were material this last quarter. But as we've said many times, pricing mechanisms in our sales contracts allow us to pass on higher OCC prices, albeit on a lag of 1 to 2 quarters. Outbound freight in Wallboard is also important, and we saw a 14% increase in freight costs this quarter.

However, the good news is that freight costs seem to have plateaued during the summer. Let me close my remarks with an update we are proud to share as it aligns with our environmental and social disclosure report we published on our website. It is a recent noteworthy development on one of our long-term initiatives that has to do with carbon capture.

We were notified on October 7 that Chart Industries, a technology development leader in this area, has received a significant funding award from the U.S. Department of Energy to conduct an engineering scale test to advance point source carbon capture, with a specific mandate to conduct this research at our Sugar Creek cement plant.

Chart Industries' cyrogenic carbon capture technology was recognized by researchers at MIT and Exxon as the most cost competitive among highly effective carbon capture systems. Our role in this endeavor is to provide technical support and operational data during the development and execution of the project. I want to emphasize that even with successful outcome, there are many other dates and hurdles to ultimate adoption, including transport and storage.

But this is an important and significant step on the path to net carbon zero future. And with that, let me now turn it over to Craig for the financial results.

Thank you, Michael. Second quarter revenue was a record $510 million, an increase of 14% from the prior year. The increase reflects higher sales prices and sales volume across each business unit. Second quarter diluted earnings per share from continuing operations was $2.46, a 14% increase from the prior year. And adjusting for our refinancing actions during the quarter, adjusted EPS was $2.73, a 26% improvement. Turning now to our 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 5%, driven by the increase in cement sales prices and sales volume. The price increases range from $6 to $8 per ton and were effective in most markets in early April. Operating earnings increased 13%, reflecting higher cement prices and sales volumes as well as reduced maintenance costs. Consistent with the comments we made in the first quarter, and because we shifted all of our planned cement maintenance outages to the first quarter, our second quarter maintenance costs were about $4 million less than what they were in the prior year.

Moving to the Light Materials sector on the next slide. Revenue in our Light Materials sector increased 28%, reflecting higher Wallboard sales volume prices. Operating earnings in the sector increased 39% to $67 million, reflecting higher net sales prices, which helped offset higher input costs, mainly recycled fiber costs and energy.

Looking now at our cash flow, which remains strong. During the first 6 months of the year, operating cash flow was $262 million, a 27% year-on-year decrease reflects the receipt of our IRS refund and other tax benefits in the prior year. Capital spending declined to $27 million.

And as Michael mentioned, we restarted our share repurchase program and our quarterly cash dividend this year and returned $259 million to shareholders during the first half of the year. We repurchased approximately 1.7 million shares or 4% of our outstanding. At the end of the quarter, 5.6 million shares were available for repurchase under the current authorization.

Finally, a look at our capital structure. Eagle maintains a strong balance sheet, access to liquidity and a well-structured debt maturity profile. During this quarter, we completed the refinancing of our capital structure, which included issuing $750 million of 10-year senior notes with an interest rate of 2.5%. We extended our bank credit facility 5 years, paid off our bank term loan and retired our 2026 senior notes. Thank you for attending today's call. We'll now move to the question-and-answer session. Josh?

(Operator Instructions) Our first question comes from Trey Grooms with Stephens.

Good morning, Michael and Craig, and nice results in the quarter. So Michael, you mentioned in your prepared remarks, a ramp-up in the cement product offering, cement side of the business. And I think you noted another cement plant worth of materials that could come out of this in a 3-year kind of time frame. Can you talk a little bit more about this to the extent you can, maybe the magnitude of the capacity pickup? It sounds very meaningful. But as far as like maybe more details around the mechanics behind the capacity expansions within existing plants, and what plants could lend themselves to this where this may be taking place? And then any ideas or color around the capital required for these expansions would be helpful.

Yes. No. Trey, I appreciate the question on it. What we're talking about here is PLC cement, which is a limestone addition to cement, which is an approved product with -- depending on the plant and the location and other factors that go in with the -- when you look at the quality of a cement product, it will increase the cement limestone addition by 10% to 15% at max.

So basically, this is effective for all of our facilities, and it is something that we've been looking at for quite a while. We still have DOT approvals to go through in some states with it. The time line is really -- each plant has a slightly different time line depending on the capital investment.

That's why we said over the 3-year window with some of the investments we have to make at some of the plants, the investments really are not real material at the plants. So it is really just adding limestone to the product and intergrinding that limestone with the product. So just to have the capital in place is why we're giving that 3-year window. We will have a little bit of that this next year, some more the year after and the final implementation in year 3.

