Eagle Materials Inc. (EXP) Earnings Call Transcript & Summary

Good day, and welcome to the Eagle Materials First Quarter of Fiscal 2027 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.

Thanks, Chuck. Good morning. Welcome to Eagle Materials conference call for our first quarter of fiscal year 2027. This is Michael Haack. Joining me today are Craig Kesler, our Chief Financial Officer; and Alex Haddock, Senior 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. Thank you all for joining us today. Against the backdrop of macroeconomic uncertainty, we are pleased to report steady results for the first quarter of the fiscal year. Our first quarter revenue was a record $651 million. We generated earnings per share of $3.29, and our gross margin was 24.8%. These results highlight how our low-cost producer position allows us to successfully navigate and execute in dynamic environments. Last month, we published our annual report, shareholder letter and an updated corporate sustainability report, highlighting our progress across Eagle for FY '26. These documents highlight how we strive to consistently make our operations safer and our assets more efficient to maintain our low-cost producer position. It is our belief that a safe, efficient operation also yields better shareholder returns. Everything we do at Eagle starts with protecting our employees' health and well-being. Candidly, our safety results weren't where we want them to be. We are not at zero. We will continue to expand our use of technology, training and the sharing of best practices to further improve our safety culture at Eagle. Environmentally, across our asset footprint, we have driven down our CO2 intensity and overall emissions levels while increasing the usage of alternative fuels at our facilities. Our drive for efficiency led us to explore alternative uses of previous waste streams across all of our businesses. Moving mine material multiple times is not efficient and is costly. Through testing and analysis, we have found new uses for a lot of the material that was once considered waste. Most of this material will be converted to revenue streams, while the remainder will help improve manufacturing processes. To this extent, I'm happy to report that we utilized over 550,000 tons of materials that were reclaimed or would have been placed back in the quarry in previous years during fiscal year '26. Importantly, our safety and operational investments are not influenced by changing macroeconomic fluctuations. Our strategy is to execute through cycles on projects that have compelling paybacks. We seek to increase the long-term profitability potential of our core businesses with a multi-cycle approach focused on resilience peak to trough and compounding earnings potential peak to peak. This is especially valuable in the current demand environment when our end markets continue to be in different points of their respective cycles. On the heavy side, our cement and aggregates volumes continue to be supported by elevated infrastructure spending driven by federal IIJA bill and elevated state DOT budgets. Even as questions remain about what comes next from the potential new federal infrastructure bill or the growth profile of state DOT budgets, our customers report a robust pipeline of multi-year infrastructure projects. Similarly, our customers across all of our regions are seeing growth in data center construction. We are still quantifying the impact on our volumes of rapid data center growth. What we do know is our customers are seeing an increased number of projects, building footprint sizes and visibility from project announcement to actual construction. They are also seeing this growth spill over into other categories such as utilities, warehousing and community build-outs. The volume growth in the cement and aggregates was also supported by our pricing initiatives in these businesses, with the gross price of cement up about 1% year-over-year. The strength of our cement sales volumes was offset by an approximately $6 million earnings impact resulting from unexpected equipment failure at the Mountain Cement facility, some of which we expect to recover through our insurance coverage. The kilns at Mountain are 1960s vintage and they are showing their age, further underscoring the rationale and importance of the new modern kiln line we are installing. The fact that our sales volumes were not impacted shows how robust the cement network we've built is as we are able to bring in cement from across our footprint to meet customer demand without any disruption. Here in late July, the equipment issues have been largely resolved. These additional movements and elevated freight rates broadly impacted our net cement prices. Cement volume growth, however, should set up nicely for better net price realization over the medium term, further benefiting from energy costs that should normalize. Infrastructure and nonresidential construction make up about 80% of our heavy side end market exposure. So growth in those markets has offset the softness in residential construction. On the light side of our businesses, residential construction represents about 80% of our Wallboard end market exposure. While there has not been a near-term catalyst to help bring down mortgage rates and spur a rebound in home construction, we have seen relatively stable demand levels. Our Wallboard is priced on a delivered basis, so the increased freight rates we saw last quarter were the primary driver for our June 1 price increase in Wallboard, which would not be typical in this volume environment. We believe Wallboard pricing additionally reflects the cost pressures that the rest of the industry other than Eagle are facing and that go beyond the elevated freight costs. Outside of freight, our costs were relatively benign this quarter, especially given our unique raw materials position with decades of low-cost gypsum across our wallboard footprint. Both the dynamic macroeconomic environment and the freight cost disruptions we've seen clearly demonstrate the benefits of our strategy to reinforce our position at the low end of the cost curve and to invest in high-return projects through the cycles, whether through our typical capital projects across our plants and quarries or larger modernizations that meet our strategic and financial criteria. We are making excellent progress on 2 larger and unique high-return modernization projects currently underway. The project at our Laramie, Wyoming Cement plant will reduce the facility's operating cost by 25%, and the Duke, Oklahoma Wallboard plant modernization will reduce the operating cost of that facility by 20%. Construction for Laramie Cement plant is still on track to be completed late this year and commissioning planned for the first part of next year, and the Duke Wallboard plant should commission towards the later half of 2027. Through the investments we make, larger modernizations or routine smaller capital projects, we remain well positioned despite cost spikes and challenged end market dynamics like we're seeing in housing today. With our capital expenditures from these 2 projects reaching a peak this year, we are still able to pursue additional high-return growth opportunities organically or through M&A and return capital to our shareholders. With those comments, let me turn it over to you, Craig.

