Q3 2024 Eagle Materials Inc Earnings Call
Participants
D. Craig Kesler; Executive VP of Finance & Administration and CFO; Eagle Materials Inc.
Michael R. Haack; CEO, President & Director; Eagle Materials Inc.
Anthony James Pettinari; Research Analyst; Citigroup Inc. Exchange Research
Jatin Khanna; Research Analyst; Goldman Sachs Group, Inc., Research Division
Keith Brian Hughes; MD; Truist Securities, Inc., Research Division
Kevin Gainey
Philip H. Ng; Senior Research Analyst & Equity Analyst; Jefferies LLC, Research Division
Trey Grooms; MD & Analyst; Stephens Inc., Research Division
Presentation
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 R. 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 3 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 9 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 0 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 material in 3 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 IIJ funds should increase noticeably for the next several years. Private nonresidential spending also continues to provide demand tailwinds for our business. While certain pockets of nonresidential 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 U.S. Cement capacity to alter the supply/demand fundamentals. Imports are increasingly required to meet U.S. 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 1, price increase. While the other half of our markets have announced an April 1 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 U.S. 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 U.S. 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 1. 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 2 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.
D. 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 tenth 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 9 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 9 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 1.2x. 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.
Question and Answer Session
Operator
(Operator Instructions) And today's first question comes from Trey Grooms with Stephens.
Trey Grooms
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?
D. 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 '22.
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 3 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 '24 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 '24.
Trey Grooms
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?
D. Craig Kesler
Yes, 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 '23, we have seen a recent uptick in recycled fiber prices, and so that will start to impact in the next quarter or 2.
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.
Operator
And our next question today comes from Anthony Pettinari with Citi.
Anthony James Pettinari
You talked about Cement hikes. I think half of your regions in January 1 and half in April 1. If I got that right, is there any way to kind of think about the differentiation between the 2 hikes or maybe where the impact or why they're staggered or any color you can give there?
Michael R. Haack
Yes. 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 James Pettinari
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 R. Haack
Yes. 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.
D. Craig Kesler
Anthony, I might just add one thing to that. In terms of the capital investments, as Michael mentioned, I would not anticipate that being in our fiscal '25. And then in terms of a profitability, look, I would just say, we believe this will more than meet our investment hurdle rates and return criteria. So very excited about it, but it is still a ways off for us.
Operator
And our next question today comes from Jerry Revich with Goldman Sachs.
Jatin Khanna
This is Jatin Khanna on behalf of Jerry Revich. Could you please talk about the potential for new margin highs for Cement, amid rising replacement costs and slowing input costs in the coming quarters?
D. Craig Kesler
Could you repeat the first part of that question?
Jatin Khanna
Yes, sure. Could you please talk about the potential for new margin highs for Cement? amid rising replacement costs and slowing input costs?
D. Craig Kesler
Yes. No. Look, it's very consistent with what we've talked about for several years now. We've improved the Cement network at Eagle through large M&A over the last decade or so on the assets that we've acquired have been high-quality assets. And so then against the backdrop of very limited supply response to improving demand. You have diminishing alternative materials like fly ash. And so that's led to an environment where we've been able to achieve good pricing.
And so yes, we've seen margins improve very nicely, and this quarter is in line with that. As we look forward into fiscal '25, we've talked many times over the last several quarters about we would expect to see some lower energy prices, especially around fuel. So we would expect over the rest of the cycle, we should continue to be able to expand margins across our Cement network.
Operator
And our next question today comes from Kevin Gainey with Thompson, Davis.
Kevin Gainey
It's Kevin on for Adam. I actually maybe wanted to talk a little bit about the California (inaudible) terminal. It seems to be performing well. And have those assets been absorbed into the network easily? And how are they performing versus kind of when you guys bought them?
Michael R. Haack
Yes. That asset was a fantastic fit into our operation, as we discussed previously with -- they were absorbed very quickly into the operation, and it's to support that Western market and to support our plants on that side and satisfy our customers' demand. We'll continue to integrate that. However, it's actually came up very fast and very efficiently and is supporting our markets very well.
Kevin Gainey
Good to hear. And then maybe if you guys wanted to go just on Cement margins a little more. Do you -- what gives you guys the confidence in sustaining that looking forward?
D. Craig Kesler
Yes. And just to be clear, we look at our margin profile, whether you want to call it a trailing 12 months or on an annual period. You certainly have quarters, where you'll have our major maintenance outages like we'll have in the June quarter. And so we're really talking about annual margins. And look, it comes from a foundation of high-quality assets, low-cost position in very good markets.
Michael has alluded to many times, we're relatively insulated from imports. So we're more in the Heartland part of the country. And so given the market conditions where demand is outpacing supply, that generally provides a pricing power to the manufacturers. And you've seen that the last couple of years, and we've got incremental price increases announced for the first half of this year. And then on the cost side, it's an energy-intensive business and energy prices certainly have stopped being as inflationary as they were a couple of years ago. So that's what gives us the confidence, as we look at this business at -- on an annual basis why we think we can continue to improve margins.
