Eagle Materials Inc Q2 FY2025 Earnings Call

Good day, everyone, and welcome to Eagle Materials Second Quarter of Fiscal 2025 Earnings Conference Call. This call is being recorded. At this time, I'd like to turn the floor over to Eagle's President and Chief Executive Officer, Mr. Michael Haack. Mr. Haack, please go ahead.

Thank you, Jamie. Good morning. Welcome to Eagle Materials conference call for our second quarter of fiscal year 2025. 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. Let me start my comments by highlighting a very important meeting conducted a few weeks ago at Eagle Materials, our Annual Health, Safety and Environment Conference, or what we term HSE. Each year, I have the pleasure of spending two days with approximately 90 leaders in our organizations across the U.S. to discuss health, safety and environmental items facing Eagle Materials. We get to share best practices across the organization, discuss how we strengthen our safety culture and how we make a difference in our operations for all employees. We always prefer to look at leading indicators to eliminate items before they happen, but it's also a time to reflect on the progress we have made in our lagging indicators. This progress is highlighted in our sustained below-industry average TRIR rate for safety. Our enhanced sustainability report we released last year shows our continued progress in reduced CO2 emissions per ton of cementitious product and highlights investments in projects that not only financially return but also provide environmental benefits to Eagle. Some of the projects highlighted in this conference include starting the commissioning of our joint venture Texas Lehigh slag grinding facility in Houston. This plant will provide the local market with over 500,000 tons of low-carbon intensity slag. We commissioned an additional alternative fuel feeder and expanded another facility's feeder to reduce our use of coal and coke at these facilities. Additionally, we reduced the water usage at our Republic Paperboard facility by approximately 40% through engineering redesign of an onsite water facility. Our blended cement production surpassed 90% of our sales. These items would not happen if we did not have the best people in the industry. I want to thank all Eagle employees who contributed to the success of another great HSE conference and to their continued leadership on safety, efficiency and sustainability. Now let me move on to the financial results for the quarter. In our fiscal second quarter of 2025, we again achieved record revenue, reaching $624 million, an increase in cash flow from operations by 35%. Craig will go through the financial results in his comments, but I wanted to specifically address a few items in my comments. Our heavy side of the business was down 5% on a volume metric basis, while our concrete and aggregates locations had a larger volume impact during this quarter across our network, most dramatically in two locations, Denver and Kansas City. Denver was impacted by reduced demand across the board, but more dramatically impacted by our aggregate-supplied oil field services customers. This demand has not recovered, so the team has been diligently working on cost control measures and securing new customers. In Kansas City, our concrete union operation experienced a work stoppage as we negotiated the current contract. This has been resolved but impacted our volumes sold during the quarter. Our drivers in this operation are no longer union, so this operation will be rightsized with a focus on the non-union market in the future. A few upcoming quarter items I want to mention: we are currently in the process of replacing our clinker cooler at Texas Lehigh. As I mentioned in several previous earnings calls, we have some maintenance to do at this facility and it was planned for this timeframe. We are currently wrapping up a 40-plus day outage to do this extensive work. We will have further work at this facility in a few months as we address our mills. All the work is going as planned. We also have a planned outage at our Tulsa Cement facility to address an issue we had with our kiln. This work is going well and will be completed ahead of schedule. Both projects will add additional maintenance costs to our upcoming quarter. We have been working with our customers to minimize the impact of sales volumes during these outages. It is also worth noting that both projects are one-off in nature and will make the plants more reliable after completions. Turning now to what we see ahead for our businesses and the demand outlook more broadly. I'll start with the infrastructure, where we've been talking for a couple of years about the demand visibility afforded to us by both the $1 trillion Federal infrastructure bill, IIJA, and the health of state and local budgets. For a variety of reasons, from weather-related disruptions to labor constraints, the level of IIJA spending has been slower to materialize than previously anticipated. Nearly 75% of IIJA funding remains to be spent. However, we believe it will continue to be spent beyond the bill's expiration date in 2026. Turning to non-residential construction, demand has varied depending on the sub-sector. While certain