Eagle Materials Inc. (NYSE:EXP) Q3 2024 Earnings Call Transcript

Eagle Materials Inc. (NYSE:EXP) Q3 2024 Earnings Call Transcript January 25, 2024

Eagle Materials Inc. beats earnings expectations. Reported EPS is $3.72, expectations were $3.56. Eagle Materials Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, everyone, and welcome to Eagle Materials’ Third 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: Thank you. Good morning. Welcome to Eagle Materials Conference Call for our Third 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 out by saying that I’m excited to report on another quarter of superior execution at Eagle Materials. A few financial results that I want to highlight from our third quarter are record revenue of $559 million, up 9%. Gross profit margin increased 130 basis points to 32.3%. Adjusted EPS was up 16% to $3.72 and we returned $106 million to shareholders through stock repurchases and the quarterly dividend. These results would not be attainable without the over 2,600 fantastic employees at Eagle Materials that make the company successful through their safe, hard work and dedication to customer satisfaction. Each of you contributes to the results I’m proud to report on.

Thank you. Because of these impressive results, Eagle Materials continued to produce strong cash flows. Over the years, we have been very clear as to how we will use the free cash flow generated from our operations. Our investment priorities have been consistent for years and will continue to remain so. They consist of three main components. First is to maintain or widen our low-cost producer strategy by keeping our facilities in like new condition. Second is to grow the company with emphasis on expanding the Heavy Materials segment through acquisitions or investments that increase existing capacity. And third, when investment opportunities do not meet our disciplined return on investment criteria, we prudently return excess cash to shareholders.

In the first nine months of fiscal year 2024, we have returned an impressive total of $276 million of cash to shareholders through share repurchases and dividends. Our ability to execute our investment priorities relies on the long-term sustainability of our businesses. A business is not just the hard assets of the equipment but consists of our most vital asset, the people operating in the plants, their safety and ensuring we are good stewards of the environment. We have made and continue to make progress in these areas and I’d like to spend a little time highlighting a few items here. In 2023, we were able to sustain our total recordable injury rate well below industry averages. Any incident is one too many and we will continue to strive for zero incidents but I am proud of the work that was done to sustain our step change in TRIR from previous years.

Environmentally we continue to make significant gains on our transition to blended cements. This quarter our blended cements accounted for over 75% of our manufactured sales volume. These cement lower our CO2 content per ton of material enable us to extend our clinker capacity. We also announced agreements with Terra CO2, granting us exclusive rights to use Terra’s technology to produce low-carbon Supplementary Cementitious Materials in three regions complementary to Eagle’s current footprint. This product has the potential to lower the carbon intensity of our Cementitious Materials and will enable us to fulfill the increased cement demand in today’s virtually sold-out market, especially as other SCMs like fly ash, continue to decrease in availability.

We look forward to highlighting these achievements and much more in our updated sustainability report to be published later this quarter. In the report you will see significant progress from Eagle both in what we are doing for our businesses, but also in how we are reporting that progress. With that let me turn to the specifics on the quarter starting with the Heavy Materials business. Our Heavy Materials performance this quarter, continued to benefit from favorable business conditions. Public infrastructure spending is robust. The bulk of the United States investment in roads, bridges and highways comes from the state and local level and tax receipts continue to be strong, while state budgets remain healthy. In addition, increased infrastructure spending from the Federal IIJA funds, should increase noticeably for the next several years.

Private non-residential spending also continues to provide demand tailwinds for our business. While certain pockets of non-residential construction such as warehousing may be a drag on the total spending the outlook from heavy industrial projects in manufacturing construction give us confidence in the visibility for our Cement business. The passing of the CHIPS Act and Inflation Reduction Act has led to meaningful increase in heavy industrial projects focused on computer, electric and onshoring of other manufacturing. Signs also suggest residential construction, may have bottomed. From these facts our demand outlook remains positive. And we will continue to focus on executing to provide materials for our customers. Turning to the supply side dynamics for heavy, we still see no meaningful supply additions for the Cement industry on the horizon.

Blended cement products, while important for making clinker go further will not add enough US Cement capacity to alter the supply/demand fundamentals. Imports are increasingly required to meet US demand, as they have been in the past, since we are well-positioned low-cost Heartland producer Eagle remains generally insulated from imports as transportation is very expensive and is expected to remain so. Against this supply/demand backdrop half of our markets are implementing a January 1st price increase, while the other half of our markets have announced an April 1st, price increase. Now let me turn to the Light side of our business. This quarter our Light Materials business held steady in an uncertain environment. Gypsum wallboard continues to benefit from a long tail construction backlog that has kept demand steadier than expected and construction across the South where much of our footprint is has held up particularly well.

