Earnings Call: Q2 2021

Oct 29, 2020

Good day, everyone, and welcome to Eagle Materials Second Quarter of Fiscal 2021 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 Heck. Mr. Heck, please go ahead, sir. All right. Thank you. Good morning. Welcome to Eagle Materials conference call for our 2nd fiscal quarter of 2021. This is Michael Hack. Joining me today are Craig Kessler, 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 the call. To access it, please go to www.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 the 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. I'm pleased to be able to report another consecutive quarter of record revenue and net earnings growth along with further strengthening of our balance sheet. Let me begin with 4 important facts. First, our EPS was up 20%, which I'm sure you appreciate is no small feat in this pandemic environment. 2nd, we shipped an all time record 2,200,000 tons of cement during the quarter. 3rd, we shipped the 2nd quarter record 720,000,000 square feet of wellbore. And 4th and most importantly, we achieved these results safely. Now let's turn to the outlook for each of our businesses. Let me start with Cement. Cement volumes were up 23% for the quarter and up 28% for the fiscal year, reflecting the overall strength across all of our land markets. Some on the call may not realize that state and local budgets account for the lion's share of infrastructure funds, not the federal government. State and local budgets have been stretched during this pandemic, but state DOT budgets have remained resilient to date. A significant portion of local government funds is property taxes. It is worth noting that property values actually have been rising considerably through this pandemic. Sales taxes represent another significant portion of the pie and as you know, retail sales have rebounded and retail sales are now in fact above pre pandemic levels. Gasoline taxes have rebounded as well with the increase in miles driven. The states will be under undeniable pressure since expenditures have been rising as well as revenues. Each state will face different challenges and different urgencies with their infrastructure's priorities. The states with the largest negative funding variances from their 5 year averages are states largely outside our footprint such as Washington, Oregon and some northeastern and southeastern states. Many of our heartland geographies are faring better. We anticipate that demand over the longer term should be positive, especially with the added potential contribution from the federal government for infrastructure funding at some point. I do not want to discount that there is also the potential for slower trend growth over the near term, especially with the current significant uncertainties about the overall economy. The reality is that we at Eagle are operating at very high levels of capacity utilization today. We are working hard to squeeze out every last bit of cement capacity to meet the customers' existing demand. If demand were to continue at the pace we have seen, frankly, our production would not be able to grow with it. Now let me turn to Wallboard. The South leads the nation in the housing starts and it is more important than the Northeast, West and Midwest combined in terms of construction activity. We have long believed that the Sunbelt meaning for us the lower half of the U. S. And not California is the right place to be in wallboard through cycles. We have strategically positioned ourselves here due to long term construction activity, growth and demographic migration trends. Recent developments around out migration from the Northeast, Chicagoland and California and a prospect of even higher taxation in some states is reinforcing our optimism that this is a good long term strategic decision. Our wallboard shipments were up 6% this quarter and were up 6% for the fiscal year, a consistent trend. Latest industry data showed industry shipments up 1% for the quarter. We fared better through the pandemic dip simply due to our geographic positioning. Continued strong housing starts and the latest single family permits would suggest these trends should remain intact for the foreseeable future. The relationship between single family starts and wallboard demand is a close one. Single family construction U. S. More wallboard than multifamily on a per unit basis. Against this backdrop, we have announced a wallboard price increase to be implemented next week. Finally, let me comment on the status of the planned separation of these two businesses, cement and wallboard. Industrial logic for the separation remains intact as does our intention to complete the separation, but the timing remains uncertain. Timing is a factor we must watch closely and carefully evaluate. While the economy's 2020 trough seems to be in the rearview mirror, the path to normalcy remains exceptionally and remarkably uncertain. Because of this uncertainty, we have not determined the timing for the split. We will continue to evaluate and watch the market. It should be noted that although it is not a driver for the decision timing, a distinct benefit of the business remaining together beyond the obvious ability to weather uncertainty as a larger enterprise is the speed of company deleveraging that is occurring. This deleveraging is highly supportive of a successful separation launch and a benefit that should not be underestimated as we formulate the capital structures and policies around return of cash to shareholders for each business. Now let me turn it over to Craig to discuss the financials. Thank you, Michael. 