sub-sectors, such as warehousing, have been softer, we remain optimistic that announced large-scale manufacturing and industrial projects will continue to be strong as they are still benefiting from federal government bills. Lastly, residential construction has held up relatively well in a tepid housing starts environment, and several factors suggest it should rebound. Underlying builder demand and lower rates as the U.S. Federal Reserve moves toward a more accommodative monetary policy are just a couple of factors that support a favorable residential construction landscape. Against this end-market backdrop, let me provide some observations on our specific businesses. In our Heavy Materials business, project delays and weather continue to affect both cement and concrete and aggregate volumes. In calendar 2024, our Heavy Materials volumes have not played out in the way we anticipated when we began the year. In fact, industry association forecasts originally projected cement volumes in calendar 2024 to be up by 1% to 2% and are now forecasting a year-over-year decline across the industry. While that view is consistent with what we're seeing within our own footprint, we believe the demand tailwinds will bounce back given the high level of IIJA funds yet to be spent and the anticipated rebound in non-residential and residential construction. Our strong position in the U.S. Heartland market further supports our outlook, as these markets currently have higher demand than the national average and are generally insulated from imports. Considering these favorable conditions, we announced a price increase for early-January 2025 across most of our markets and look forward to speaking more about them in the next quarter's call. Turning to our Light Materials segment, residential construction and more specifically single-family building activity is, as you know, the most important driver of wallboard demand. As you can see from our sales volumes, the wallboard business has kept its consistent demand pace despite one of the most restrictive rate environments we've seen in quite some time. In some ways, current demand levels have played out as expected since decades of underbuilding have created the need for new housing construction to keep pace with household formations. Also, homeowners with low mortgage rates tend to stay in their homes longer, which in turn has created better-than-expected new home construction resulting in better-than-expected wallboard demand. What has not been surprising to us is the overall steadiness of our margins, given significant cost pressures and constrained capacity brought about by the synthetic gypsum shortage for the rest of the industry. When demand turns higher, these pressures will become increasingly difficult for others to manage and we feel Eagle is well-positioned to capture future opportunities for our wallboard businesses. With these supply-demand dynamics, we have announced a wallboard price increase for early November, but this increase will most likely be delayed to the first part of 2025. All in all, we're excited about what's ahead, especially given our history of executing when and where it matters. At Eagle, we're always looking for ways to improve our businesses and ensure they are sustainable for multiple generations of employees and investors. This can be demonstrated by several facts that makes us different. We have long been a low-cost producer in our industry because of the long track record of strategic decisions that have created structural advantages that are hard to replicate. We are relentless in our operational focus to consistently improve our assets and footprint. Our businesses have high barriers to entry; our products are necessities for the growth and renewal of America. Our healthy balance sheet gives us the flexibility to invest in growing our core businesses and finding inorganic growth opportunities. Our acquisitions and internal investments are designed to strengthen our current network, extend our healthy reserves position, and continuously refresh our infrastructure to keep it like new. For example, this quarter, we acquired a small bolt-on aggregates business to help extend the customer reach of our Battletown Materials aggregate business in Louisville, Kentucky. Our cash flow generation also means we can execute on these opportunities while still returning excess cash flow to shareholders. We have a long-term horizon when we think about where best to invest our capital. Our businesses have been in some communities for nearly 100 years and our investments are designed to help us maintain the viability of our assets for another 50 years or more. This can be best seen with our recently announced upgrade to our Mountain Cement plant. I am pleased to say that we broke ground on this project with several foundations being put in place before winter hits us. Our pipeline of M&A opportunities remains robust and our commitment to continuously upgrading our current asset base remains resolute. As such, I'm confident we can sustain industry-leading margins and invest our cash flows to create value for our shareholders. With that, I'll turn it over to Craig for some more details on our financial performance last quarter.

