Good day, everyone, and welcome to Eagle Materials Third Quarter of Fiscal 2023 Earnings Conference Call. This call is being recorded. [Operator Instructions]. 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, Drew. Good morning. Welcome to Eagle Materials conference call for our third quarter for fiscal 2023. 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 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 the 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 want to start my comments today by stating that this was a tremendous quarter for Eagle Materials financially, operationally, and strategically. Financially, we achieved record revenues, up 10% year-on-year, exceptional margins of 31%, EPS growth up 26%, which reflects the strength of our businesses and our continued pricing opportunities in every segment. This EPS growth also reflects our exceptional cash flows in excess of our operating growth and improvement needs. This enabled us to repurchase over $100 million in company shares this quarter, bringing our total cash return to shareholders over the last three years to nearly $1 billion. Operationally, we achieved the best safety performance in company history in terms of both recordable injury rate and lost time injury rate. This achievement is one that I'm most proud of, as the result stems from years of focus from every employee at Eagle to ensure that we have a culture of protecting each other and caring for…

Great. Thank you, Michael. Third quarter revenue was a record $511 million, an increase of 10% from the prior year. Excluding the acquired business in Northern Colorado, revenue was up 8%. The increase reflects higher cement and Wallboard sales prices as well as increased Wallboard sales volume. The strong fundamentals in both Cement and Wallboard contributed to record EPS during the quarter. Diluted earnings per share was $3.20, a 26% increase from the prior year. This increase also reflects our reduced share count resulting from our share repurchase program. Fully diluted shares were down 10% from the prior year and down nearly 30% from the peak in 2015. Turning now to segment performance. In our heavy materials sector, which includes our Cement and Concrete and Aggregates segments, revenue increased 3%, reflecting higher cement sales prices and revenue from the acquired business in Northern Colorado, partially offset by lower cement sales volume resulting from difficult weather conditions and much lower inventory levels during this quarter. Cement prices increased 13% and sales volume were also down 13%. Operating earnings declined 11%, reflecting lower sales volume and higher costs, partially offset by higher cement prices. Moving to the Light Materials sector on the next slide, revenue in our Light Materials sector increased 23%, driven by higher Wallboard sales prices and sales volume. Operating earnings in the sector increased 51% to $95 million as higher net sales prices helped to offset higher input prices. Looking now at our cash flow, which remains strong and as Michael highlighted in his remarks, we continue to generate very strong cash flow and allocate capital in a disciplined way. During the quarter, operating cash flow improved 7% to $180 million and capital spending decreased from $28 million to $18 million. We also repurchased approximately 824,000 shares of our common stock for $103 million and paid our quarterly dividend, returning a total of $113 million to shareholders during the quarter. Year-to-date, we have repurchased approximately 2.5 million shares or 6.5% of our outstanding. We currently have 8.3 million shares remaining under our current repurchase authorization. Finally, a look at our capital structure. At December 31, 2022, our net debt-to-cap ratio was 47% and our net debt-to-EBITDA leverage ratio remains at 1.4 times. We ended the quarter with $61 million of cash on hand. Total committed liquidity at the end of the quarter was approximately $675 million, and we have no meaningful near-term debt maturities, providing us with substantial financial flexibility. Thank you for attending today's call. Drew, we'll now move to the question-and-answer session.

[Operator Instructions]. The first question comes from Trey Grooms with Stephens. Please go ahead.

Hey, good morning and nice work in the quarter, especially given these weather headwinds. And on that, first on -- for Cement, I guess, the volume there in the quarter, weather was obviously an issue, and I think it was pretty well expected. But Craig, you mentioned lower inventory as well. Can you help us understand maybe the -- how much that really impact and how much impacted the quarter, how much was weather, and then will these lean inventory levels continue to impact your year-over-year volume going forward or with the lower volume in the quarter, were you able to build some inventory and maybe help mitigate the impact there as we move into the spring?