Thank you, Michael. As mentioned, we delivered record first quarter revenue of $651 million, up 3% year-over-year. The increase was driven primarily by higher cement sales volume, record recycled paperboard sales volume and increased aggregate sales. The revenue growth was offset by higher operating costs, primarily in Cement and Wallboard. Increased freight costs and unexpected downtime at our Mountain Cement plant were the primary drivers, contributing to a 13% decrease in first quarter earnings per share. This impact was partially offset by a 5% reduction in our fully diluted shares as a result of our share repurchase program. Turning now to segment performance highlight on the next slide. In our Heavy Materials sector, which includes our Cement and Concrete and Aggregates segments, revenue was up 8%, driven primarily by increased cement and aggregate sales volume, underscoring healthy underlying demand. Sales volume growth in both business lines was supported by continued strength in public infrastructure spending as well as key areas of private nonresidential construction, such as data center development. Operating earnings in the sector were down 11%, primarily because of the impact of higher freight and raw material costs and the $6 million impact from the downtime at Mountain Cement. Moving to Light Materials sector on the next slide. First quarter revenue in our Light Materials sector declined 5%, reflecting lower Wallboard sales volume and sales prices, which were partially offset by record recycled paperboard sales volume. Operating earnings in the sector were down 16% (sic) [ 15% ], reflecting lower Wallboard sales volume and higher freight costs. Looking now at our cash flow. We continue to generate strong cash flow and allocate capital in a disciplined manner, consistent with our long-term strategic priorities. During the first quarter, operating cash flow increased 13% to $154 million, reflecting the strength of our businesses, the resilience of our operating model and the expected tax benefits from the capital spending program. Capital expenditures totaled $121 million during the quarter, driven primarily by investments in the modernization and expansion of our Mountain Cement plant in Laramie, Wyoming and the modernization of our Duke, Oklahoma Wallboard facility. These projects will enhance operating efficiency, improve reliability and further strengthen our competitive position. We continue to expect fiscal 2027 capital expenditures to range between $490 million and $525 million to fund these strategic growth initiatives as well as ongoing sustaining capital investments across the company. Capital spending is expected to peak in fiscal 2027 with construction at Mountain Cement scheduled to be completed later this year and the Duke project anticipated to be completed in mid-fiscal 2028. At the same time, we remain committed to returning capital to shareholders, a goal enabled by our strong balance sheet. During the first quarter, we returned a total of $92 million through our quarterly dividend and the repurchase of approximately 406,000 shares for $84 million. We ended the quarter with approximately 2.5 million shares remaining under our current repurchase authorization. Let's look now at our capital structure. We remain committed to maintaining a prudent capital structure that gives us significant financial flexibility, which is especially important in uncertain economic conditions. At June 30, 2026, our net debt-to-cap ratio was 51%, and our net debt-to-EBITDA leverage ratio was 2.1x. We believe these levels are both prudent and supportive of our growth strategy. We ended the quarter with $234 million of cash on hand and nearly $1 billion of total committed liquidity. Importantly, we have no significant near-term debt maturities, positioning us well to continue investing in the businesses while returning cash to our shareholders and maintaining a strong and flexible balance sheet. Thank you for joining today's call. Chuck will now open the line for questions.

