Good day, everyone, and welcome to Eagle Materials Second Quarter of Fiscal 2023 Earnings Conference Call. This call is being recorded. At this time, I'd 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, Jason. Good morning. Welcome to Eagle Materials conference call for our second 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. This morning, I'd like to offer a few perspectives about our quarter, the outlook for our business, and our ESG agenda. First, let me talk about the quarter. The demand for our products continues to be strong. I'm pleased to report record revenue, up 19%, and record earnings per share, up 51%. Our earnings results are driven by robust price improvement across our businesses and across our entire geographic system. Price realizations more than mitigated the cost of inflation pressures. We also returned $110 million to shareholders through dividends and the repurchase of roughly 840,000 shares. This quarter's performance reflects our strategic and operational disciplines. Disciplines that serve us well at all points in the economic cycle. We have been growing and improving our businesses systematically in keeping with a strong strategic focus and clear strategic boundaries. This quarter's actions included the acquisition of a distribution terminal in Nashville, which extends our profitable operational reach in this high-growth Southeastern region and the purchase of aggregates quarry in Northern Nevada, increasing our access to aggregate reserves and our ability to serve this rapidly growing market. The decisions we have made over the years are providing significant advantages today, and the decisions we are making today will provide significant advantages to us in the future as we make our operations increasingly sustainable and resilient. The successful and well-demonstrated pursuit of our low-cost producer strategy positions us well for any eventualities that might be ahead this cycle. We will continue to grow the heavy side of our business as we have been doing in two ways. First is through asset acquisitions that meet our strategic and financial returns criteria and the second is through growth investments that expand our system capabilities. We will also continue to invest in improving the profitability and sustainability of our existing assets. Now let me turn to the outlook for our businesses starting with the heavy side. For cement, as well as aggregates, we have perhaps the best multiyear visibility into demand and into the opportunities for pricing power than perhaps ever before. We have announced a cement price increase across our network of plants effective January 1, 2023. The die is pretty well cast for public construction and infrastructure over the next three to five-year time frame. It is not a stretch to think we could see public construction spending substantially higher. Some facts supporting demand optimism for Eagle are state DoT budgets are running well above prior decade averages. The infrastructure portion of state DoT budgets is receiving high fund allocations, and the magnitude of state DoT budget dollars skews favorably for Eagle Cement system footprint. Infrastructure contract award values are trending above national averages in the states in which we operate. At the same time, US cement manufacturing supply response is highly constrained, and we see no material build or expansion in markets that will fundamentally change this picture. Bottom line, we have excellent visibility on US cement demand for the next three years. We have excellent visibility on cement manufacturing capacity expansion in our markets or the lack thereof for the same time frame. And we know how expensive imports are on a delivered basis to our US heartland markets. These facts should provide a relatively healthy formula for cement pricing power. Now turning to the light side, first, as to demand given the rapid rise in interest rates, it is reasonable to expect some softening in wallboard demand ahead. I want to emphasize that we have not seen softening yet, as our quarterly results attest. The main reasons for this are there are 1.7 million housing units under construction in the U.S. today. This is an all-time record. Our wallboard business has its production footprint in the U.S. Sun Belt. The South region is the most important in the country, more important than the three other regions in the U.S. combined. We are where the action is. Repair and remodeling is another important driver of wallboard demand, and the near-term outlook implications for wallboard appear favorable. Now turning to the supply side, in many ways our wallboard business today has its characteristics resembling our cement business. To name three in wallboard, we operate at high-capacity utilization and comparatively our cement plants are sold out. Our demand outlook would suggest these higher utilization conditions will be persistent through the mid-term for both businesses. Both businesses have significant constraints to capacity addition albeit for different reasons. Both Cement and Wallboard are products with very limited substitutes and each is essential to U.S. construction and the growth in rebuilding of America. Now let me turn to operations. I am delighted with the results we reported across our network of plants as a whole, but I'd be remiss in not talking about one plant that has recently struggled with equipment failure issues. This plant is our Texas Lehigh cement plant joint venture. As you know, one of our hallmarks is keeping our plants in like-new condition. This plant has had a few one-off failures that are not commonly seen. With each of these failures, we want to ensure that we fix the root cause of the issue. This usually takes a little additional time in understanding the failure and doing the engineering work to fix it properly but will serve us well over the long-term. Supply chain issues have resulted in some extended downtime with these equipment repairs and replacements, which are reflected in this quarter's numbers. Some of this downtime will extend into the coming quarter, but we feel confident that the plant will be more reliable when these investments to fix the root cause of the issue. Let me close today with some comments on our ESG agenda, starting with environmental. I have mentioned before that our biggest opportunity for moving the needle on our path to a net-zero future is through the introduction, marketing, and acceptance of Portland limestone cement. It is the best and quickest way for us to make our clinker go further. Adoption requires approvals from state DoTs as well as some capital investment in our manufacturing plants. Implementing PLC at all locations will not be completed overnight as we face supply chain issues on the equipment side and approval timelines with state DoTs, but I'm happy to report we continue to make significant progress. Last quarter, I commented that almost 15% of our system-wide cement sales were Portland limestone cement. This quarter, that proportion grew to 25% with two plants shipping PLC in the 60% to 70% range. We have set an internal goal to move all of our operations to construction-grade cement to 100% limestone cement production by 2025. Meeting this goal will enable us to produce more cementitious products, which is of critical importance given we are in sold-out conditions. But also, very importantly, it will improve our carbon footprint at the cementitious level. Shortly after the first of the year, we will be more formally updating our progress and we intend to make these goals and their implications more explicit as part of a broader disclosure on the E as well as the S of ESG. With that, let me turn it over to Craig for the financial review of our quarter.

