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 Haack. Mr. Haack, please go ahead, sir.

All right. Thank you. Good morning. Welcome to Eagle Materials conference call for our second fiscal quarter of 2021. 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 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 subjects 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 four important facts: first, our EPS was up 20%, which I'm sure you appreciate, is no small feat in this pandemic environment; second, we shipped an all-time record 2.2 million tons of cement during the quarter; third, we shipped the second quarter record 720 million square feet of Wallboard; and fourth, 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 organic 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…

Thank you, Michael. Second quarter revenue was a record $448 million, 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. Second quarter earnings per share from continuing operations were $2.16, an improvement of 20%. As we highlighted in the press release, the second quarter results included a onetime $0.14 per share tax benefit. This benefit related to regulations issued during the quarter to clarify the calculation of certain interest deduction limitations. Before we turn to the segment performance, I'd 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 Material results for the quarter, highlighted on the next slide. The Heavy Materials sector includes our Cement, Concrete and Aggregates segments. Revenue in this 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-19, we delayed certain planned cement plant maintenance outages until our second quarter, which resulted in approximately $5 million of higher maintenance costs this quarter compared with the prior year period. Moving to the Light Materials sector on the next slide. Second 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 this sector declined 1% to $48 million, again reflecting lower Wallboard sales prices, partially offset by increased volume. Looking now at our cash flow, which remains strong. During the first 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 million, and we continue to expect capital spending in the range of $60 million to $70 million 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 line with pandemic-related uncertainties. At September 30, 2020, our net debt-to-cap ratio was 48% and our net debt-to-EBITDA leverage ratio was 2x. Total liquidity at the end of the quarter was over $700 million, 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?

[Operator Instructions]. 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. I hope you drive some of the quarterly [indiscernible] Light [indiscernible] there. My first question would be along the Heavy Materials sizing, can you just talk a little bit about how the [indiscernible] it's just a good touching on the improved pricing dynamics and in demand changes.

Yes. I think, Zane, were you asking about cement pricing? We had hard time hearing you.

Yes.

Yes. So with the Cement pricing and demand across the markets is -- again, I had a hard time hearing you. Yes. So Zane, 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, mostly with regards to second half as well as calendar '21?

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 up that Heartland side, along with the Nevada operation out to the West.

Your next question comes from the line of Anthony Pettinari with Citi.

[Technical Difficulty] capacity utilization for your development [indiscernible] right now. And then you had a large competitor announced [indiscernible] the capacity project during the quarter. Wondering if you can just talk about supply demand balance? And if maybe you see any opportunity to expand your footprint, given some strong demand that we're seeing?

No. 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 plan network, as Michael highlighted, we're very fortunate in the regions in which we compete and operate. Those markets, 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 a 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 thumb point on magnitude or timing or just kind of the setup compared to maybe previous price hike attempts if you look like you're up for it?

Yes, look, the price increase is -- will be 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 this time.

Our next question comes from the line of Jerry Revich 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.

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. And in residual, 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 at our plants. And 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 in discussions on pricing with our customers.

Your next question comes from the line of Kevin Hocevar with Northcoast Research.

Wondering, if you could comment on -- in the Wallboard business. How would you say this residentially focused -- in the Wallboard is doing versus the more commercially focused private?

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 private nonresidential is, by far away, the smallest portion of the demand effort for Wallboard. So -- and I think Michael commented in 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 2x more than multifamily unit does. So that's what really drives Wallboard demand here in the U.S.

Okay. Got you. And then just kind of talk about how demand was down in this quarter and here into October? Have trends been pretty steady or have you seen any acceleration in demand trends as time is going on?

Yes. To put it into perspective, Wallboard consumption into a home or building is 60 to 90 days after the start. So you -- we're just started to see this pickup and 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. So -- which is very natural to follow housing starts in that way.

Okay. Our next question comes from the line of Adam Thalhimer with Thompson, Davis.

So Kosmos, 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're going to have 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, it's a little bit more northern of the markets. So there will be some seasonality, but it was in line with what our expectations are in the nonseasonal months.

Okay, helpful. And then on Wallboard, what was the quarter in Wallboard size?

It was right around the average rate, $1 below the average for the quarter.

All right. And then 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?

Yes, 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 Wallboard side, Cement is no different. We went into October with a very consistent run rate. It's Cement -- where Cement gets more impacted in the fall as 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 the last months forward, and we don't see it changing unless weather hits us.

Your next question comes from the line of Philip Ng with Jefferies.

[Technical Difficulty] Is that mostly mix? Or you did see some price compression? And then going forward, appreciating that nonres 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 looks like it slipped a little bit sequentially. How much of that was mix related versus like-for-like pricing? And when we think about going forward, appreciating that nonres 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 impacting the price for the quarter. It's pretty like-for-like. And in terms of margins, 5 inch versus 0.5 inch, they're pretty consistent, little higher priced on the commercial product because of the incremental cost for it. So any change in nonres wouldn't really impact the overall margin profile of the business.

Got it. Yes. I mean your organic volumes in Cement was really impressive, hoarding up far better than your Heavy Materials peers. Any thoughts on what's driving some of the resiliency? And have you seen a slowdown in some of your big states from a lighting standpoint or bidding at this juncture? It sounds like October is 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 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 timeframe. And this year, it will be more dependent on if we have that winter or not.

Okay, great. And then we're seeing some signs at 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 as 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.

Next question comes from the line of Trey Grooms with Stephens.

I've dropped off here for a little bit. So forgive me if you've asked -- or if these questions have been asked. But on the Wallboard side, the OCC, that spiked earlier in the year, did that have any impact in the third quarter? 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. And 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 passed through the higher OCC prices from the spring, they get passed through a quarter later. And 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 summer time, the early summer, they've been fairly flat now, 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, 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. Craig, it's helpful. And then you kind of touched on my next question was on the syn gyp side. I know there was some noise around Santee Cooper and maybe some of the shutdowns or something with their -- along the lines with one of their plants there. But my understanding is that, that is a -- 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? And is that correct?

Yes, that's right, Trey. Santee 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. It's -- might a little bit bigger picture, but still around syn gyp is -- is there a way -- and I know the thought is long-term that syn gyp 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 two? Do you see that being contributing to some cost increases for the industry over the maybe 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 gypsum is a 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 that 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.

Your next question comes from the line of Josh Wilson with Raymond James.

Congrats on the quarter. Just a few one-off for me here, and I [indiscernible] for technical difficulties as well. So I apologize. Did you quantify the headwind weather that you mentioned in the press release?

Say that last part, did we quantify what, Josh?

You mentioned some adverse weather impacting [indiscernible] can you quantify that?

No. Look, it was the first 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 net margins going forward, is there any other change in the timing of maintenance costs? Or was there any benefit from fuel that you want to call out as the nonrecurring that we shouldn't continue forward?

The only thing we have, as you know, 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 a -- it won't be a significant pull on a quarter or anything with it, but we delayed it from the first 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 plant's outage here in this last quarter. But as 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, 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.

Your next question comes from the line of Keith Hughes with Truist.

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 case? Is it around demand patterns? Just trying to pick up what would give us a clue what will be coming.

Yes. What we're really looking for is -- and in my opening comments, I said some of it, as you know, 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 you talked about pricing in Wallboard a little bit earlier. There is at least one competitor 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? 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.

And at this time, there are no further questions.

Okay. I just want 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 first part of next year.

This concludes today's conference. You may now disconnect.