2nd quarter revenue was a record $448,000,000 an increase of 12% from prior year. This increase primarily reflects contribution from the Kosmos Cement business we acquired in March and organic revenue improved 2%, reflecting increased cement and wallboard sales volume. 2nd quarter earnings per share from continuing operations were $2.16 an improvement of 20%. As we highlighted in the press release, the 2nd quarter results included a one time $0.14 per share tax benefit. This benefit related to regulations issued during the quarter that clarified the calculation of certain interest deduction limitations. Before we turn to the segment performance, I note that having completed the sale of our oil and gas proppants business during September, the current and prior period financial results of that business have been presented separately as discontinued operations on the income statement and balance sheet. Let's look at our heavy materials results for the quarter highlighted on the next slide. The Heavy Materials sector includes our Cement, Concrete and Aggregates segments. Revenue in the sector increased 15%, driven primarily by the addition of the recently acquired Kosmos Cement Business. Organic cement sales volume and prices improved 1% and 4% respectively. Operating earnings also increased 15%, again reflecting the addition of the Kosmos Cement business. As we discussed last quarter, because of COVID-nineteen, we delayed certain planned cement plant maintenance outages until our Q2, which resulted in approximately $5,000,000 of higher maintenance costs this quarter compared with the prior year period. Moving to the light material sector on the next slide. 2nd quarter revenue in our wallboard and paper business was up 1% as improved sales volume was partially offset by lower wallboard prices. Quarterly operating earnings in the sector declined 1% to $48,000,000 again reflecting lower wallboard sales prices partially offset by increased volume. Looking now on our cash flow, which remains strong. During the 1st 6 months of the year operating cash flow increased 94%, reflecting earnings growth, disciplined working capital management and the receipt of the majority of our IRS refund. Capital spending declined to $41,000,000 and we continue to expect capital spending in the range of $60,000,000 to $70,000,000 for fiscal 2021. Finally, a look at our capital structure. We continue to prioritize debt reduction as a primary use of cash at this time and the preservation of financial flexibility in light of pandemic related uncertainties. At September 30, 2020, our net debt to cap ratio was 48% and our net debt to EBITDA leverage ratio was 2 times. Total liquidity at the end of the quarter was over $700,000,000 and we have no near term debt maturities. Thank you for attending today's call. We'll now move to the question and answer session. Lisa? Your first question comes from the line of Zane Karimi with D. A. Davidson. Hello, can you guys hear me? Yes. Okay. Sorry about that. Well, congrats on the quarter again. My first question would be along the heavy material side of things. Can you talk a little bit about how the quarter develops particularly, it's specifically touching on the improved pricing dynamics and demand changes? Yes. I think, Dave, were you asking about cement pricing? We had our time here. Yes. So with the cement pricing and demand across the markets is again, had a hard time hearing you. Yes. So, what I would basically say about that is all of our markets contributed over this last quarter. We feel very comfortable with how our network is performing on the heavy side of the business. There's not one location that I'd spike out over any other location with it. Each location contributed and they contributed equally both with the pricing improvements and on the demand side of the picture. Okay, got you. And then you mentioned earlier as well about DOT funding environment, but I was hoping you could talk a little bit more on the key states for you and how they're doing, most with regards to second half as well as calendar 'twenty one? Yes. So I'm not going to talk about the projections forward. What we see basically is what we've always been saying is low single digit growth. There's nothing that's changed our thought process on that. What we're seeing here currently as you can tell by our cement volumes is demand is very robust in the locations we operate. As you know, we're primarily a Heartland company. So with the states that are impacted are primarily of that Heartland West. Your next question comes from the line of Anthony Pettinari with Citi. Capacity utilization for your development right now. And then you had a large competitor announce a broad capacity project during the quarter. I was wondering if you can just talk about supply demand balance and if maybe you see any opportunity to expand your