[Operator Instructions] And our first question for today will come from Trey Grooms with Stephens.

Michael, great work in the quarter. Congrats on that. I wanted to touch on Wallboard volume. So it held in really well, especially given the tough comps and you saw the strong industry numbers as well. Just curious to maybe get your thoughts on what's going on there. The starts data has just kind of been bouncing around, still pretty subdued levels and Wallboard seem to really outperform in this most recent data and in your results. So anyway, just curious your take on the relative strength there.

Yes. Trey, we've talked a lot about where housing is today and has been now for quite some time. We're at what I would typically look at a trough level activities. And so again, with interest rates being a little bit higher over the last period of time, that's kept the activity level a little lower, but there's still good demand, and we're still structurally short supply of homes in the U.S. So there's a balance there. But the activity levels are hanging in there, as you say, better than anticipated. And -- but that's just given the environment and the low construction activity we've been at for many, many years now.

Yes. Okay. I didn't know if there was anything unique going on in the quarter, but it doesn't sound like that's the case. Okay. And then you mentioned on cement kind of better net pricing realization maybe over the medium term, which kind of brings up the question around maybe the Canadian tariffs on cement. I'd love to get your take on any potential impacts that this could have in your markets, maybe any impact to supply or potential pricing in any of your -- maybe your more Midwest markets?

Yes. When you look at that, Trey, in particular, you look at -- you got to take a step back and look at the U.S. as a whole first and then kind of drill into where those impacts would happen. And we are pretty balanced on cement supply-demand dynamics across the U.S. And you can see the volume movements that we've had this past quarter or 2 kind of reflect that with it. Any kind of pressure on that will have kind of a little bit of a waterfalling effect with it. We don't participate as much in the Northeast section where most of that cement comes in. However, there probably would be a waterfall type impact to that. So any tightening of the supply chain is just -- it's already tight today with the supply-demand dynamics. So any tightening of that would be beneficial for a pricing environment or for a supply-demand environment.

Yes. Okay. That makes sense. Last one for me, and this one is looking out a bit, a little bit higher level. But you guys continue to put up nice cash generation. You continue to buy back stock, your capital projects are going well, and they're going to be winding down, I guess, in the next 12 months or so, just roughly. And presumably, we would be in a better kind of demand environment at that point. And with the lower cost operations that you're going to have in those plants, it seems like you'd be in a position of very strong free cash flow generation when we get -- especially once we get past these capital projects. So my question on that is longer-term thinking on -- are there other internal projects that you see where there's opportunities because it seems like it's a continuous kind of effort from you guys that you've seen over the last several decades. But any additional internal projects worth noting, thoughts on how you would approach the stock buyback, M&A, et cetera, because you're going to have a lot of cash flow generation once these projects are behind you.

Yes. Trey, when we look at it, we look at all of our operations continuously. Each of our operations, we do a set strategy for and look at where they reside, what the health of that facility is, what the investments of that facility need to be and kind of plan those out over multi years with it. The main thing on the growth side with that with the unique projects we have with regards to Mountain and Duke still revolve around the permitting aspect of a lot of those facilities. It is very difficult to get a permit just to even expand the facility. So that's where we like I said, we continue to look at everything that would make sense to improve, but it still resides back down to a long permitting process if we could even get that permit and then what those investments are with it. On the M&A front, we've always continuously looked at M&A. We are value buyers in a lot of ways. So we will look at M&A with our financial criteria that makes sense for us that determines -- the price really determines what we'll do on the M&A front and where it's located and it fits into our strategic footprint with it. We look at a lot of transactions every year. We will continue to look at a lot of transactions. And if they make sense from our financial perspectives, we will be definitely buyers. We have the financial balance sheet to do M&A transactions with it, but they have to meet those strict criteria we have. And then I'll turn it over to Craig on the share buyback side and some of the other uses of capital that we have on that side.