Yes, good question, Trey. Yes, in terms of this quarter, I think it's a pretty unique comparison, both in terms of weather patterns and inventory levels of where we were a year ago versus this year. If you recall, last winter really was late to start and allowed us to really sell through the entire month of December. And then this year, the weather pattern is a little different in December. And we just didn't have near the inventory levels. So I think just a unique comparison year-over-year for this quarter. I think we get back more into our typical cadence where volume growth is tough to come by as we are and remain sold out, but I don't think you'll continue to see this type of variance in the sales volume as the inventory issue is kind of just a one quarter thing.

Got it. Okay. That's super helpful. Thank you for that. And then kind of still sticking with Cement. So you guys have January price increases that have been in place now here in your Cement market, I guess, for a few weeks now. Is there any early read on maybe even directionally on how those increases are going thus far?

Yes. Trey, this is Michael. When you look at the supply-demand dynamics, we have implemented double-digit price increases across our network. We're still working through with some customers, but with the supply-demand dynamics, that's what we're expecting.

Okay, thanks a lot. I will pass it on. Appreciate you taking the questions.

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

Hey, thanks. Good morning. Great quarter as well. Hey Craig, the earnings contribution from the joint venture was pretty strong, I guess, really snapped back despite the headwind on volume. Is there anything in particular to point to there?

Yes. I think, look, as we said in the last couple of quarters, we had some operational issues there that we believe we had turned the quarter on. And when these businesses and the operations start to become more consistent, you see a turnaround pretty quick in terms of profitability. So that the operation has seemed to make that term.

Okay, great. And then I guess, back to Trey's question, realizing the supply/demand dynamics, I'm just curious, I mean is this harsher winter sort of impede your ability to realize these sort of new year price increases in Cement in the short-term, I mean, how do you think about that?

No. When we look at it, we went into the winter time frame and the fall time frame at very low inventory levels. And so the weather really, as I said in my comments, just really delays the use of that product with it. So we don't see any impact going forward for that winter weather issue with it. Supply and demand fundamentals will drive the business.

Okay. And then just one on Wallboard. Michael, I appreciate your -- sort of your comments around advantaged cost structure, those sorts of things, all very valid. Have you seen any disruption either lean of competing assets within your footprint, those that just can't be as cost competitive in this environment, just wondering if you've seen any sort of changes in competitive dynamics around your markets you play in, in the Wallboard business?

No, when you look at how Eagle is structured, we're not dependent on any third parties for our raw material supply. We're located in the Sun Belt regions. I love where we're located. I love how we control our own cost structure with it. We don't have any plant that is disadvantaged in any way to compete in these markets.

Okay, all right. Thank you.

The next question comes from Anthony Pettinari with Citi. Please go ahead.

Good morning. On Cement, it sounds like the demand outlook is pretty positive despite past issues. And I'm just wondering, understanding you don't always know your cement is going. Are you starting to see IIJA spending flow through and volumes? And are you seeing that maybe replace weaker residential activity or just wondering sort of the end markets and that infrastructure impact?

Yes, Anthony, good question. Look, the infrastructure spending is supported in a couple of different ways. There's no doubt state spending has taken the bulk of the financing effort over the last several years, and that has continued to remain very robust in our markets. To your point, you have federal spending that is on top of that going forward. It's hard to parse out exactly what's funding an individual project sometimes. But anecdotally, you are starting to hear that those monies are starting to impact planning and individual projects. So that side of the business continues to do very, very well. I'll point out, we also continue to see recovery and strength in the private nonresidential construction activity, especially in our markets around some of these very, very large projects that are just starting to get underway.

Okay, that's very helpful. And then just a quick one on the Wallboard Paperboard side. I mean, the decline in OCC late last year was pretty dramatic, and I'm just wondering what you thought maybe drove that and the sustainability of that? And if you can just kind of remind us maybe the margin benefit that you could accrue from there and what the sort of lag is there?