Operator
Our next question today comes from Phil Ng with Jefferies.
Philip H. Ng
Appreciating you're pretty insulated from imports, Craig, as you mentioned. But there is the conflict in the Red Sea. Are you seeing any impact out there from imports, whether it's supply and pricing, and what that ultimately means for the markets you're in?
D. Craig Kesler
Phil, no direct impact for us in terms of supply or anything coming across the ocean. But I think it does highlight the risk that imports have that they are subject to global issues, whether it's very specific events, as you mentioned, or others that could impact timing of ships, the trips that they have to take longer trips that are more expensive. So that is the issue with why imports have a restricted ability to impact the U.S. market.
Philip H. Ng
Are you seeing any upward pressure on import prices, just given that dynamic in recent weeks?
D. Craig Kesler
Ocean freight rates have kind of gone up and down over the last, call it, 6 to 9 months. Those are impacted by many things. Again, we're not as large of an importer as others are. So I can't say that we've seen any direct impact at this point. But I think your point is well made that there are some upward pressures on ocean freight rates.
Philip H. Ng
Okay. On the Wallboard side, the quarter was obviously quite strong from a volume standpoint. Is any of that like tied to like prebuy, I know there was a fall price increase or any of your customers trying to hit these rebates. So my question is, could there be a hangover effect on the demand side for your March quarter? And then I guess bigger picture this year with rates potentially coming back, let's say we get back to like 5.5%. How quickly do you see that kind of rippling through? I appreciate there's a lag, but like how quickly do you kind of see that inflection, if you do see one on Wallboard demand?
D. Craig Kesler
Yes. We didn't see any sort of prebuy activity, those type of things. I think that is fundamental Wallboard consumption. We look at our orders post the quarter and been very happy with the environment and the order activity. So I don't think it is pretty clean volume.
Yes, in terms of the inflection point for interest rates and therefore, the benefit to housing affordability and demand. As I mentioned earlier, there is a lag between a start to Wallboard consumption, that was elongated post COVID because of some of the supply chain issues the homebuilders we're dealing with. I think those issues have been have eased over the last 18 months, let's call it. So you would expect to see going back to more of a normal timing in terms of, call it, 3 to 4 months from a start to Wallboard consumption is typically what -- or historically what we've seen for how fast that flows back into the business.
Operator
And our next question today comes from Keith Hughes with Truist.
Keith Brian Hughes
I had questions on the volume of the JV. It was down in the quarter. It was fairly easy comp in the prior year. I'm sure weather played some role here, but you just talk about the pace of business at the volume of the JV in the quarter.
Michael R. Haack
Yes. I'll take that question, Keith. Thank you. When we look at the JV, we had discussed earlier in the year that we had some older equipment at that JV that we -- if you remember about a couple of quarters ago, we had a mill that we were struggling with a little bit. And we did a repair to that mill that we thought would carry us through the lead time to get the parts that we need for that mill. That mill actually had some additional issues that it was still running fine, but from a safety perspective and standpoint, we wanted to make sure we took it down and address the issues that were happening, so we didn't have a catastrophic failure.
So we did take a little bit more of an outage this last quarter to address that. We have the parts for that mill on order. It's just the lead time on these heavy industrial parts, and it's a part that typically doesn't wear out as much that we're going to have to replace. So it had an 18- to 24-month lead time with it. We're going to change that, those mill components out later on this year. The other thing I also wanted to highlight with Texas Lehigh, as I've talked about in previous quarters is, but we have the secondary thing that caused us some issues throughout the year was a clinker cooler we have, which we are going to also address during this next year.
So this next fiscal year, we will have a little bit more extended downtime to address those 2 issues. We're very confident that the plant infrastructure other than these 2 components is very, very good. We just are getting to the end of life of these components, and they take a little bit of time to replace and to get the parts into dissatisfy them. So we had a little bit more downtime in the quarter.
Keith Brian Hughes
Okay. It sounds like this is going to continue through really the next fiscal year, is that you're saying...
Michael R. Haack
Yes. We're going to have an extended outage. We haven't defined when that outage is going to be yet because we want to ensure all the components are in, but it will happen sometime in this next fiscal year, where we will have an extended outage probably a couple of weeks longer than a typical outage to address these 2 issues.
Keith Brian Hughes
And any -- can you give us any kind of feel of how much capacity effectively is affected by the problems you're discussing?
D. Craig Kesler
Yes. Keith, I don't know that I would say it's impacting the capacity. It's just the ability to ramp up to full production. And as Michael said, post the installation of these -- of the new equipment, we should be back to our ordinary level.
Operator
And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Michael Haack for any closing remarks.
Michael R. Haack
Thank you, Rocco. We entered the new calendar year committed to continuing to operate safely and responsibly and deliver excellent results for our customers and you, our shareholders. The outlook for Eagle is bright, and we look forward to capitalizing on opportunities ahead. We're also excited to publish an updated and upgraded sustainability report and to discuss highlights, when we meet again in May, on the report and our full fiscal year 2024 results and progress on our strategic priorities. Thank you for joining us today.
Operator
Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.