Got it. Okay. Thanks for the detail. But in effect, though, you are actually -- it is -- I guess, could be considered an actual increase in capacity, or maybe your capacity just goes further, might be another way to look at it. You're talking about somewhere in the 10% to 15% range?

Yes. So what you do is you put limestone in with your clinker so you could extend your clinker further. So if you look at our capacity across the system, you could figure in that right around that in 10% area is where your (inaudible) increase in product for sale across our entire network.

Got it. Perfect. That's super helpful. And then switching gears, the -- I guess one thing to note is the cost inflation. I mean, you talked about it briefly. It's something that most of the world is facing in a pretty big way right now. And -- You called out energy and paper, obviously, shouldn't be a surprise given the swings we've seen there.

But really, my question is more around how we should be thinking about the cadence of the margins across your business segments given the timing of pricing as it flows through, the timing of when costs flow through. So -- I mean I know there's a timing aspect, but you called out a little bit, particularly in Wallboard or in Paperboard for that matter. But -- so I also wanted to ask about the outlook though for the cement side of the business and submit cost and any potential inflation you might be seeing there.

Yes. Trey, this is Craig. On the pricing front, as Michael mentioned, we did announce price increases across the majority of our cement network. They were double-digit increases, $10 to $12 a ton or more, across our markets, and that is effective January 1, which is 3 months ahead of our typical cadence for cement pricing.

Most of our energy contracts in the cement market are on an annual basis, which is through the end of our fiscal year. So it will really be starting fiscal '23, where we would see some of those energy impacts start to come through. But in other cases, we also had 2-year agreements in place. So we're going through that process right now.

On the Wallboard side, that's going to be, again, the natural gas, as Michael mentioned, we've repurchased effectively forward purchase contracts for more than 50% of our gas needs within the Wallboard business. So we've mitigated some of the uptick in natural gas prices there. And then on paper, you obviously saw this quarter, the profitability in the paper mill down, and that's just a function of the mechanisms that for pricing, we pass through the majority of our raw material input increases.

It just happens over a 1- to 2-quarter lag. And so you'll see the majority of that come back to us in what would be our Q4. There'll be a little bit of it here in Q3, but then we'll see the full benefit in Q4. And all of that's relative to what OCC prices do. We're expecting them to plateau here a little bit as we left the summer, so that's been good to see.

Our next question comes from Brent Thielman with D.A. Davidson.

Great quarter as well. I guess first question is on the Cement JV. You had a relatively modest decline in sales volume was down a little harder. I don't think that's totally surprising. The profit dollars declined, I guess, more than I would have expected from last year. Anything in particular to be aware of, for that business?

Yes. When you look at that business, you could see the volume metric side is really if you strip it back between manufactured product and purchase product. We were pretty flat on the manufactured product side. So it's really on what we could go out in the market and purchase and resell on that side, that was the biggest impact on there.

We also did have an additional outage down at that facility this year. So that's what the majority of the cost side was in. So this last quarter, we had an outage in that area.

Okay. All right. It sounds like fairly transitory things. And then obviously, great -- incredible pricing traction in Wallboard this quarter. I guess my question is, some of the challenges the builders are experiencing, whether that's labor, whether it's sort of supply chain related issues just in terms of moving their jobs forward. I guess, Michael, I'll be curious to your thoughts, is that hindering yours or the industry's ability to recognize even more pricing than what we're seeing in the business today?

Wallboard is really driven by, as everything, with supply and demand on the side. And when this does get pushed out a little bit, there was a little bit less demand in the last month with we expect that's just a transitory temporary item with it. The backlog for builders is very strong. And we have headroom capacity at our facilities to supply that.

And so we really think as this supply chain gets back in order and the builders get back into their construction process and don't have the supply chain interruptions that, that demand will be busy and busier than it was even than we are today, which is very busy.

And then are you seeing any sort of improved momentum in volume in that business versus what you reported in the quarter?

We've been pretty consistent with what we've been doing these last months with it. So it's been consistent.

Our next question comes from Anthony Pettinari with Citi.

On cement, understanding that you're sold out, can you talk a little bit about what you're seeing in terms of underlying demand and understanding that you don't necessarily have full visibility in terms of where your cement is ultimately going. Just any thoughts on sort of public versus private demand? And specifically, if you're seeing any kind of pickup in private nonresidential or commercial activity, which has maybe been a little bit softer for the industry this year?

