Eagle Materials Inc Q2 FY2026 Earnings Call

Good day, everyone, and welcome to the Eagle Materials Second Quarter of Fiscal 2026 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Eagle's President and Chief Executive Officer, Mr. Michael Haack. Mr. Haack, please go ahead, sir.

Thank you, Chris. Good morning. Welcome to Eagle Materials conference call for our second quarter of fiscal year 2026. 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. Thanks for joining us on today's call. I'm looking forward to discussing the details of our first half of fiscal 2026. I'll start by saying how proud I am of the Eagle team having achieved financial, operational and safety performance we did this quarter, even as we felt the headwinds from the residential construction pullback. Financially, we were able to achieve record revenue of $639 million, gross margin of 31.3% and deliver an EPS of $4.23. Strategically, we made significant progress on our Laramie, Wyoming plant modernization and expansion and commenced construction of our Duke, Oklahoma Wallboard plant upgrade. I'll talk about both strategic capital investments more in a few minutes as they tie directly to our capital allocation principles and value generation for our shareholders. Turning to safety performance. The halfway point of our fiscal year is also a time when we reflect on our safety performance and prepare for our upcoming Annual Health Safety Environment, or HSE conference. Eagle Materials has a fantastic safety track record, consistently performing below the industry average for total recordable incident rates across all of our businesses. While we are proud of the safety history, our goal is 0 incidents. At this year's HSC conference, we will focus on how we could capitalize on our momentum by being proactive and continuing our emphasis on leading indicators to drive further improvement. I'm excited to welcome our employees to our HSE conference later this quarter. Thank you for everything you do to keep our people safe. Next, let me comment on the business outlook for the remainder of our fiscal year and beyond, starting with the heavy side of the business. We entered this calendar and fiscal year cautiously optimistic about potential volume recovery in cement and aggregates. In line with our expectations, our cement and aggregates volume increased for the second consecutive quarter and were up for the first half of the year. The backdrop for cement and aggregates volumes remains favorable for the remainder of our fiscal year for several factors. About 60% of the investment in the Infrastructure and Jobs Act or IIJA funds have yet to be spent, and all signs point to those IIJA dollars flowing into construction projects. We also continue to believe private nonresidential construction dynamics should support cement consumption. Against the improving volume outlook for cement and aggregates, we have announced price increases across most of our markets effective January 1, 2026. Our views regarding residential construction activity, the primary driver for wallboard consumption remains more reserved in the near term. Volumes this quarter are affected by reduced demand due to high interest rates and affordability challenges. As the builders pulled back over the summer, our Wallboard volumes were impacted. The stability in Wallboard pricing, however, is the clearest evidence to date of the structural changes benefiting our business. The capacity reduction and steepening of the cost curve brought about by the decline in synthetic gypsum availability has kept capacity utilization rates reasonable even in the challenging homebuilding environment that has persisted in the United States. The decades of underbuilding of homes should lead to mid- and long-term growth in wallboard demand. The obvious question that follows is often when will housing turn. At Eagle, we do not obsess over near-term demand drivers. We run our businesses and invest in their long-term growth. Even in this more challenging market, we continue to generate meaningful excess free cash flow. And thus, we do obsess over how we best invest the cash to generate shareholder value. I'm excited about two organic growth investment projects we have underway, both of which currently are on budget and on schedule. Both projects are unique and compelling, albeit for different reasons. At our Laramie, Wyoming cement plant, we are on track to complete our $430 million modernization and expansion project by the end of calendar 2026. This project provides us with several unique advantages. Federal and state environmental regulations make it increasingly difficult to permit greenfield or brownfield cement capacity additions, and we have not seen any loosening of restrictions. The Laramie, Wyoming plant is also one of the oldest and therefore a higher-cost cement plant in our network. Modern cement kiln technology is much more efficient than the 1960s vintage kilns currently used at our Laramie facility. This allows us to reduce our manufacturing cost by 25%. The new preheater pre-calciner tower and single kiln system will replace the current long dry 2-kiln system. This will result in lower energy usage in the form of fuel and electricity and allow us to use a significantly higher proportion of alternative fuels and natural gas while having meaningful savings on annual planned maintenance. We are undertaking a similar modernization project at our Southern Oklahoma Wallboard facility. Again, much of the return is driven by the fact that our Duke, Oklahoma Wallboard plant is one of the oldest, highest-cost wallboard plants in our network. Upon completion, we will lower the per-unit cost of the wallboard production by about 20% by reducing electricity consumption, automating the production process and lowering our annual maintenance needs. Importantly, when volume does recover, Laramie and Duke will be well positioned to capitalize on long-term growth drivers. In tandem with these projects, we continue to look for other high-growth, high-return and high-impact projects. This includes M&A opportunities that meet our return criteria. We also continue to return capital prudently in the form of share repurchases while maintaining flexibility on our balance sheet. With that, Craig, I'll turn it over to you.