Yes. No, Trey, I think you pointed out, we positioned ourselves with a good balance sheet, good free cash flow. We can continue to balance the approach of capital allocation, whether that's good growth projects, as Michael highlighted, whether that's organic or M&A. And then we've been a serial acquirer of our own shares for not just the last 5 or 10 years, but for 20 years. And we continue to see good value in the shares. And so it will be a continued balanced approach to how we deploy capital.

The next question will come from Brian Brophy with Stifel.

It looks like cement volumes were a little bit stronger than some of the other peers that have reported. Just any color that you're seeing on what's driving this and where the sources of strength have been?

It was pretty broad-based across our markets, Brian. And look, it's consistent with what we've been talking about in terms of the primary driver for demand in the U.S. for cement is public infrastructure. We have very supportive federal spending levels, state levels continue to be very supportive. So strength there. The private nonresidential construction activity, especially around data centers and the activities that follow along with that continue to be strong, probably in the early innings of some of that activity. So we've been very happy with our footprint and our footprint continues to perform very well.

Yes, that's helpful. And then just as a follow-up to that, are there any notable differences in cement pricing that you're seeing across your footprint? And I'm particularly curious as to what you're seeing in Texas at the moment.

Cement is a very regional business. The shipping radius is pretty limited. So you will see different regions have different dynamics, whether that's demand-oriented or supply-oriented. So we had definitely some markets where we were able to move pricing in the spring time, if you will, here in the early summer and then other markets weren't conducive to that. So it's really market by market as how we manage the business.

The next question will come from Anthony Pettinari with Citi.

Your net cement sales price was down 2%. And if I look at last year at fiscal 1Q, they were also, I guess, flat year-over-year. So we're kind of on 2 years of maybe flat to down prices. I'm just wondering from the big picture, if you could give any context in terms of what you think is sort of driving the sort of flattish pricing in the face of rising costs? Is it really just come down to the housing market? Are there changes to import dynamics? Are there really strong regional changes? I'm just wondering kind of stepping back, how you'd characterize the last 1.5 years in terms of pricing and what's driving that?

Yes, Anthony, good identification. I would say it's 2 separate issues. If you go back to a year ago with pricing being flattish, recall that we were coming off of 2 consecutive years with nationally cement consumption being down in the U.S. And so a much tougher environment to get a price increase. So that's a year ago. Now we've continued to see improvements in volume over the last 12 months. And so that's why we bifurcated in the earnings release gross prices versus net. So the second issue, which is this year's issue. So we actually did have some markets that saw a gross price increase, but with elevated freight costs that more than offset those price increases. So that's why we tried to separate the 2. But we did see some gross price improvement, but on a net basis, net of freight, they were down slightly.

Okay. That's very helpful. And then that spread, that $3 a ton gross up 1%, net down 2%. Any kind of view on how that would be trending in July or thinking about fiscal 2Q, understanding it's just a very volatile situation on fuel and freight.

Yes. Look, I think probably a little early to call. I mean a lot of geopolitical issues across the globe right now that is really driving a lot of that. Certainly, oil still being elevated, diesel being elevated, that's driving some of that. And we've also seen underlying freight rates go up. So I don't want to say it was all diesel oriented, which in some ways is a good thing. The truckers are busy. But a little early to try to speculate if and when that comes down.

The next question will come from Timna Tanners with Wells Fargo.

I wanted to approach the question a little differently, perhaps, if I could, for some color on any market color from your Wallboard price hike you mentioned, and you mentioned it was abnormal. So how is that being received to the extent you can talk about that? And similarly, what's the latest on cement price increases as well?