Yes. Where our cement plants are located in everything we've seen a pretty consistent demand profile across all our end markets with -- some are stronger than others, but it's been a very consistent demand profile. You can see in the notes that I said in my comments that we're working with our customers to satisfy all their demand in areas with it because we are at or near sold-out capacity, but we're actually at a sold out capacity across our facilities with it.

And the demand, like I said, is consistent across residential, and commercial is starting to pick up more and more. And so we see a very favorable demand profile across all aspects.

Okay. That's very helpful. And then just on Wallboard, in terms of the delays that homebuilders are seeing and kind of this monumental backlog of orders that needs to be cleared, is your expectation that we'd see that kind of volume pickup as we normally would in calendar 1Q with the spring season? Or is there any reason that you might think it would be maybe pushed out a little bit? And can you just talk about sort of the normal seasonality with Wallboard volumes versus what we might be seeing in the current environment?

Yes. Look, Anthony, I think we would say that it's probably a little too early and a little too difficult to speculate on when that log jam clears. There's lots of pieces that would go into that. But there's no doubt, as you said, the log jam just continues to build and there is a lot of pent-up demand for these homes. And so we are expecting to be, have a very busy next year when that does release.

Your next question comes from Jerry Revich with Goldman Sachs.

This is Jatin Khanna on behalf of Jerry Revich. Could you provide some color on the capital deployment opportunities? And how would you characterize the M&A pipeline and the opportunity set from here?

Yes. Great question. It's really the most important question here at Eagle around capital allocation. We've said this for many years, it's been very consistent, our primary and first use of capital is to continue to maintain our assets and like new condition so that we can continue to keep very high utilization rates. Closely followed by that is a desire to continue to grow Eagle.

We've found many opportunities over the last decade to grow the business with very high return projects predominantly on the heavy side of the business. And we continue to explore those opportunities. But as we've also said, there is a high barrier at a strategic level and a financial return level for those investments and we have not relaxed those standards. And so when those opportunities don't meet our hurdle rates or strategic criteria, our next use of cash, and we did that in a significant way this quarter, is to return excess cash to shareholders.

And we generally do that through our share repurchase program. We do have a modest quarterly dividend, a cash dividend that we paid. But that is consistent with what we've done for years. The pipeline of opportunities is good. And it is there things that we continue to explore, and we hope to continue to find ways to grow Eagle.

Our next question comes from Adam Thalhimer with Thompson Davis.

Sorry if I missed this, but can you give a little color on the quarter and Wallboard price?

It was consistent with the quarterly average, Adam. We...

Okay. And then on the Cement side, really, I think that was a record quarterly margin for you guys. Just curious if there's any maintenance you would call out for the back half and what your outlook is for Cement margins.

The maintenance cadence should be very similar to what we experienced over the last 12 months or so. So now with Kosmos being in the fold for a little over a year, I don't see any major issues. But yes, look, I think as we've been saying, we've been able to manage some of these inflationary pressures. And with the price increases, we've seen good margin expansion.

And then how will higher OCC impact gypsum margins?

We will start to see some of that flow through into the Wallboard business in Q3 and into Q4, and it's a function of those pricing mechanisms we price internally at the same level that we do externally. And so that's just the way the cadence will fall. And then as we've been saying, really the opportunity to expand margins there is going to be demand driven as some of the supply chain disruptions on the line.

Okay. Understood. And then on the M&A front, Craig, would you say that it's -- are you not seeing any opportunities? Or are you just not happy with where the price is?

No. What Craig was mentioning there with it is, we continuously look at the market for opportunities. We're actively and aggressively looking for opportunities. They just need to make the strategic criteria that Craig mentioned there.

Our next question comes from Phil Ng with Jefferies.

Given the well-documented challenges on supply chain and logistics, how has that impacted your business? I know in the past, perhaps limits distance you and your competitors may ship on Wallboard, and here's what you're seeing on the import front for Cement as well.

Yes. In the comments that I mentioned, Baltic Freight Dry index is up 135%. There is going to be a supply demand dynamic that needs imported cement, but it's going to come in at a more costly some than previous years with that freight cost being up. Other supply demand dynamics is what we talked about previous as we see on the wallboard side, the demand being pushed to the right, but it's building. It's not going away in our view. So that log jam will break at some time when the supply chain gets an order and we should see even user demand on the Wallboard side.

That's great. The double-digit price increases for cement next year, that's certainly very encouraging. That's a nice step up. Have pretty much all your competitors in the markets you compete in matched that increase for January?