Yes. So as you saw this quarter, the lag is pretty quick within the paper business itself. So that contributed to a large majority of the improvement and the profitability in the paper business. It then does take a quarter or two lag into the Wallboard business. But what has been a headwind in what I'm going to say, calendar 2022, fiscal 2023, has certainly turned around from OCC prices as we look forward into calendar 2023 and our fiscal 2024. A lot of international reasons why OCC prices go up and down relates to generation and overseas purchases. But the spike that we saw a year ago, probably wasn't sustainable, and these are a little bit more normal levels.

Okay, that’s helpful. I will turn it over.

The next question comes from Jerry Revich with Goldman Sachs. Please go ahead.

Yes, hi, good morning everyone.

Good morning Jerry.

I'm wondering if you could just talk about Cement margins when your footprint was smaller. Some 20 years ago, you folks were able to get that business up to 30% margins. And I'm wondering what the price increases that you have in place now, do you think you could approach that level of margin in this cycle?

Yes, Jerry. Look, I would say the acquisitions that we've made over the last decade or so and the improvements that we've continued to make in the network, whether that's from a distribution perspective or just operating efficiencies, I think we actually have a lower cost system today than where we were in prior cycles, in many different ways, again, logistically and operationally. And at the end of the day, that's what we can focus on, and that's how we can improve margins.

And Craig, maybe just to cap in the pencil a little bit there. You spoke about the pricing actions you've taken, can you talk about just the level of inflation that you're expecting in Cement, just to put into context for us the level of margin expansion that's feasible in calendar 2023?

Yes. As we've been saying in the last couple of quarters, we do continue to see some inflation pressures still around cement energy prices and Cement that's generally solid fuels and electricity. So we expect that to continue into fiscal 2024. Now the pricing that we have in place should more than offset that like we have done here in fiscal 2023. But I think we'll continue to see some inflation around energy and cement.

Okay, super. And then around the volume cadence, to your point on whether your volumes were maybe five points lower sequentially than normal seasonality. As we look at the current run rate and running that through with normal seasonality in March and June, it does look like the business still has shipments that are down in the high single-digit range year-over-year. And I just want to make sure there aren't any inventory moving pieces, etcetera that might skew where that cadence is shaking out just based on normal seasonality off of the past six months of performance?

Jerry, with one exception there, we've talked a lot about this Portland Cement product that we've begun producing and selling out of our facilities. I think you'll continue to see that ramp up over this coming year, which should give us some incremental volume out of facilities. So you're right, generally, the growth in sales volumes will be tough to come by, given that we're continuing to be in sold-out conditions, but we do have one lever to pull around PLC that might be able to offset some of that.

Super, appreciate the discussion. Thanks.

The next question comes from Stanley Elliott with Stifel. Please go ahead.

Hey good morning everybody. Thank you guys for the question. This past year, a lot of cement markets were on allocation. I mean, do you guys think we're going to see a similar sort of dynamic in calendar 2023, and I know you mentioned being sold out but just curious kind of what you're seeing high level there?

Yes, it's a great question and how the supply and demand is currently right now, I think we're going to be going into this next year, very similar to last year, where we will be -- our key is to keep our plants running and get as much out of each plant as we can because the demand is there. So there will probably be some allocations later in the year as long as this demand profile maintains, which we think is going to maintain this year.

And could you talk a little bit about what's happening or what you're seeing in the M&A marketplace right now and maybe kind of the bias of pursuing some -- an acquisition versus buying back your shares here at these levels?

Yes. So we look at everything as we say. We are also very disciplined in what we will buy, how it fits into our network. You could see during the past quarters where we have done transactions, where we've extended our distribution footprint, it's -- right now, we would look at anything that comes to the market. It's just when businesses are in sold-out positions, there's not as much on the market. So you can see where we pivoted to the logistics side, like I said, with the Nashville acquisition. We bought aggregates positions in the Denver market. Those are things we look at continuously, and we will continue to look at anything that comes to the market that makes sense for Eagle. It just has to meet our strategic criteria.

Perfect guys, thank you very much and best of luck.