Thank you, Michael. Second quarter revenue was a record $624 million, a slight uptick from the prior year. The increase was driven by higher cement sales prices and higher wallboard sales prices and sales volume, partially offset by lower cement sales volume. Second quarter earnings per share were $4.26, even with the prior year. The quarterly EPS reflects lower earnings offset by a 5% reduction in fully diluted shares due to our share buyback program. As we highlighted in the press release, we had two non-routine expense items during the quarter. First, $1.6 million of costs associated with selling acquired inventory after its markup to fair value as a part of acquisition accounting plus related business development costs. And second, a litigation loss of $700,000. Turning now to our segment performance highlighted on the next slide. In our Heavy Materials sector, which includes our cement and concrete and aggregates segments, revenue declined 2%, primarily because of lower cement sales volume, partially offset by cement sales price increases we implemented earlier this year. Operating earnings were down 9%, primarily because of the lower cement sales volume in addition to higher maintenance costs. Moving to the Light Materials sector on the next slide, revenue in the sector increased 5%, reflecting higher wallboard and recycled paperboard sales volume and a 1% increase in wallboard sales prices. Operating earnings in the sector were also up 5% to $98 million, driven by the higher wallboard and recycled paperboard sales volume and higher wallboard sales prices. Looking now at our cash flow, we continue to generate strong cash flow and allocate capital in a disciplined way in line with our strategic priorities and rigorous financial return criteria. During the second quarter, operating cash flow increased 35% to $233 million, reflecting strong working capital management. Capital spending increased to $66 million. As Michael mentioned, during the quarter, we began construction on our modernization and expansion project at our Laramie, Wyoming cement plant. This construction project accounted for approximately $27 million of the total capital spending this quarter. We also acquired a small aggregates business for $25 million. The acquired operation is complementary to our existing aggregates business in Kentucky. Finally, we repurchased 253,000 shares of our common stock for $61 million in addition to paying our quarterly dividend, returning a total of $69 million to shareholders during the quarter. We have approximately 5.3 million shares remaining under our current repurchase authorization. Finally, a look at our capital structure, which continues to provide significant financial flexibility. At September 30, our net debt-to-cap ratio was 41%, and our net debt-to-EBITDA leverage ratio was 1.2 times. We ended the quarter with $94 million of cash on hand, total committed liquidity at the end of the quarter was approximately $679 million, and we have no meaningful near-term debt maturities, giving us substantial financial flexibility. Thank you all for attending today's call. Jamie will now move to the question-and-answer session.

Our first question today comes from Trey Grooms from Stephens. Please go ahead with your question.

Hi, good morning, everyone. So obviously, weather impacted cement and aggregates in the September quarter. So first off, was there any negative impact from the hurricane earlier this month on either the wallboard or the heavy business? And then how has volume been trending over the last, I don't know, two or three weeks maybe or so since the weather has been cooperating, particularly in the heavy business?

Yes, thanks, Trey. Fortunately, the hurricanes did not affect our operations regarding equipment. However, some heavy rainfall in the Southeast did impact volumes in some of our Eastern markets, particularly for cement and wallboard. Since the end of the quarter, October has been drier across much of the country, and I have been very pleased with the volumes in October.

Good, good. That's encouraging. And then, so on the wallboard pricing, it was up slightly year-over-year, down just a little bit sequentially. It seems like we can have these small fluctuations like this product mix, geographic mix, those types of things moving around. But you also pushed that November increase out. So are you seeing any real like-for-like pricing pressure or anything like that in wallboard? And I guess, what's the status there and maybe outlook for the near-term pricing there in wallboard until demand gets a little bit better?