footprint given strong demand that we think? In terms of really not appropriate for us to comment on other people's capacity announcements, I think they were pretty clear. In terms of our capacity utilization across our wallboard plant network, as Michael highlighted, we're very fortunate in the regions in which we compete and operate those markets. The southern half of the U. S. Generally has been very resilient. Our utilization rates have certainly picked up. And with single family construction being the most significant driver of demand for wallboard. On the for the foreseeable future, we see good strong volume in our markets. Okay. That's helpful. And then just on the wallboard price increase, is it possible to give any kind of fine point on magnitude or timing or just kind of the setup compared to maybe previous price hike attempts if you look back at your inventory? Yes. Look, the price increase is what we implemented early next week, early November. And with strong demand behind us, that should be supportive of a price increase. We're certainly having those conversations directly with our customers at this time. Okay. I'll turn it over. Thanks. Your next question comes from the line of Jeremy Travis with Goldman Sachs. This is Jatin Khanna on behalf of Jerry Revich. Can you please talk about which of your cement markets have had more success in putting through price increases? Yes. Like I said before, when we look at the cement, we really look at our cement now as a network across and each section of the network is contributing equally. We're very happy with our pricing and our price increases across the entire network. So there's not one that I would spike out compared to the others. It was pretty consistent across the U. S. U. S. I would add to that. If you look at the price realization, our organic realization was an increase of 4%. That is ahead of what we've seen in the last 2 years. So I would just point that out in terms of the strength that we've seen in our markets. All right. Thank you. And in residue, we are seeing strong price increases across basic commodities. Are you optimistic about getting more pricing power over the next 12 months compared to challenges in recent years? Yes. When you look across with the high utilization we're having across both of our businesses, I think that's a good assumption to make. We have a very high capacity utilization on our plants and as in my opening comments, I did discuss on the cement side that production cannot keep up with the demand growth that keeps growing at this pace with it. So utilization is going to be a key factor which will result discussions on pricing with our customers. Thanks a lot. Your next question comes from the line of Kevin Hoessinger with Northcoast Research. Wondering if you could comment on in the wallboard business, how would you say the residentially focused half inch wallboard is doing versus the more commercially focused 5G? Yes, Kevin, wallboard demand is around 85% driven by residential construction, a large piece of that being new within a follow on repair and remodel, the other piece of it. Commercial or prime and non residential is by far and away the smallest portion of the demand effort for wallboard. So and I think Michael commented at the beginning, but when we talk about new residential construction, we really focus on the single family side of that. Multifamily is good and we appreciate it. But single family consumes 2 times more than multifamily unit does. So that's what really drives wallboard demand here in the U. S. Okay, got you. And then can you just kind of talk about how demand going into the quarter and here into October? Has trends been pretty steady or have you seen any acceleration in demand trends as time has gone on? Yes. To put it in perspective, wallboard consumption into a home or building is 60 to 90 days after the start. So you we're just starting to see this pickup in starts flowing through into the business. And so we have seen as you saw for the quarter strong volumes there. October has continued to be strong as well. Which is very natural to follow housing starts in that way. Okay, great. Thank you very much. Your next question comes from the line of Adam Stauchner with Thompson Davis. This call, so hopefully this is clear. All right. So I want to start with Kosmos. The volumes for Kosmos were like 25% above what we were modeling. And I'm just curious if that's a good run rate to use? Obviously, you got normal seasonality, but were there any puts and takes in the quarter for Kosmos? Yes. Really, when you look at Kosmos, Kosmos was in line with our expectations on the volumetric side this month and there will be seasonality as you noted. So you should take into account that it's a little bit more northern of markets. There will be some seasonality, but it was in line what our expectations are in the non seasonal months. Okay, helpful. And then on wallboard, what was the quarter end wallboard price? It was right around the average, maybe $1 below the average for the quarter. All right. And last one for me. I think a couple of people have tried on this. I just want to try one more time. How would you characterize the overall cement volume environment as we head into