Yes. We don't really track what our competitors do. We really look at supply-demand dynamics and what we feel is right for our footprint in our company with it. So I'm not going to comment on what others are doing, just where we stand.

Got it. And Michael, you mentioned that you have some headroom still on capacity for Wallboard. Can you give us a little color how quickly can you unlock some of that capacity? Is that mostly from adding a shift? And just given some of the labor challenges, just curious how quickly can you ramp that up.

Yes. One of the hallmarks at Eagle is we do a lot with less. And really, our facilities are set up where it is just a people addition more than anything else. And it's not a significant people add with it. So ramping up would be feasible depending on what the demand profile looks like, and it should be fairly quickly if we decide to do that.

Our next question comes from Kevin Hocevar with Northcoast Research.

Craig, you mentioned that the Wallboard pricing exiting the quarter was similar to the quarter average. I think you guys had a price increase for mid-September in Wallboard. So curious if that means that one didn't necessarily gain a lot of traction or, we've also heard that, that's been pushed back to maybe October, some -- so maybe that's just a sign of that. But curious if you could just kind of comment on that most recent price increase.

Yes. No, Kevin, consistent with what we've been saying as some of these supply chain issues at the homebuilders were being worked through, that price increase, as you said, well chronicled that it got moved out. And so we're still working through that but pretty consistent with what you would have expected to see.

Okay. And then you guys have talked about -- I know you've talked about this in the past, but on the synthetic gypsum side of things, that's obviously a challenge for the wallboard industry, which I think you guys are pretty well immune to, just given you mind most of your own natural rock and have a favorable situation kind of where you do use synthetic gypsum. So I'm just wondering if you could just give an update on how this has evolved?

Because I know one of your competitors, I believe, is building an import terminal in Florida to bring in natural rock. So it seems like maybe it's getting to the point where some others have to take action. So I guess if you could just kind of update us on, is this getting worse, just given demand is getting better and coal keeps coming offline? And do you expect it to just keep getting worse for the industry? And then it seems like you guys wouldn't necessarily be affected and then you would benefit, I would imagine, as others are impacted. But I'm curious if you could just give maybe a little bit of color there?

Yes. When you look at synthetic gypsum, synthetic gypsum is generated really from plants burning coal. So you'll see some short-term noise potentially if gas prices spike and more coal burn with it. But over the midterm and longer-term horizon, the calculus is as the U.S. goes to greener sources of power generation, that less coal will be burned and less synthetic gypsum will be produced. And so I'm not surprised with your comment that you said somebody is building an import terminal to bring in rock and to satisfy their facilities.

Over time, you can see the power plants have decreased in their coal consumption, and we expect that to continue. So that's just a straight supply and demand, there will be less supply of the product at some point in the future.

Your next question comes from Josh Wilson with Raymond James.

Congrats on the quarter. On the Paperboard side, could you give us a sense of what the price was exiting the quarter in that business?

Yes, Josh, again, that price is contractually developed. And so -- and it changes on a quarterly basis. So the average in the quarter is pretty consistent, and it will change October 1, it will change January 1 based on the price of inputs. And so we'll see a meaningful change in that price in Q3 and then another meaningful change in that price in Q4, consistent with the raw material inputs.

And were there any mix impacts on your pricing in any of those products?

No.

Our next question comes from Dennis Camporeale with Truist Securities.

This is Dennis Camporeale. I'm calling in for Keith Hughes. Thanks for taking my questions. So just 2 brief ones. In terms of supply-side headwinds, you mentioned that you're likely to pose less of a challenge going forward. Just generally, I wanted to touch briefly on labor and whether you anticipate or have been seeing challenges in labor and to what extent that plays into the bigger supply chain challenge picture.

And then just briefly, just to touch on Paperboard, whether cost in this business, whether you anticipate that these costs are maybe peaking and what stands that when the peak by come or when these costs might level off?

Yes. What I would tell you on the first question is, it's not a labor-intensive business generally across our footprint, both in Cement and Wallboard. So that's not as big of an issue for us. And then on your last point, as we said earlier, we saw a significant increase in OCC prices through the summer, July, August and September.

They seem to have plateaued here more recently. I don't want to speculate too much, but the educated guess right now is that they remain in this range for a little bit until further notice.

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Michael Haack for any further remarks.

Thanks, Josh. No, we appreciate everybody calling in today and look forward to talking to you in the -- after the [rest] of the year. Thank you.

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