Thank you, Michael. Second quarter revenue was a record $605 million, an increase of 19% from the prior year. Excluding the recently acquired business in Northern Colorado, revenue increased 16%. The increase reflects higher cement and wallboard sales prices as well as increased wallboard sales volume. Second quarter diluted earnings per share were $3.72, a 51% increase. Excluding the impact of our refinancing actions in the prior year, the EPS increase was 36%. The increase was driven by improved earnings and reduced share count due to our buyback program. Fully diluted shares are down 10% from the prior year. Turning now to our segment performance. This next slide shows the results in our heavy material sector which includes our cement, concrete, and aggregates segments. Revenue in the sector was up 14%, driven by higher cement sales prices. Operating earnings increased 10%, reflecting higher cement prices which were partially offset by increased energy and maintenance costs. Given the strong demand backdrop, we implemented a second round of cement price increases in early July across the majority of our markets. Moving to the light materials on the next slide. Revenue in our light material sector increased 26%, reflecting higher wallboard prices and sales volume. Operating earnings in the sector increased 42% to $95 million, reflecting higher net sales prices which helped to offset higher input costs, namely freight, energy, and paper. However, recycled fiber costs have come down significantly in September and again in October. Looking now at our cash flow, which remained strong. During the first six months of our fiscal year, operating cash flow improved 15% to $300 million and capital spending increased to $43 million. As Michael mentioned, during the quarter we completed the acquisition of the cement distribution terminal in Nashville, Tennessee, with a purchase price of approximately $39 million. We also repurchased 840,000 shares of our common stock for $101 million and paid our quarterly dividend. Year-to-date we have repurchased approximately 1.7 million shares, or 4.5% of our outstanding shares. We also have 9.1 million shares remaining under our current repurchase authorization. Finally, a look at our capital structure. At September 30, 2022, our net debt-to-cap ratio was 48% and our net debt-to-EBITDA leverage ratio was 1.5 times. We ended the quarter with $84 million of cash on hand. Total committed liquidity at the end of the quarter was approximately $628 million, and we have no meaningful near-term debt maturities, giving us substantial financial flexibility. Thank you for attending today's call. Jason, we'll now move to the question-and-answer session.

Thank you. We will now begin the question-and-answer session. Our first question comes from Trey Grooms from Stephens. Please, go ahead.

Hey, good morning, everyone. Congrats on the quarter.

Thanks.

The first question is about the cement business. You mentioned that you are nearly sold out. Considering your geographical footprint and the health of the markets you operate in, can you discuss your expectations for the various end markets? We are aware of the situation in residential, but how are your markets performing? Additionally, could you provide insights on private construction and any expectations for infrastructure demand in those markets as we look ahead to next year? Specifically, if we see a slowdown, do you believe we will continue to be in this sold-out condition as we move into calendar 2023?