Thank you, Michael. In the second quarter, we achieved record revenue of $639 million, marking a 2% increase from the previous year. This growth was largely due to higher cement sales volumes and contributions from our newly acquired aggregates businesses. If we exclude these acquisitions, consolidated revenue rose by 1% year-over-year. Our earnings per share for the quarter were $4.23, which is down 1% compared to the second quarter of fiscal 2025. This quarterly EPS decline is primarily linked to lower net earnings, mainly driven by decreased Wallboard sales volumes; however, this was partly offset by a 4% reduction in fully diluted shares resulting from our share buyback program. Now, focusing on segment performance, in our Heavy Materials sector, which encompasses Cement, Concrete, and Aggregates segments, we witnessed an 11% revenue increase, largely fueled by higher cement sales volumes and a 24% rise in concrete and aggregates revenue. We also achieved record aggregate sales volumes, which increased by 103%, including contributions from the acquired aggregates businesses. Organic aggregate sales volumes rose by 35%. Operating earnings in this sector were up 11%, primarily due to an 8% rise in cement sales volumes, although this was somewhat diminished by a 1% decline in net sales prices. We have recently announced cement price increases in most markets, effective January 1, 2026. Shifting to our Light Materials sector, second quarter revenue fell 13% to $213 million, reflecting a decrease in Wallboard sales volume and a 2% decline in Wallboard sales prices. Operating earnings for this sector decreased 20% to $78 million, primarily due to the lower Wallboard sales volumes. Regarding our cash flow, we continue to generate robust cash flow and manage our capital allocations judiciously. In the second quarter, operating cash flow fell 12% to $205 million, primarily due to changes in working capital related to tax payment timings. Capital spending rose to $109 million, mainly linked to modernizing and expanding our Mountain Cement plant, along with a project to upgrade our Duke, Oklahoma Wallboard plant. Taking into account these projects and our sustaining capital expenditures, we anticipate total company capital spending in fiscal 2026 to fall between $475 million and $500 million. During the quarter, we maintained our cash distribution to shareholders while investing in these growth initiatives. We repurchased around 396,000 shares for $89 million, alongside paying our quarterly dividends, returning a total of $97 million to shareholders in the second quarter. We have about 3.9 million shares left under our current repurchase authorization. Lastly, looking at our capital structure, it continues to provide significant financial flexibility. As of September 30, 2025, our net debt-to-cap ratio stood at 45%, and our net debt-to-EBITDA leverage ratio was 1.6 times. We concluded the quarter with $35 million in cash. Total committed liquidity at the end of the quarter was around $520 million, with no significant near-term debt maturities, which gives us substantial flexibility. Thank you for joining today’s call. Chris, we will now proceed to the question-and-answer session.

And today's first question comes from Trey Grooms with Stephens.

I guess, first off, on Wallboard volume, down almost 14% in the quarter after seeing some outperformance over the last few quarters. And I understand you guys are facing tougher comps now, and you had some easier comps earlier this year. But if you could maybe talk about the Wallboard performance and a little more color within the quarter? And then kind of what drives the big swings that we've seen from one quarter to the next? And any color on maybe directionally how we should be thinking about the demand drivers here?

Yes. Thanks, Trey. The first point I want to make is that we definitely observed a pullback in production from builders during July and August, which was widely reported in the housing sector. This has been the main factor influencing wallboard demand, and we experienced this during the quarter. As you mentioned, we had various factors contributing to our outperformance in the first half of the year. When I analyze these businesses on a trailing 12-month basis, we are performing in line with, if not slightly ahead of, the industry. Changes from quarter to quarter are often just noise. Currently, the demand for wallboard across the United States stands just below 26 billion square feet on a trailing 12-month basis, which is similar to consumption levels in the late 90s, despite having 25% more people in the country compared to that time. When considering the short term, the headlines regarding affordability and interest rates grab significant attention; however, looking at the broader picture, we believe we are in a favorable position. We are enhancing that position, and there is a considerable underconsumption of wallboard and a shortage of homes being built in the U.S.

