Good day, everyone, and welcome to Eagle Materials Second 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.

Thank you, MJ. Good morning. Welcome to Eagle Materials conference call for our second 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 off by saying that I'm excited to highlight another quarter of record operating and financial performance for Eagle Materials. In the second quarter of fiscal 2024, Eagle generated record revenue of $622 million, up 3%. Eagle expanded gross margins to 33.6%, up 150 basis points, and we achieved record net earnings per diluted share of $4.26, up 15%. A key reason for our superior margin performance is our commitment to our long-term sustainability of our plants, our businesses and our employees. On the employee front, I want to highlight an event that we conducted this past quarter, one that I always look forward to attending and participating in. Our Seventh Annual Health, Safety and Environment Conference. This conference brings together our operations and HSE leaders from across all of Eagle. We have an open and honest discussion about where Eagle is currently and where we will be going with regards to HSE. From the focus and dedication of our people, Eagle has been able…

Thank you, Michael. Second quarter revenue was a record $622 million, an increase of 3% from the prior year. The increase reflects higher cement sales prices and contribution from the recently acquired cement import terminal in Stockton, California, partially offset by lower wallboard and paperboard sales volume. Excluding the Stockton acquisition, revenue was up 1%. Again, this past quarter, we generated record earnings per share. Second quarter earnings per share was $4.26, a 15% increase from the prior year. The increase was driven by higher earnings at a 5% reduction in fully diluted shares due to our share buyback program. Turning now to our segment performance, highlight on the next slide. In our Heavy Materials sector, which includes our Cement and Concrete and Aggregates segments, revenue increased 10%, driven primarily by the increase in cement sales prices implemented earlier this year, and the contribution from the recently acquired cement import terminal in Northern California. Operating earnings were up 19%, primarily because of increased cement prices. Given the strong market conditions that Michael discussed, we implemented a second round of cement price increases in early July, and our average cement price increased approximately $5 per ton or 3% sequentially. We've also recently announced cement price increases in most of our markets effective January 1, 2024. Moving to the Light Materials sector on the next slide. Revenue in our Light Materials sector decreased 8%, reflecting lower wallboard and recycled paperboard sales volume, while wallboard sales prices were flat. Operating earnings in the sector declined 2% to $93 million, reflecting lower wallboard sales volume, partially offset by reduced input costs, primarily for recycled fiber and energy. Looking now at our cash flow. We continue to generate strong cash flow and allocate capital in a disciplined way. During the first 6 months of our fiscal year, operating cash flow improved 4% to $313 million, while capital spending increased to $66 million, and we acquired the cement import terminal in Stockton for $55 million. We also repurchased a total of 917,000 shares or 2.5% of our outstanding for $151 million in addition to paying our quarterly dividends, returning a total of $169 million to shareholders during the first half of our fiscal year. We have approximately 6.8 million shares remaining under our current repurchase authorization. Finally, we used our strong cash flow to strengthen our balance sheet. Let's look at our capital structure. At September 30, 2023, our net debt-to-cap ratio was 45%, and our net debt-to-EBITDA leverage ratio was 1.3x. We ended the quarter with $47 million of cash on hand. Total committed liquidity at the end of the quarter was approximately $627 million and we have no meaningful near-term debt maturities, giving us substantial financial flexibility. Thank you for attending today's call. MJ, we're ready to move to the question-and-answer session.

[Operator Instructions] Today's first question comes from Trey Grooms with Stephens.

So we've seen volume down in wallboard now for, I guess, the last 2 quarters and no surprise, and I think it's actually holding in better than most would have thought. And Michael, you gave a little color on the demand outlook there, but understandably with the backdrop of higher rates, this clearly creates more uncertainty, at least around the residential backdrop here. But given what we've seen from starts and completions on the residential side. To the extent that you can talk about it, how are you thinking about the wallboard volume outlook in the near term? And then at what point do you expect that we could start to see some stabilization there?

Yes, Trey, you bring up a lot of interesting points. Look, the higher interest rate environment it will navigate through. And there's factors on the other side, most notably, a shortage of homes in many markets across the U.S. of existing homes which is a very different environment than we've seen in prior cycles. It's also important to note where we operate in the southern part of the U.S. where activity has been more robust than other parts of the country. And I think that's our core market. And look, we continue to have homeowners requiring to live somewhere. So there are a lot of factors and -- we've seen homebuilder orders improved this quarter and again last quarter as well. So it's hard to predict right now, but we think we're positioned pretty well.

Okay. And I guess with that, just kind of sticking with the demand picture. On the cement side, granted, there's maybe some more -- or quite a bit more visibility there into the demand picture, which sounds like it's still pretty good. But as we look into maybe the calendar '24, with this kind of increased uncertainty again that's created by the rate situation. Is it your expectation that we should continue to stay in what is kind of a sold-out position or at least nearly sold-out position as we kind of look over the foreseeable future?