Yes. Trey, I'll take that question. So when we look across, we run our system a little bit differently than we did years ago in that we have a network of cement plants now. And that's why you see some of the acquisitions we did with extending that network and making sure that network is reliable and resilient during good times and bad times. So this Nashville purchase was a hallmark of that too that we extend our profitable distribution footprint down into the Southeast region for some of our plants, and we could hit that through multiple areas. We feel very comfortable, as my earnings comments said, on where the infrastructure side of the business is; the state DOT budgets looked very favorable. Where we participate in our markets, they're pretty shielded from imports getting into those markets. And overall, there's nothing in my mind that doesn't think that public construction spending will be higher over the near and mid-term of this with this infrastructure spending. Your question on individual markets itself and that we really look at it as a network. We think that Cement overall is in a great position. It's in a sold-out position today. With some softening in one submarket or another, it's going to be more than consumed in another submarket. We just think that Cement is sitting in a very good position right now.

Perfect. Great. Thank you for that, Michael. And on kind of sticking with Cement on the cost front. I know you guys are locked in on energy largely for the Cement business for the year for the – I guess the rest of the fiscal year. And I guess when those reset, I guess it would be in March from where we stand today and any color on maybe early conversations you're having with folks there on the energy front? And any color on maybe what you're expecting there for next year with that next 12-month lock-in?

Yes. Thanks, Trey. The – on the cost side you've got it right. Energy has been upward inflation in fiscal 2023. And I would tell you sequentially we didn't see a lot of change there. You locked in those energy prices largely at the beginning of the year. But as we're getting into the negotiations for next year, we are continuing to see a similar type of inflation there as we go into FY 2024. Look, natural gas is down a little bit here recently so that's been favorable. And you can change your fuel mix a little bit. But for more of the solid fuels we will continue to see upward pressure.

And just as a follow-on to that the price increase you have announced for January across your footprint there, is the thought there that that's going to be enough to kind of cover that step-up that you're expecting, or any color around that side of things with the margin outlook given the cost increase in the pricing?

Yes. That's definitely the intent on that side, Trey with it. We haven't finalized on the numbers with any. We've announced the price increase and we're going to be working with our customers on what that materializes on. But yes, we're going to recover any cost increases.

Okay. Well, thanks, I'll pass it on and good luck for the rest of the year. Thank you.

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

Hey, great. Thank you. Good morning. My first question was just the – more of a near-term question. The issues on the Mississippi River and whether that's having any direct or indirect sort of impacts in your business thinking specifically cement.

Yes. Brent, no, we're not on the Mississippi River so that wouldn't impact us.

Okay. Yes I just didn't know if there's any indirect effects. Okay. And then the dive in in the OCC prices recently just wondering should that have an effect on wallboard prices eventually? Is there just that much more behind the strength in pricing here to consider.

No. Look I think the pricing strength we've seen in wallboard has been largely around demand and supply dynamics that have been going in our favor and some of the raw material issues that we've talked about for others in the eastern part of the country. But OCC prices being down, as I talked about in my comments in September and then again in October, that will be a nice tailwind for the paper mill as well as the wallboard business. It takes a little bit of time for that to flow through to the wallboard business, a couple of quarters, but we will see some lower costs there as we get into the winter.

Okay. And then your comments on all of your facilities effectively being able to sell PLC by 2025. Is the governor on that whether or not all the DOTs you serve effectively will take in PLC? I'm just wondering if you're seeing that already where they're already accepting PLC for all the DOTs you already serve or other factors kind of play into that?

Yes, it's really a combination of two factors. We're making good progress with the approval status for the DOTs, which is why you see some plants operating between 60% and 70%. We expect to keep expanding significantly on that front. However, we are facing some supply chain challenges regarding equipment and materials that we need to obtain to convert some plants to 100% PLC. While some plants may partially reach that goal, we will need to wait for the delivery and installation of the necessary equipment to fully comply, which may result in 30% to 40% compliance at certain plants due to additional grinding capacity or other required parts.

Okay, great. Thanks, guys.

The next question comes from Anthony Pettinari from Citigroup. Please go ahead.

This is Asher Sohnen on for Anthony. Thanks for taking my question. Just on the January hike that you communicated to customers, understanding that those conversations are ongoing, can you size that roughly? Are we thinking about another double-digit increase maybe? And then as you communicate a January hike to customers rather than historical April, is the sort of implied message that customers should expect another midyear hike, or is January just sort of a new normal now?

We will continue discussions with our customers, and we will provide updates on our progress next quarter. We anticipate maintaining a similar rhythm to what we have experienced previously regarding the dollar amounts. When it comes to potential future price increases, I prefer not to speculate at this time. We will keep an eye on the market and assess its condition before determining our pricing strategy. We've mentioned in our previous notes that we will actively evaluate the market and observe developments in the second half of the year.