Yes, that all makes a lot of sense. Looking at the long-term picture definitely appears bright. Considering the medium term, it may continue to be choppy. In this environment, so far, you have maintained very stable wallboard pricing despite some challenging operating conditions in terms of demand. This quarter exemplifies that resilience. Is your expectation still that wallboard pricing will remain relatively stable as we navigate the near-term fluctuations in the demand environment?

Yes. Look, it's always a balance. I think you've heard us say for years, we're more oriented to price than we are volume. And look, there's lots of factors that have affected this industry over the last 15 years around raw material shortages and things like that, which I think have contributed to a much more stable environment. But it's a balance, and we've taken the approach of value over volume.

Okay. And if I can sneak one more in there. Just with the cement volume, I mean, clearly very, very strong, if you could maybe talk about some of the drivers there. And you mentioned it remains favorable for the rest of the year. And is that kind of to say that you expect positive demand here to continue maybe through your fiscal year as we look at the Cement and Aggregates business?

Yes. We entered the year with a cautious optimism regarding cement volume, which is influenced by infrastructure spending and private non-residential projects, both of which have remained strong demand drivers. We observed this in the last quarter and continue to see it in the current quarter, as those infrastructure funds begin to positively impact the business. Although the benefits came later than we initially expected, it's encouraging, and volumes have maintained a positive trend. Therefore, we remain cautiously optimistic about seeing similar results moving forward. We are approaching the winter months soon, but this construction season has been as good, if not better, than we anticipated.

And the next question comes from Brian Brophy with Stifel.

This is Andrew on for Brian. I just had one on the organic aggregates volume up 35% in the quarter. Are there any particular drivers or sort of onetime projects to call out there? And then also, is that a good run rate for how you're thinking about the next couple of quarters?

Yes. When we examine our overall volumes, we've been consistently discussing our capital allocation, and aggregates have always been a key area of interest for us. Over the past year, we've focused on enhancing capacity at our current operations as well as evaluating our acquisitions. Much of our growth, as Craig highlighted, originated from these acquisitions. However, we also achieved a 35% increase in our existing operations, thanks to some capital improvements we implemented. We will maintain our focus on this business segment, which we are keen to grow over time if the right acquisition opportunities arise. If those do not present themselves, we will continue to enhance our internal capabilities, as we are doing with our cement and wallboard facilities through our upgrade projects to maximize our existing reserves.

There was very strong profitability in concrete and aggregates during the quarter. I would like to know your thoughts on margins in that area over the next couple of quarters.

Yes, Andrew, a year ago we discussed some unique events, including a work stoppage and other factors. Additionally, we completed two acquisitions last year, which brought on a variety of one-time costs as we integrated those assets. This year represents a return to a more typical performance level. As Michael mentioned, we are pleased with the acquisition we made in January in Western Pennsylvania and the investment's return. There will be seasonal factors related to the two businesses we acquired, one near Pittsburgh and the other in Northern Kentucky, but we are satisfied with their performance as we enter this year.

And our next question is from Brent Thielman with D.A. Davidson.

I had a question on just cement and the reported ASP and any sort of factors to consider there. I've heard from some others about competitive pressures here and there. Also was just curious if there was any impact from oil well on the reported ASP. Obviously, that's been a softer market. Just hoping you could bridge that out.

Yes, Brent, today, given the footprint of Eagle Cement business, oil well cement has become a much smaller percentage of our business as we've diversified across the country. And I think as we pointed out in the press release, pricing within the wholly owned business, so the vast majority of our business is actually pretty stable. Texas, we saw some price degradation, but the rest of the market hung in there pretty well. And a lot of that, again, is driven off of two years, the calendar '23 and '24 having had down volume. So as I said earlier, it's been nice to see calendar '25 for us start to see year-over-year improvements. And as Michael mentioned, we also do have price increase announcements out for the early part of calendar '26. A little early to speculate on the expected realization of those. But certainly, the volume improvement is the first step in that direction.