Yes, as we talked, we did implement a price increase in March, which is really driving this year-over-year improvement in pricing. As you said, sequentially, I think pricing is down less than 1%. So you have product mix, regional changes, those types of things. I’ve been very happy with the performance of that business, the resilience of pricing, even in what for the last 24 months has been a pretty tepid housing environment. As we look forward, as we mentioned, it should be a more accommodative monetary policy, which should help continue to spur some single-family construction activity and that's generally the formula for future pricing.

Yes, got it. Just got a couple of questions about it; wanted to make sure that we were all on the same page there, but that's what I fully expected. So thank you for that, Craig. And I'll pass it on. Thank you.

Thanks, Trey.

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

Hi, thanks, good morning. I just wanted to follow up on that, just the comment around the wallboard price increase most likely delayed into next year. Is it your sense some of that is also due to some of the disruptions from weather seen so far this year and I guess sort of continuing in some markets? Or is it just simply the fact the industry is awaiting a little more momentum in new home construction into next spring?

Yes, Brent, there are lots of factors that influence pricing, timing, and magnitude. As we look at our wallboard business and pricing going forward, it is driven by single-family construction activity, which is by far and away the largest driver of activity there. Interest rates have moved around over the last several months. So yes, we need clarity on the demand side. But again, over a broader timeframe, we think there are some structural reasons why pricing and therefore our margin should remain higher. Just a matter of timing is the only question.

Okay. And then maybe just on taking all your opening comments around the cement side, we haven't seen the full effects of IIJA yet here. Could you talk about your backlog and visibility across your cement platform? Has it been any worse than it was six months ago? Is it better? How does it look as you're heading into calendar 2025? Any sort of comments there would be helpful just in terms of how that's evolved.

Yes. Regarding our backlog, we really don't carry backlog as much on the cement side. We know projects and discussions with customers and nothing has fundamentally changed there. We still have, as I mentioned in the opening comments, a lot of heavy industrial projects going on. We have the IIJA that should be hitting. Overall, we see a very positive demand picture across every market we operate in. We were down a few percentage points, mostly affected by weather and some delays in these projects, but these projects are going to happen. We think that over this next horizon, whether it is six months or nine months from now, these projects are queued up to start.

Yes, Brent, there's no doubt the 2024 construction season got off to a very slow start across much of the country. We've continued to face some of these weather headwinds even into the summer and fall. It's a relative comparison from the prior year. I think if you point to the Portland Cement Association and some other industry views, they continue to see growth not only next year but in several years post that as these projects get going in earnest.

Got it. Appreciate that. Just last one on Texas Lehigh. Should the investments, I guess, the big outage and the investments you're making here, cover you here for a while, meaning we should kind of get back to your normal maintenance cycle after this quarter?

Yes, this is a project we've talked about for quite some time. The timing was always a little bit of a question when equipment showed up and when contractors could be on-site. But as Michael mentioned, that's been done here in October. Yes, this is a 50-year-old plant. This is a 50-year-old project. You'll replace a clinker cooler once every 50 years. These are the investments that you make into a facility of that age, and reliability should significantly improve.

Our next question comes from Anthony Pettinari from Citigroup. Please go ahead with your question.

Hi, this is Asher Sohnen on for Anthony. Thanks for taking my questions. Is there a way to think about the magnitude of increased maintenance costs that you're expecting in the upcoming quarter? And then just generally, the cadence of cement margins over the balance of the year? And then stepping back, what could the cement business margins look like in the long term?

Yes, it's a good question. I'll handle the last part of that first. As we've talked about for many quarters and years now, the cement industry has fundamentally changed over the last decade or more with some of the regulations that have put in place that have really restricted new capacity from being added. It’s been well over a decade since really the last greenfield cement plant was built in the U.S., and so you have some significant supply constraints in today's demand environment, which is materially below where we've been in prior peaks. As we think about this industry over a cycle and over several cycles, we think the margin profile and the resiliency of those margins should be much higher than what we've seen in prior cycles. More specifically to our footprint, we've more than tripled our cement capacity over the last decade-plus. The quality of the assets we operate today is in a much higher position. You think about the investment we're making at our Mountain Cement facility; again, that will lower the cost structure of that facility, making it more resilient. We believe we've positioned the business very well. In the industry at large, I think the supply and demand dynamics would favor a better margin business over the next cycle. Regarding just this next quarter, between what Michael mentioned about the Texas Lehigh facility and the Tulsa facility regarding the kiln, that will have a $6 million to $8 million type of impact here in the third quarter, but those projects will be complete.