The next question comes from Adam Thalhimer with Thompson Davis. Please go ahead.

Hey, good morning guys. Hey Craig, I wanted to follow up on something, I think you said it about non-res and particularly like large projects, large non-res projects. Are you seeing that in specific regions or are you seeing that everywhere?

Yes, pretty broad-based, Adam. Whether it's the semiconductor facilities, the battery facilities, it's those types of very large on-shoring of manufacturing that we've seen in our markets. And again, pretty broad-based.

Okay. And then Michael, you made some comments about the lack of new capacity entering the Wallboard market going into this a little bit of a soft patch. Are you -- what's the implication of that, do you actually see pricing even if volumes decline a little bit do you see pricing kind of staying flattish?

When you look at everything, it's all on the supply and demand criteria with it. And when you -- one of the inputs into that is how much board is going into the market. So I know there's been debates both with analysts and us when we look at different markets on what the capacity of the Wallboard industry is today with it. And we just don't see -- in previous years, we've seen or previous cycles, I should say, not years, we have seen where there's been capacity expansion added, and we are not seeing that capacity expansion added. We also have a Wallboard industry that's much different today than it was in the past with a lot of consolidation that happened since the last cycle with it. So I do see a different animal this time than in previous cycles.

And then lastly, your Wallboard cost per unit went down a little bit sequentially in Q3. Do you think that trend can continue with gas prices coming down?

Yes, very driven [ph], Adam. Yes. On a sequential basis, we did see energy prices come down, and that was a good sign. Natural gas has certainly been under pressure here over the last couple of months and more importantly here in the last few weeks. So -- and look, I'll also tell you at a freight level, we saw freight tick down just slightly. That doesn't happen very often. So yes, we saw again some of those would have been headwinds this year starting to turn around.

Okay, thanks guys. Perfect.

The next question comes from Philip Ng with Jefferies. Please go ahead.

Hey guys. Well, Michael, it's great to hear that in the medium term, you don't expect volumes to be down in Cement. Any color on how to think about Wallboard in the near term, call it, calendar year 2023, just given the tougher housing backdrop? At least what we're hearing is maybe backlogs will carry the industry through the early parts of the calendar year. But any color here on how you're thinking about the shape of the year in terms of Wallboard demand?

Yes, Phil, it's a great question. When I look at it in my comments, I'll point to some things in the comment is we're monitoring the near term very closely. As said, we have a great foundation going into this year with it. Demand has been consistently strong with it. However, we do monitor as you guys do, housing starts, everything else with it. Our concern more is around the near term than the midterm or the long term. But right now, demand is strong, and we're going to be positioning the company that if that does change, we could react quickly to that. But right now, we are producing what we can produce for the near-term demand, and then we'll see where the market takes us.

And on that note, Michael, you guys have some of the lowest cost Wallboard facilities out there. If you guys had a pivot on the cost side, what are some of the things you can do just given your low cost profile already?

Yes. So how we run all of our facilities, we monitor each of the facilities. We know which ones -- which market it is with it. We've been very flexible. With Wallboard it's not a very cost-intensive input business. We've been able to modulate with the demand just by ship structures and everything to be able to satisfy that and not add significant cost to the operation with it. So we watch that closely for each of the markets, each of our plants serve and then we modulate as needed. But right now, where I won't leave you is demand has been strong. So we're prepared for those if those happen, but we haven't implemented those.

Got you. And just one last quick one for me. So Craig, on the energy front, help us think through the step-up, I guess, for calendar 2023. Because you're hedged a bit on that gas and then solid fuel prices, I think, for Cement. I think the - you have the ability to kind of hold on to prices for a full year, but I think it starts resetting fairly soon. So just give us a little color on how you're set up currently?

Yes. So for fiscal 2024 on the cement side for solid fuels, most of our prices are effectively locked in for the year, albeit at higher prices than where we were this past year. And we have a good hedge position within -- for natural gas, again, which is more within the paper and Wallboard segments. And -- but we're not overly hedged. So we are enjoying some of these lower prices and expect to continue to enjoy them at these lower levels.