Yes. As opposed to the wallboard industry, which is more residentially oriented, cement and aggregates demand is more driven by infrastructure spending. And obviously, with the multiyear highway bill that those funds are starting to really benefit of highway awards and that activity, that should more than offset the residential impact on the heavy side. Not to mention, and Michael pointed to them out, several large kind of manufacturing/industrial type projects for battery plants, semiconductor facilities, that activity is at a multi-decade high. So that's what gives us some confidence around the outlook for the heavy side demand not just for '24, but beyond that, given those projects are multiyear in nature.

Okay. And I've got to sneak 1 more in here, if I could. You mentioned you went out with a cement pricing announcement for early January. Any additional color you could give us on maybe magnitude or maybe how widespread these announcements are?

Yes. It's across most of our markets, January 1, still evaluating all of our markets, but the announcements have ranged between $10 to $15 a ton.

Perfect. I’ll turn it over.

The next question comes from Stanley Elliott with Stifel.

Congratulations. I was just curious, when you talk about the wallboard pricing has been so resilient. Is there a way to quantify kind of the differences that you're seeing in the East and the West? And you spoke a little bit about some of the synthetic piece. I was curious as to what that might be having an impact on it.

Yes, Stanley, look, and Michael mentioned it, it's such a different environment this cycle than what we've seen in prior cycles where not only were you facing demand pressures but there has been a significant amount of new supply being added and most of that was centered around the availability of synthetic gypsum as the source of gypsum has declined significantly as we've reduced the power generation vehicle that's reduced that raw material. And it's more predominant in the eastern half of the U.S., no doubt. But again, the western and southern part of the country is where a lot of the construction activity has been more robust. So it's a balance. And I'd say pricing has kind of held in pretty well nationally and different factors across the country for sure.

And you talked a little bit about the balance sheet kind of 1.3x. You should be generating a bunch of cash on a go-forward basis. Help us again with kind of what's happening with the M&A pipeline, you've been active buying shares. Just curious a little -- if we get a little more color on plans around that? Or should we see the leverage continue to tick down with the thought of maybe something larger coming down the pipe? Just really more curious than anything.

Yes. Stanley, it’s a great question. The capital allocation is an area where we spend a lot of time and focus because we are generating a high level of free cash flow. And as we’ve always said, maintaining the assets is paramount and a bedrock function of Eagle as is the capital structure management, which we put ourselves in a good position in both of those fronts. And so the next use is to continue to grow the enterprise. As you know, we have very high strict criteria, both financially and strategically for that investment. And when those investments don’t meet that criteria, we’re happy to continue to return cash to shareholders. We obviously saw value in the shares this past quarter, and continue to balance that capital allocation between those 2 opportunities, and it’s dependent upon the balance of whether the investment in front of us meets those criteria or not. And that’s kind of the way we’ve operated for a long time.

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

I just wanted to come back to Wallboard. I guess I'd just be curious if what you've seen sort of fiscal year-to-date considering your sort of conversations with customers, what you see around your regions and then we have these prevailing mortgage rates. I mean, does this still feel like sort of a down mid-single-digit environment for volume over the short term? Are you actually more optimistic than that?

Yes, Brent, as we said in our prepared comments, look, I think you got to recognize the recent increase in interest rates. And traditionally, what that -- how that would impact home building. There's just some other factors today that are in place that are very different than as we pointed them out, the shortage of homes, existing homes that are at very, very low levels across the country. And you have this idea where you've got a significant amount of the mortgages that are outstanding that are sub-4%. And so folks just aren't moving like they once were and which just puts more pressure on the need to build new homes. And so it's hard to predict. We've kind of been running in this down mid-single digit. It would surprise me that you're in that range for a little while. But again, it's not -- it's very different than what we've seen in prior cycles.

Understood. And Craig, the wallboard margins, I mean, considering some top line pressure in the business, we're comparably strong or a little better than last year. I wonder if you could just sort of flesh out a few of the variables there that are allowing you to keep margins up.

Yes. Look, again, it’s not a big volume oriented business. It’s not a high fixed cost business. So down volumes doesn’t hurt as much. And paper prices, which is a large input are down year-over-year. That continued to be a benefit, a nice tailwind as is energy. So energy is down a couple of dollars a million versus where we were last year and seems to be continuing to track that direction. So what had been tailwind or headwinds a year ago have kind of turned around and help keep margins pretty flat.

The next question comes from Anthony Pettinari with Citi.

Can you talk a little bit more about the rationale for the Stockton terminal acquisition, what was attractive about that asset and how it supplements your system? And then just following up on Stanley's question on M&A. You had a lot of success with the Kosmos acquisition. Are there heavy-side assets out there that could potentially be attractive? Or are those just kind of so scarce to kind of once the blue moon?