Okay, great. Thanks. That's really helpful. And just a second one on cement. It sounds like last quarter basically mid-year projections were taken off the table. So just looking forward to 2025 around the timing of potential cement hikes; do you think that's more of a January or in April? Just kind of how those conversations are going so far?

Yes, as Michael mentioned, we put out price increases in most of our markets for early 2025 in January.

Great. Thank you. I'll turn it over.

And our next question comes from Jerry Revich from Goldman Sachs. Please go ahead with your question.

Yes, hi, good morning, everyone.

Morning, Jerry.

I just wanted to follow up on the disclosure about the slag capacity addition in Texas. Can you just take a step back for us and just update us on cement additive mix across your footprint? Where do we stand now? And as you look at other potential additives, anything else that we should be on the lookout for from an Eagle standpoint over the next three to five years in terms of other cement additives that could make sense?

Yes, great question, Jerry. We announced the slag cement facility earlier this year, through our joint venture down in the Port of Houston. We'll be receiving slag granules over by ocean freight. That's similar to a business that we already operate and have operated for quite some time in the Chicago area. Slag improves the durability of the concrete and will be very complementary to our cement business here in Texas. We continue to explore those opportunities. We announced several months ago a partnership with Terra CO2 as it relates to some alternative cementitious materials as well. That's a little more out in front of us in terms of the opportunity, whereas the slag cement facility in Texas is being commissioned here in October. We continue to look for ways to grow our footprint and are excited about that.

Yes, super. And then in terms of just the cadence of cement demand over the course of the quarter, can you just comment on what the year-over-year performance looked like by month? I know you mentioned weather was an issue. Can we expand on how that played out?

Yes, Jerry. For example, so volumes were down 5% overall. In Texas, we had a hurricane in July. Market-to-market, you face different headwinds. Some of it's weather, and some of it, as Michael mentioned, we've just seen projects get pushed out. Some it is just a bureaucratic process to get money through the governmental system, in other cases, jobs get pushed for other reasons. I wouldn't necessarily highlight a unique month because each market is very independent of each other. However, I think that's in line with what the Portland Cement Association has seen for calendar '24 as well as considering a national average.

Got it. Super. If we applied normal seasonality to December volumes, I think that would yield December cement shipments that are down something like 10% to 11% year-over-year. Is that where we should be thinking about the cadence based on what you're seeing so far? Just trying to understand that mix, Craig, in terms of what's push-out versus weather.

Typically, look, especially for those Northern markets, this December quarter is dependent upon when winter shows up. We've seen years where winter doesn't show up until mid-December. In other years, by Thanksgiving, Chicago and Kansas City know that winter has hit. So it's somewhat weather-dependent. Considering the rest of the second half of our fiscal year, we also faced some pretty unique headwinds in our fourth quarter last year, especially in the Midwest. Assuming we don’t face those again, you should have a better result this year.

And our next question comes from Adam Thalhimer from Thompson Davis. Please go ahead with your question.

Hi, good morning, guys. Just a couple of quick ones that haven't been asked. The aggregates acquisition you did, can you give a little more color on that? Should we bake anything into volumes, or is that more long-term positioning?

No, it certainly contributed to the business on the aggregates side with volume. In terms of the quarter, it's a little over 100,000 tons that came from that business. Longer-term, it will fit very nicely with the existing business. I think in the quarter, revenue from that business was about $1.7 million, so it didn't close until the middle of the quarter. We should see a better benefit as we go forward.