Any color on how hedged you are for that gas?

It's around 30% or so as we go into fiscal 2024.

Okay, great. Thank you guys. Appreciate it.

The next question comes from Tyler Brown with Raymond James. Please go ahead.

Hey, good morning guys.

Good morning.

Hey, a couple of questions on the Wallboard side, but I got to go back to the Wallboard margins. Can you just help us maybe parse a little more specifically the impact of OCC on that 400 basis points, maybe what percentage of your costs are paper and wallboard and given that OCC prices remain pretty low, and I know there's a lag, could we see even more help as we kind of move into fiscal Q4?

Yes. So in terms of the lower OCC prices, they really didn't have much of an impact on the Wallboard business. As I said, it manifests itself first within the paper business as they're purchasing on a daily basis. The shift to the pricing to the ultimate Wallboard business happens over a one to two quarter lag. So that margin improvement that we saw this quarter didn't really have much to do with OCC. That is still yet to come for the Wallboard business.

Okay. That's super helpful. And I don't want to be super near-term focused, and I think there's some questions out there that I want to talk about Wallboard volume. But just any color on how January is tracking, I mean are volumes still positive, it just seems like if you use normal seasonality, Wallboard volumes could be down year-over-year in Q4, just any color there?

Yes. Look, I think as we said, I think Michael's comments are orders and shipments have remained steady during the quarter and even here into a little bit of early January. So as Michael has been saying, we haven't seen any change in that.

Okay. And just my last one here, just a big picture question. It kind of comes again back to this idea around Wallboard margins more in the intermediate term. But doesn't the outlook look pretty good there, I mean, one, you've still got the OCC benefit kind of on the come, they're saying what looks to be kind of lower for longer. Two, freight rates have peaked in the near term. In my view, they're going to be deflationary in 2023. Three, diesel and gas prices are both fading. And four, I think labor starts to disinflate as the year goes on. I mean doesn't that lend itself to durability around margins at a minimum or an ability to, I guess, at a minimum, at least absorb any pricing weakness that may be on the horizon in Wallboard?

Yes. Look, Tyler, I think you pointed out some very good positive trends for the industry and for us. I would add to that, just again, for our unique position and the surety around supply of gypsum that we have. So, many of these things that you were mentioning were macro more general ideas. But as it relates to Eagle and the other, there's that surety of supply at a reasonable cost for us. So yes, we think our business, our Wallboard business is very well positioned.

Yeah, perfect. Okay, thanks guys.

Next question comes from Keith Hughes with Truist. Please go ahead.

Thank you. Most of my questions have been asked, but one quick one on Wallboard. What are you hearing from your distributor customers on how they feel about their inventory positions heading into this season, any kind of indication, light, heavy, just directional commentary would be great?

Keith, at the end of the day, there's really not a lot of inventory in the channel. Wallboard is a perishable product so it degrades if it's kept outside. So you're talking about weeks. So -- and it's always hard at this time of year. You exited the holidays and you're into January where you can have weather disruption. So I don't know if that's much of an issue.

Okay. And secondly, on Cement and particularly in the JV, the amount of tons has come down the last couple of years. I know you've got the issues we discussed earlier in the last couple of quarters. But longer term, is there any reason it wouldn't get back to the kind of tons we saw a couple of years ago, particularly given the tight market in Texas, you've been discussing?

Well, yes, I -- Keith, we need to look at that in two different lenses on that. For our manufacturing tons, we've been sold out consistently. And we've talked about some of the operational problems we've had that we think are behind us. So the operational side and the manufacturing tons would be there. We also had a larger side that was a procured material that we are moving, that side has dried up. So the growth tonnage on the procured side where we were buying and reselling will be more consistent with where it's been over this past year.

Okay, that’s helpful. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Michael Haack for any closing remarks.

Thank you, Drew. We appreciate everybody calling in today, and we'll look forward to talking to you at our next call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.