the fall and the winter? And like I said before, we're consistent across all of our locations. We had a good consistent run rate and like Craig said on the wellbore side, cement is no different. We went into October with a very consistent run rate. Cement where cement gets more impacted in the fall is we are weather dependent. So we're going to have more weather dependency than anything else. As I said, October has held up very consistently with what the last months were and we don't see it changing unless weather hits us. Okay, perfect. Thanks guys. I'll turn it over. Your next question comes from the line of Philip Ng with Jefferies. Is that mostly mix or you did see some price compression? And then going forward, appreciating that non res might be a little weaker, will that have an impact on your ASP and margins going forward? Phil, you're actually the first 10 seconds of your question cut out. There's some issue with the muting that's going on. If you could just kind of reintroduce the question. Sure. No problem, Craig. On your wallboard pricing in the quarter, it looked like it slipped a little bit sequentially. How much of that was mix related versus like for like pricing? And then when we think about going forward, appreciate that non res might be weaker than new resi. Does that have an impact on your ASPs or margins? Yes. So it was not a lot of product mix impacted the price for the quarter. It's pretty like for like. And in terms of margins, 5eight versus 0.5 inches they're pretty consistent, a little higher priced on the commercial product because of the incremental cost for it. So any change in non res wouldn't really impact the overall margin profile of the business. Got it. Yes, I mean your organic volumes in cement was really impressive, holding far better than your heavy material peers. Any thoughts on what's driving some of the resiliency? And have you seen any slowdown in some of your big states from a lighting standpoint or bidding at this juncture? It sounds like October holding up really well. Yes. October has been holding up well. We haven't seen anything that is a major distraction for many of our markets right now on the heavy side. The biggest thing that we'll experience as I said before is we're more weather dependent on that side of the business. So depending on if we have a winter or not, if you recall last year, we did not have much of a winter. So we were very busy throughout the whole time frame and this year will be more dependent on if we have that winter or not. Okay, great. And then we're seeing some signs that freight and logistics spot prices are starting to tick up a bit and maybe supply is getting a little more constricted. Curious what you're seeing and what kind of impact it's having in your business? Yes, Bill, we see the same things on the margin. Here the economy is starting to pick up and we're getting out of the shutdown areas. So but we haven't seen it impact us materially at this point, but certainly as economic activity in the residential side certainly that's something that we're monitoring very closely. Okay. Thanks a lot. Really appreciate it guys. Your next question comes from the line of Trey Groom with Stephens. Hey, good morning. Thanks for taking my questions. I dropped off here for a little bit. So forgive me a few if you've asked or if these questions have been asked. But on the wallboard side, the OCC, Alex spiked earlier in the year, did that have any impact in the Q3? And how are we thinking about wallboard margins just going forward here in the next quarter or 2? Yes, it's a good question, Trey. You saw sequentially the paper mill profitability improved significantly. A part of that was associated with the ramp up of the new equipment that we installed in the spring. But certainly the other piece of that is the pricing mechanism that we pass through the higher OCC prices from the spring. They get passed through a quarter later. So that really contributed there. Conversely on the wallboard side, certainly they did have a higher paper cost. Now that ends up reversing itself because OCC prices then fell again during the summertime, the early summer. They've been fairly flat now for 3 or 4 months. So on the balance of the year, they'll equalize out in terms of the OCC price impact for the wallboard business. Longer term, we think about our business, we've got a long term supply of natural gypsum. We've got a unique synthetic gypsum supply agreement. So we have a good low cost structure. We don't see any significant headwinds to that. And so we think we sit in a pretty unique position that we can drive margins higher from here given the strength of single family residential construction. Okay, good. Thanks for that, Craig. It's helpful. And then you kind of touched on my next question was on the CNGP side. I know there was some noise around Santee Cooper and maybe some of the shutdowns or something along the lines of one of their plants there. But my understanding is that, that is it's not going to be impactful to you guys and you're supplied by the plant that's going to continue to be up and running. Is that correct? That's right, Fred. St. Jude Cooper has been a wonderful partner with Eagle over many, many years now. They