Great. And then switching to Wallboard. You talked about pricing remaining strong in the medium term. But some of the homebuilders we cover talk about working with material producers to reduce their costs as their home prices come down. So, I'm just wondering if you started to see any sort of that pressure from builders on the wallboard side or having any sort of conversations to that effect.

Yes. We had a mid-quarter price increase in Wallboard. It was in August. As you can see our prices were up sequentially. I understand that there are questions about the 12-18 months from now. But in the meantime, we were largely able to achieve a price increase across our footprint.

Sure. Thanks. I'll turn it over.

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

Good morning, everyone. Craig, could you discuss the inflation trends in the cement business throughout the quarter? Were there any significant changes? We see fluctuations in various commodities, but what about concerns like contracted labor or other services? Can you elaborate on whether inflation is stabilizing for some of those miscellaneous repair and similar costs?

Yes, the two things that I pointed out were energy and maintenance, energy being the larger component of the year-over-year cost increase. As I mentioned earlier, the sequential change in energy prices wasn't significant. As we said we locked in those costs generally for the year. We will see some inflation into FY 2024. But sequentially not a lot of major changes. Again, the labor component within these businesses is generally not significant. We do see inflation on some of the parts that we consume, but that's kind of been ongoing as a part of that maintenance bucket as well.

What do you, sorry, please continue.

I would say the freight seems to have also flat-lined here, plateaued from where we were in the prior year. That's more of a cost within the Wallboard business but some of them have kind of flat-lined here. And OCC prices, as we mentioned earlier, have come down significantly in September and then again in October just post the quarter.

And with the big robust price increases in Cement, they have essentially been necessary to maintain strong profitability, and 7% margins are very similar today versus a year ago. Do you see an opportunity with the January price increase that you spoke about? Could pricing actually outpace inflation so we see year-over-year margin expansion potentially, or how are you thinking about the price cost balance into January?

Yes. Look, Jerry, we were able to expand our wholly-owned margins over 100 basis points this past quarter. So the pricing that we achieved in January of this year and again in July has been margin accretive. And given where the supply-demand dynamics are and where our production facilities are operating at a high utilization rate and as Michael mentioned, those price increases should more than offset some of these inflationary pressures that we're seeing.

I didn't mean to shortchange you on the improvement with the last question, but can I ask you folks are very deliberate in your capital deployment program big stock buybacks year-to-date? And you spoke about all the signs that we're all looking for residential construction to slow 12 months out. So can you just talk about the confidence you have in the wallboard margin profile in your business, given the cost increases for the industry? It feels like behind your stock buyback actions is confidence on better than historical trough margins in wallboard, but maybe I can get you to expand on that.

Yes, Jerry, it's a great point. I'll tell you my confidence is more around the cash flow generation capabilities of these assets throughout the cycle. To me, that is what these assets are all about. And we've positioned the capital structure in a place where leverage is manageable whether that is for opportunities to continue to grow the company, whether that is to manage cycles. That's always been a hallmark of how we position our capital structure. And so the free cash flow can then be used to either continue to expand our geographic footprint if the strategic criteria are met or, and the extent we have additional free cash flow we returned that to shareholders and we know how to do that pretty well through our share repurchase program. So I think it's just the confidence in the cash flow management and generation of these assets more than anything. And as you point out, the position of our company relative to where we were in prior cycles is dramatically more resilient given the geographic footprint that we have and given the position of our wallboard business relative to where we were 15 years ago.

Okay. Appreciate the discussion. Thanks.

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

Good morning, guys. Thank you for taking the call. Quick question. I know it's probably very hard to do. Is there a way to size kind of what the industry typically sees from these major hurricanes both for cement and then I guess more for wallboard for you just from a regional standpoint?

Stanley, it's a good question. Here's what I would tell you. It is our experience with hurricanes is that there is an initial surge for the cleanup of an event like that and a very unfortunate event. The rebuild effort happens over such a broad time period that it's hard to parse out what's hurricane rebuild versus what's new construction. We just know that the fighting with the insurance companies and everything else that happens just happens over such a broad time period.

And then as it relates to the JV and some of the equipment issues I mean, do we think that this or is this basically pulling ahead capital spend or maintenance CapEx however you want to think about it for next year into this year so that vis-à-vis you're actually looking at lower capital maintenance spend across the system, or just kind of trying to parse out a little bit more what exactly is going on with the JV.