Yes. So this is Michael. I appreciate the question. Yes, when we look at -- first, I'll take your second question first. We're always involved if any acquisition work come to light. We evaluate a bunch of stuff. But as Craig and I both mentioned, we have some strict financial performance criteria that are there. But again, if anything were to come to light, we would be interested in it, one of our cash allocation criteria is to keep our existing assets and like new condition and grow through acquisition if something were to come available. We look at a lot of different businesses out there. And we only select the ones that really fit our network the best. As for Stockton, if you look at the West Coast and everything where we stand, we have a business on that side. That import terminal really supports our business as we grow with our Nevada Cement opportunity. We were already bringing cement into California from Nevada. And as Nevada continues to grow and some of the surrounding areas there continue to grow, we're finding -- we were a little light on supporting our customers. So we saw this as a great opportunity to bring in a product to support our customers and continue to grow in that market that supports one of our cement facilities there.

Okay. That’s very helpful. I’ll turn it over.

The next question comes from Jerry Revich with Goldman Sachs.

This is Jatin Khanna on behalf of Jerry Revich. How are you thinking about cement pricing for 2024 in light of the extreme volatility in diesel prices and overall inflation?

Just to be clear, diesel prices don’t have as much of an impact on us in our cement business. And – so we have announced price increases in cement for early January, as we said earlier, kind of between $10 and $15 a ton depending upon the market. And that’s our announced plans at this point.

The next question comes from Adam Thalhimer with Thompson, Davis.

Nice quarter. Craig, what was the exit price in Wallboard for Q2?

It was pretty consistent with the quarterly average.

Got it. And then cement volumes down 1% year-over-year, you cited weather. How are you thinking about the December quarter, you have an easy comp. You were down 13% last year. I don't remember what that was, probably weather. But how are you thinking about that comp and then kind of early 2024 cement volumes?

Brent, yes, look, there's always weather in different quarters. But look, the underlying fundamental demand for cement continue to go in the right direction, whether that's infrastructure, the highway awards that continue to grow these large industrial facilities, it's hard to predict quarter-to-quarter depending upon when certain things happen or project delays or whatnot. But we continue to see an environment where utilization rates should remain high across our network, and there's a good demand backdrop for us.

Do you see any more variability than normal geographically?

No, I don't think so. There's -- again, for us, it's interesting if you were to think through the prior cycle, we're nearly 3x the size that we were back then. We got exposure from Northern California, East Ohio, South Texas. So we very much more represent a national average today versus where we were a decade or so ago, where we were kind of a very -- smallest regional player. So we just operate more markets today than we ever had before.

Got it. And then I'm trying to back into because the cement margins -- the cement margins remain exceptional. But I'm wondering, do you have any thoughts on cement cost per ton in the back half of the year?

Yes. So yes, as you pointed out, our margin profile continues to do very well in that business. And as we’ve said, what the tailwinds a year ago were around energy, specifically fuel, those have abated. Certainly here in FY ‘24 as you start looking beyond FY ‘24 certainly, in fuel costs, which for us is today predominantly solid fuels have trended lower. So you should see some benefit there. Maintenance costs we’ve seen inflation across parts and services, I would hope that, that might start to turn and go the other direction or at least become less inflationary. So it should be a reasonable environment for us.

The next question comes from Phil Ng with Jefferies.

This is actually Collin on for Phil. I just wanted to touch on Stockton terminal really quickly. It was a nice contributor to the Cement segment this quarter. Can you just help us think about the volume contribution from that plant going forward? Does have the ability to ramp up from its fiscal 2Q contribution? Or is it at capacity at this point? And then any color as to how those margins look versus your wholly owned margins?

Look, imported margins are going to be lower than your normal manufacturing margins. It's just a function of it's a distribution business versus manufacturing business, but it is operating with a good margin profile. And as we had expected. We pointed out in the earnings release, there is some kind of purchase price allocation still flowing through there this quarter, but that's largely behind us and a good amount of depreciation. But in terms of the volume profile, I expect it to remain in this level in the immediate term. And there are some opportunities to expand that that we are exploring, but we've not made any decisions on that quite yet.

Great. That's helpful. And just going to the wallboard side of the business, you've seen Wallboard EBIT margins north of 40% for the fifth consecutive quarter now. I guess how sustainable is this level of margin just given the uncertain macro backdrop that we're in?

Colin, look, it's a function of price and cost and price, as we've said, has been much more resilient, pretty much flat and almost exactly flat year-over-year. And again, we just don't face some of the other uncertainties that we had in prior cycles. So not surprised to see pricing more resilient here. And then on the cost side, as we pointed out, paper prices have stabilized here at least sequentially, gas prices for us, natural gas has remained pretty stable here, $3 or a little below that on an MMBtu basis. Those are the primary inputs into the manufacturing of wallboard and don't see any significant changes on the horizon as we sit here today. So those are the biggest factors, and they've been very supportive so far.

Appreciate the color.

This concludes our question-and-answer session. I would now like to hand the call back over to Mr. Michael Haack for closing remarks.

Thank you, MJ. I just want to say I appreciate everybody joining us for the call today, and we will talk to you in our early 2024. .

The conference has now concluded. Thank you for your participation. You may now disconnect.