continue to meet the requirements as stated in the contract. And so we don't have any concerns there. They've been a great partner with us. And then last one for me is maybe a little bit bigger picture, but still around CinJIP. Is there a way and I know the thought is long term that CinJip will continue to be in shorter and shorter supply. But how are you guys thinking about that dynamic in the more maybe medium term over the next year or 2? Do you see that being contributing to some cost increases for the industry over the maybe a medium term? Yes, Trey. It's a phenomenon and a trend that has only continued to pick up pace. For those who might not be familiar, synthetic chips in the byproduct of a coal fired power plant. As coal fired power plant production has come down significantly over the last couple of years, the supply of synthetic gypsum has diminished. We sit in a very unique position with our supply agreement. I can't speak to how others have positioned themselves. But over a long run, synthetic gypsum is becoming harder to find, more expensive to get. And so you would expect to see for many the cost curve increase. But again, I don't know everybody's situation. I just know ours and we're uniquely positioned with a long term supply agreement there with our one plant in the Southeast. Great. That's it for me guys. Thanks a lot. Congrats on the good quarter. Thanks. Your next question comes from the line of Josh Wilson with Raymond James. Good morning. Congrats on the quarter. Thanks for taking my questions. Thanks. Just a few one offs for me here and I this release as well, so I apologize. Did you quantify the headwinds of weather that you mentioned in the press release? Say that last part, did we quantify what, Josh? You mentioned some adverse weather impacting that. Can you quantify that? No, look, it was the 1st couple of weeks of September, we just commented on it. But it didn't dramatically change the quarter, but it certainly had a couple of weeks fell there for us. Okay. And then as it relates to the cement margins going forward, is there any other change in the timing of maintenance costs? Or was there a benefit from fuel that you want to call out as non recurring that we shouldn't continue forward? The only thing we have is with this pandemic side, we've shifted around some of our outages. We have one more plant we're going to do an outage at, which is just it won't be a significant pull on a quarter or anything with it, but we delayed it from the 1st part of the year. We staged these out, so I wouldn't have more than 1 or 2 plants down at any time during the quarter. So we're going to complete the last plants outage here in this last quarter, but like I said, it's not going to be real significant of a value. Got it. And then last one for me, the ramp up of the paperboard equipment, are we now at the full run rate for that or is there more benefit to come? Well, we do have the equipment installed now. We were able to get the people over that we needed to get the equipment installed. We're still working through that equipment. We probably have a couple of quarters of getting that equipment up and running. As you can see by our volume side though with it, we're very happy with where we ended up this last quarter. We were seeing some improvement on a volumetric standpoint. We expect over the next two quarters that you'll see some creeping up on that volumetric side as we get the equipment fully integrated and running. Thanks. Good luck with the next quarter. Your next question comes from the line of Kevin Hughes with Truist. Hi, this is Keith Hughes from Truist. Just a question back on the split, obviously external things have delayed this. What type of things will we need to see in the market for you to go ahead and complete the split? Is it around virus cases? Is it around demand patterns? I'm just trying to pick up what would give us a clue what would be coming? Yes. What we're really looking for in my opening comments, I said some of it is around seeing something that's sustainable and everything. I mean every time you pick up the paper you see different things and it's affecting the economy in different ways. So I'd like to see some normalities and sustainability in a couple of quarters of run rate where we feel comfortable with taking these two businesses out on their own. They're both going to be smaller businesses and I'd like to see them just have a runway in front of them that has some consistency. Okay. And the you talked about pricing in wallboard a little bit earlier. There is at least one competitor has announced an increase for January of next year. There may have been more since I saw the first letter. Is that something you think the industry will participate or are you going to participate with? Yes, Keith. In terms of any future pricing decisions, we'll communicate that to customers first and before we try to speculate on this. Okay. All right. Thank you for taking the questions. And at this time, there are no further questions. Okay. Just wanted to say thank you all for attending the call. It was great talking to you and we look forward to talking to you in the 1st part of next year. This concludes today's conference. You may now disconnect.