Yes. You can assume that the capital spend will remain the same. We will conduct the same type of outage work. The issues we encountered were one-time failures involving items that usually do not fail for us. As a result, we didn't have all the necessary spare parts on-site. The supply chain for ordering these specialty parts took slightly longer. However, I expect the same pace and expenditure during outages. We typically take our plants offline and ensure they are brought back to like-new condition. We invest in this process to ensure they operate properly. These were simply isolated incidents.

Perfect guys. That's it for me. Thanks and best of luck.

Thank you.

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

Hey, good morning guys. Nice quarter.

Thanks.

I wanted to ask first about cement and wallboard margins both of which are really good in Q2. What are your thoughts on the sustainability of that in the back half kind of year-over-year margin improvement?

Yes. Look the wallboard, we have seen as I mentioned freight has kind of plateaued. So if you think about the different pieces, we had good price realization in the quarter. OCC prices are coming down. Gas prices have come down here over the last couple of weeks. So that's all been positive for the Wallboard business. On the cement side, again, the July price increase was realized across the majority of our markets and in good shape. And look I will tell you on the cement side, it's all about when does winter show up in the December quarter especially for some of those more northern climates, but the businesses are in a good spot. The maintenance programs are largely done. And we have a good margin profile.

And then similar question, but as it relates to the OCC price declines. To what extent have you been eating the higher OCC prices at the Paperboard segment?

Yes. So we don't have a lot of inventory on hand of recycled fiber. So you see that benefit within the paper business pretty quickly especially when prices fall like they have here in the last two months or so.

The paperboard margins used to be in the gross operating margins in the 30% range. Could they return to that range quickly with the decline in OCC prices, or does it require more than just that?

Yes. Look certainly we saw a nice margin improvement both year-over-year and sequentially in the paper business this quarter. I would tell you relative to call it four or five years ago energy prices are still higher for that business. Freight costs are still higher for that business. So that will impact the ability for margins to get back to those levels, but we have seen nice improvement here.

Okay. Last one Texas cement, the price spiked a lot sequentially. Is that sustainable, or was that kind of a one-off related to the production issues?

Our pricing in that market is sustainable. That market is very consolidated, and the supply-demand situation right now is extremely intense.

For you guys. Thanks a lot.

The next question comes from Phil Ng from Jefferies. Please go ahead.

Hey, good morning. This is actually Colin on for Phil. I just wanted to touch on your prepared remarks you talked about EXP being well positioned in its principal markets for the second half of the fiscal year here despite the increase in interest rates. Can you just elaborate on what you're seeing in your markets and what this implies for wallboard volumes in the back half of the year? And then just as you start to look out into calendar year 2023, any preliminary thoughts on what wallboard volumes might look like for you guys?

Yes, Colin, good question. As we said, our orders, our shipments in wallboard have remained steady throughout the quarter. And a lot of that is because of the construction cycle for building a home elongated. There is a backlog of construction activity, as those homes need to be completed. I think it's a little too early to speculate on 2023 volumes quite yet. We're all trying to figure out what is the recent rise in interest rates due to the homebuilding industry. Certainly, there's still a significant demand for homes here in the U.S., whether that'd be single-family or multifamily. I'd also say again, we operate in the southern half of the U.S. generally. Those markets have been much more resilient than the national average. You saw this past quarter. So we think we're well positioned from that perspective as well.

Okay. That's helpful color. And then in your prepared remarks, you also talked about some constraints from the supply side and capacity additions for wallboard. Can you just dive into those constraints a little bit more? And then just given these dynamics, how are you thinking about the resilience of wallboard pricing going forward, especially if we start to see volumes decline given that interest rate spike?

Yes. Colin, those constraints are for the eastern half of the U.S., generally, where synthetic gypsum was the predominant raw material that was expected to be used to produce wallboard. That was a lot of the new capacity that was added 15 years ago and 20 years ago, was designed to utilize synthetic gypsum, which is generated from coal-fired power plants. As that has reduced, as we've generated less power via coal, the availability of that gypsum has diminished. And that's a material amount of the capacity in the U.S. we wanted to use that material. So that's going to be a major constraint. The alternative is generally to go overseas, which is expensive, and it would be difficult to arrange. So, in large part, that's why the wallboard cycle could be very different this go-around versus prior cycles where we were actually adding capacity in advance of a demand pressure this cycle. We're not seeing much new capacity. So, that's why we think this cycle could shape up to be very different than prior cycles.

Great. Thank you for the color.

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

Thanks, Josh. Thank you for joining the call today and we look forward to talking to you at the next call, early next year. Thanks.

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