The near-term outlook remains dynamic with the latter half of our fiscal third quarter seeing constructive market conditions for housing and wallboard demand given the drop in interest rates. In the medium-term, the direction of the US monetary policy and its effect on mortgage rates remains uncertain and will dictate the big component of the demand picture. While we expect multifamily housing starts and construction to drop off, single-family housing starts are recovering nicely especially in the South and homebuilders are reporting favorable outlooks. The longer term housing deficiency in the US will need to be addressed through New Home Construction. The wallboard demand backdrop continues to be set against supply constraints that are fundamentally changing our business.

As the availability of synthetic Gypsum continues to diminish, the approximately 50% of the wallboard industry designed to use synthetic Gypsum basis raw material challenges. Challenges from, which Eagle is generally insulated given the surety of raw material we’ve maintained at all of our wallboard plants. The result of the Synthetic Gypsum shortages is a steepened industry cost curve and crimped industry capacity. We do not see any improvement in cost or capacity in the medium-term. Against these market conditions we recently announced a wallboard price increase for February 1st. Given the structural and operational dynamics we believe our heavy and light materials businesses look increasingly similar. Structurally as I have discussed supply-side dynamics mean capacity remains constrained for both cement and wallboard although for different reasons.

On the demand side, each business is supported by long-term demographic driven tailwinds that should provide meaningful growth. Operationally, our two core businesses are well-defined, well-established and well-positioned. Each uses mine minerals that have many decades of owned reserves and each are in cyclical sectors, so cycle management skills are important and we have proven for decades that operating through the up and down of the cycle is where we excel. In all, the combined businesses produce meaningful free cash flow, keeping our balance sheet healthy and positioning us to capitalize on growth opportunities when they come. With that, I’ll turn it over to Craig to go through our financial results in more detail.

Craig Kesler: Thank you, Michael. Third quarter revenue was a record $559 million, an increase of 9% from the prior year. The increase reflects higher cement sales volume and prices and contribution from the recently acquired import terminal in Stockton, California partially offset by lower wallboard sales volume and prices. Excluding the Stockton acquisition revenue was up 7%. Again this past quarter, we generated record EPS. Third quarter earnings per share was $3.72 that’s a 16% increase from the prior year and represents the 10th consecutive quarter of year-over-year improvement. This quarter’s increase was driven by higher earnings and a 5% reduction in fully diluted shares due to our buyback program. Turning now to Segment Performance highlighted on the next slide.

In our Heavy Materials sector, which includes our Cement and Concrete and aggregates segments, revenue was up 18% to $366 million. This revenue growth was driven primarily by an increase in Cement sales prices that were implemented earlier this year, higher Cement sales volume and the contribution from the recently acquired Cement import terminal in Northern California. Operating earnings were up 43% primarily because of increased Cement prices and sales volume. Cement prices increased 13% and sales volume was up 7%. Given the strong market conditions that Michael discussed, we have announced another round of price increases for the first half of calendar 2024. Moving to the Light Materials sector on the next slide. Revenue in our Light Materials sector decreased 4% reflecting lower Wallboard sales volume and prices partially offset by record recycled Paperboard sales volume which was up 9% in the quarter.

One comment on our Wallboard sales price this quarter. With Wallboard sales volume coming in stronger than we had anticipated we had a catch-up in our customer rebate program this quarter that impacted our quarterly average Wallboard sales price. Excluding the catch-up, our Wallboard sales price decline would have been about half sequentially. Operating earnings in the sector declined 13% to $83 million reflecting lower Wallboard sales volume and prices. Looking now at our cash flow. As Michael discussed, we continue to generate strong cash flow and allocate capital in a disciplined way. During the first nine months of our fiscal year, operating cash flow was up 4% to $501 million. Capital spending increased to $88 million and we acquired the Cement Import Terminal in Stockton California for $55 million.

We repurchased approximately 1.5 million shares or 4% of our outstanding for $249 million in addition to paying our quarterly dividends, returning a total of $276 million to shareholders during the first nine months of the fiscal year. We have approximately 6.3 million shares remaining under our current repurchase authorization. Finally we also used our strong cash flow to strengthen our balance sheet. Let’s look at our capital structure. At December 31, 2023 our net debt-to-cap ratio was 43% and our net debt-to-EBITDA leverage ratio was 1.2 times. We ended the quarter with $49 million of cash on hand. Total committed liquidity at the end of the quarter was approximately $684 million and we have no meaningful near-term debt maturities giving us substantial financial flexibility.

Thank you for attending today’s call. Rocco will now move to the question-and-answer session.

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Q&A Session

Operator: Thank you. [Operator Instructions] And today’s first question comes from Trey Grooms with Stephens. Please go ahead.

Trey Grooms: Hi. Good morning, everyone. Thanks for taking my question. Wallboard volume clearly came in a little bit better looks to maybe even seen a little bit of an inflection here in the quarter. First is that primarily the impact of single-family starts beginning to show up? And as we kind of look into the next few quarters would you expect to see volume continue to get better here?