Great. And then the $6 million to $8 million impact from Texas and Tulsa, was that an all-in number for Q3, Craig?

Yes, just incremental relative to those two projects.

And our next question comes from Phil Ng from Jefferies. Please go ahead with your question.

Hi, good morning, guys. It's Jesse Barone on for Phil. Just two quick ones for me. First, could you give us kind of just an update on the cost structure for both the cement and wallboard business? Specifically on the energy side, kind of what you're hedged out? And then I have a quick follow-up.

Yes. On the cost structure within wallboard, we're fortunate that we either own or control our gypsum sources. So that's not a significant cost component for us, and we have good certainty around that. The other large pieces are paper, which we generally source internally, and natural gas. In terms of the hedge position across all of Eagle for natural gas, we're right around 50% for the year, and that's off about today's levels. We feel good about where we are from that perspective. We haven't seen a lot of volatility in natural gas prices recently. On the cement side, the larger components for costs are maintenance and energy. In the energy side of things, it's a portion of that is fuels, for which, as we've talked about, we generally have one to two-year contracts for those prices. They're relatively stable throughout the year. Then you do have electricity costs, which are subject to market fluctuations.

Got it. Thanks. And then just last follow-up, anything more that you can give on the impact from the KC and Denver issues that you had in the quarter? Thanks.

Yes. On the Denver issue, we had an acquisition in that market. This is a newer business for us. We were probably a little overweighted in one sector. When that sector went down, we had to pivot and move to other sectors. There are more residential and some other consumers of aggregates, so we're in the process of doing that now. We're setting up that business to be a bit more diverse than how the previous owners had it. As for the Kansas City situation, that's pretty much resolved. We're just refocusing that business on the non-union work in that market, and we'll be working to right-size that business and get it back up and running with more volume here as we speak.

And we have an additional question from Tyler Brown from Raymond James. Please go ahead with your question.

Hi, good morning, guys.

Hi, Tyler.

Craig, can you just talk a little bit more about the wallboard unit costs and maybe specifically about OCC? I know OCC rose early in the year and has kind of rolled back over. But can you just talk about how big paper is of that wallboard cost structure? And just any comments, is OCC a headwind right now, or will it be a building headwind? And then maybe in a couple of quarters, it actually becomes a tailwind again?

Yes. As I mentioned, paper is the largest component of our cost structure, and it fluctuates with the OCC pricing. It's a market-based price and not too dissimilar from natural gas or something along those lines. You're right; OCC has been elevated for the first half of this year. We've talked about that, and it does take time to flow through into the wallboard business. In October, OCC prices were down; again, the market was down. That benefit takes time to flow through the business as well. But yes, it’s relatively elevated, but hasn’t changed much over the last several months.

Okay, that's helpful. And then just my last one here, any update on CapEx for '25? I know '26 is still a ways away, but with Laramie, should we think about CapEx being north of $300 million again in '26, just for a placeholder?

Yes, that's not a bad place to be. We had previously given some guidance, and it was north of $300 million for FY25. Just based on timing and payment flow, my guess is that number is between $280 million to $310 million for fiscal '25. Obviously, that increase from the prior year is associated with the investment we're making in Laramie for that modernization project. So a good place to start is around there, and that is a multi-year construction project that will continue through fiscal '26. We can refine that as we get further along, but that’s a reasonable starting point.

Okay, cool. Thank you.

And in showing no additional questions at this time, we'll conclude today's question-and-answer session. I'd like to turn the floor back over to Michael Haack for any closing remarks.

Thank you, Jamie. Thanks to everyone who joined us on the call today. This past quarter continued to highlight the strength of our operational execution and our ability to capitalize on opportunities for our businesses. It was great to showcase our operational initiatives on today's call and at our annual HSE Conference. Thank you again to every Eagle employee for their contribution to our success. We look forward to discussing our results again with everyone next quarter.

Ladies and gentlemen, that concludes today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.