Yes. And then maybe just on the demand side of the equation, you mentioned the strength in infrastructure, clear factor here. What are your backlogs at your facilities and/or sort of customer discussions tell you about, call it, next 6 months, if you're able to see out that far? I'm just trying to get a feel beyond kind of this next quarter where the climate sits.

Yes. We don't have a backlog like an engineering and construction company would. However, discussions with customers provide valuable insights into future expectations. As we mentioned at the start of this year, our customers have experienced improved bidding activity. They are noticing an increase in private non-residential projects, particularly in areas like data centers. The upcoming winter months may impact this outlook, and while we have to be cautious about the next six months, it is clear that customers have seen more favorable bidding activity this year compared to the past several years.

And the next question comes from Anthony Pettinari with Citigroup.

With Duke and Laramie, I was just wondering if there were updated thoughts on CapEx in fiscal '26. And understanding you don't give multiyear guidance, if there's any way to think about kind of step up in '27 and maybe what it could look like in '28? And also just on One Big Beautiful Bill, if you can remind us sort of how that impacts Eagle as a cash taxpayer with the two big projects?

Yes, great questions, Anthony. For fiscal '26, which we are currently halfway through, we anticipate capital spending to be between $475 million and $500 million, which is a notable increase compared to previous years. Most of this will be driven by the modernization of the Mountain Cement and the Duke Wallboard plant. The Mountain Cement plant is expected to be completed in late calendar '26, aligning with our fiscal '27, meaning you'll see almost a full year of expenditure there. The Duke Wallboard plant will also incur full spending in fiscal '27. However, I expect total spending to decrease to around $400 million to $425 million in fiscal '27. In fiscal '28, we anticipate a significant reduction in spending as the Mountain Cement project concludes and the Duke Wallboard plant nears completion, coming online in the second half of calendar '27. Therefore, we expect a gradual decrease as we enter fiscal '28. Our balance sheet is in a strong position, maintaining a 1.5x debt-to-EBITDA ratio, which enables us to make solid long-term investments while also allowing for M&A and other potential investments.

Okay. That's very helpful.

Regarding the last part of your question, the key benefit of the new tax bill is the ability to accelerate depreciation, allowing us to fully depreciate those investments when they start operating. For instance, the Mountain Cement plant will begin operations in fiscal '27, which will greatly lower our cash taxes for that year. Following that, as the Duke plant comes online, we will also receive an immediate deduction. This change is advantageous for us in terms of cash taxes paid.

And the next question comes from Phil Ng with Jefferies.

It's Jesse on for Phil. Just on cement, I wonder if you guys have like a view on what actual underlying demand is there. It's obviously probably not up 9%, but it's probably not down mid-singles last year with a lot of cross currents with weather. Just curious if you kind of had a view on what underlying demand actually looks like.

Yes, it's interesting, Jesse. To your point, we've experienced significant weather conditions last year that affected volumes. I would say cement demand typically grows in the range of 2% to 4%, which is low single digits. This growth can be influenced by weather; jobs are not eliminated, just delayed. Over a 20- to 25-year period, I would expect cement demand to grow within this range. Part of this is due to seasonality, as there is a limited construction season, and there are only so many hours in a day, along with some logistical challenges. Similarly to what we mentioned earlier regarding Wallboard, cement demand is currently well below previous peaks, despite a significant population increase in this country. This gives us considerable optimism about both of these businesses, and we anticipate an increase in volumes over the next several years.

That's helpful. I have a quick follow-up regarding cement, and also Wallboard. Are there any major maintenance projects we should be aware of in the next 12 months? I know you advanced several projects in cement last year, but is there anything else to highlight?

No, I would expect to see the cadence of the big maintenance programs pretty similar to what we saw last year.

The next question comes from Jonathan Bettenhausen with Truist.

I'm on for Keith. Just one quick housekeeping item for me. The price increases, is that wallboard as well? Or is that just cement?

Just in cement.

And at this time, there are no further questioners in the queue. I'd like to turn the call back over to Michael Haack for any closing remarks.

Thank you, Chris. Our performance in the second quarter of fiscal 2026 was a result of consistent financial, operational and safety discipline. We entered the second half of our fiscal year in a position of strength, focused on operational excellence and committed to continuing to invest in our assets, in our network and most importantly, in our people. Thanks for joining the call today. We look forward to discussing results and progress on our modernization projects again next quarter.

Thank you. The conference has now concluded. You may now disconnect your lines, and have a pleasant day.