Craig Kesler: Yes. Thanks Trey. So I would say yes look as I said in my comments, I think, Wallboard volumes came in stronger throughout the entire year not just this quarter. I think that for the calendar year 2023 volume was 27 billion square feet not that far off of the pace for calendar 2022. So overall, I would say, things sales volume for Wallboard was stronger than anticipated. And as you say, you’ve looked at the Housing numbers coming — the orders coming out of the homebuilders for the last three quarters or more, and they’ve certainly seen a pickup in their order books, which would translate eventually into Wallboard volume. There’s a little bit of a lag between the start or really an order to a start and then ultimately to Wallboard consumption.

Our best guess is that’s more of a calendar 2024 event. So, I don’t know that we’ve actually seen that turn yet in the actual volume, but would anticipate that given the increase in orders and as Michael mentioned that’s why we put out a February price increase in Wallboard as we start — we think we’re going to be pretty busy into calendar 2024.

Trey Grooms: Thanks for the Craig. I wanted to touch on that as well. So thank you for bringing up the price increase here. The Wallboard margins were down and I understand volume and price were both slightly down in the quarter, but maybe if you could talk about a little bit more into the drivers there on the margin declines. And clearly, the February price increase comes at a good time given that some of the headwinds you’re seeing on the margin. Any color on magnitude or geographically, if it’s widespread, or just any other color you could give us around that increase?

Craig Kesler: Yeah. The February increase is slated for across the country, a little too early for us to speculate on exact dollar amounts and region by region. But again, given the volume strength and utilization rates are still pretty high. We’re going to be moving forward with it. You did point out some cost pressures OCC prices, while they had been lowered during most of calendar 2023 we have seen a recent up-tick in recycled fiber prices and so that will start to impact in the next quarter or two. And then in terms of the price for this past quarter as I mentioned in my comments the — we had — because volumes were better we had our rebate programs needed to get caught up in the last part of the calendar year. And so really if you were to exclude that catch-up the price cadence has been very similar for the last several months.

Trey Grooms: Yeah. Okay. That’s helpful. I appreciate. Craig, I’ll turn it over. Thank you.

Operator: Thank you. And our next question today comes from Anthony Pettinari with Citi. Please go ahead.

Anthony Pettinari: You talked about Cement hikes. I think half of your regions in January 1st, and half in April 1st. If I got that right is there any way to kind of think about the differentiation between the two hikes or maybe where the impact or why they’re staggered or any color you can give there?

Michael Haack: Yeah. Really, when you look at the staggering of the increases, if you remember in last year we had several price increases and some of them were at different times on the second price increase. So, really this is more on the cadence of where these price increases are falling for our customers and everything. If they got one in the later half of the year, they’re not in the January time frame there in the April time frame with it. As for consistency, it’s very similar to what Craig was saying on the Wallboard side. Nationally, as everybody knows, we’ve been in a sold-out condition across the nation with it. So it’s going to be increases pretty much across the nation for our Cement businesses with it. And we also with the Wallboard, as you know it’s too early for us to speculate on what those numbers are. We’re working with our customers right now. And then you’ll see those results as we report the next quarter.

Anthony Pettinari: Okay. Okay. That’s helpful. And then, I guess maybe switching gears, can you talk a little bit more about the Terra agreement? And I guess in the announcement, it says that you have sort of the right to build the SEM plants, and that those could produce each 240,000 tons per year. In terms of time line implementation capital investment, I’m just wondering if you can give us any more kind of details on how this agreement is expected to play out?

Michael Haack: Yeah. No, I’m happy to talk about the Terra businesses with you today. We as a company look at a lot of different technologies out there that help us provide product to our customers and also reduce our CO2 footprint through some blended products. As you know we’ve been talking a lot about blended products here over the last year and we’ve increased that quite a bit. Terra was a great partner that we wanted to work with. Us as Eagle, don’t necessarily have a research and development arm with it, and we rely sometimes on some outside experts in that field to help us there. And we’ve been very happy with the — what Terra has brought to the table. They have done a bunch of research on a product that we feel is very beneficial for us.

What I do want to caution in a way is that they are working on their first commercial scale facility right now. So we’re still a little ways away from having that commercial production, but we’re working with them really daily between our engineering teams and their engineering teams on how we bring that to the market. They do have one facility they are building that they’re doing with another partner that they have. And that is in process of being constructed on a commercial grade. We are kind of watching that closely. So we know when we could pull the — I feel confident on pulling the trigger on building our own facilities with Terra with it. So in the meantime, we’re going to work with them, still work on the making this a commercially viable product, which they feel confident in doing.

And so we’re still several quarters out from having in potentially several years out from having a commercially available plant running to deliver that 240,000 tons that we put in the Press Release. But all indications are very favorable in their product and their performance and the testing we’ve done in the Cement manufacturing.