Eagle Materials Inc

Good day, everyone, and welcome to EGLE 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 EGLE's president and chief executive officer, Mr. Michael Hack. Mr. Hack, please go ahead.

Thank you, Jamie. Good morning. Welcome to EGLE Materials' conference call for our second quarter of fiscal year 2025. This is Michael Hack. Joining me today are Craig Kessler, 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 EGLE Materials, that being 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 US to discuss health, safety, and environmental items facing EGLE 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 is 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 showing our continued progress in reduced CO2 emissions per ton of cementitious product, and highlights investments in projects that not only financially return, but environmentally return benefits to EGLE. Some of the projects highlighted in this conference include we started commissioning 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 have commissioned an additional alternative fuel feeder and expanded another facilities feeder to reduce our use of coal and coke at these facilities. We reduced the water usage at our Republic Paperboard facility by approximately 40% through engineering redesign of an on-site 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 EGLE 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 and increased 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 volumetric basis, while our concrete and aggregate locations had a larger volume impact during this quarter across our network, but most dramatically in two locations, Denver and Kansas City. Denver was impacted from reduced demand across the board, but more dramatically impacted by our aggregate supplied oilfield 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 has been in a work stoppage situation as we were negotiating the current contract. This has been resolved, but impacted our volume sold during the quarter. Our drivers in this operation are no longer union, so this operation will be right-sized in the focus on the non-union market in the future. A few items I want to mention for the upcoming quarter are we currently are in 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 also should be noted that both projects are one-off in nature and will make the plants more reliable after completion. 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 years about the demand visibility afforded by us by both the trillion-dollar federal infrastructure bill, IIJA, and the health of state and local budgets. For a variety of reasons, from weather-related days 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 subsector. While certain sub-tech 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 US Federal Reserve moves toward 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 supports our outlook to an even greater extent. 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 more 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 are tending to stay in their homes longer, which in turn created better than expected new home construction, resulting in better than expected wallboard demand. What has not been a surprise 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 EGLE 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 most likely this increase will 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 has 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 to 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 the 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 volumes. partially offset by lower cement sales volume. Second quarter earnings per share was $4.26, even with the prior year. The quarterly EPS reflects lower earnings, offset by 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 aggregate 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. And 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 give us significant financial flexibility. At September 30th, 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.

Ladies and gentlemen, at this time, we'll begin that question and answer session. To ask a question, you may press star and then one using a touch-tone telephone. To withdraw your questions, you may press star and two. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. Once again, that is star and then one to join the question queue. Our first question today comes from Trey Grims from Stevens. Please go ahead with your question.

Hey, 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 You know, how has volume been trending over the last, I don't know, two or three weeks maybe or so since the weather's been cooperating, particularly in the heavy business?

Yeah, thanks, Trey. You know, fortunately, the hurricanes didn't impact our operations in terms of any of the equipment, but certainly some of the heavy rainfall, even in the southeast, did impact volumes. Some of our eastern markets, And that's the case for cement and wallboard to a certain degree. But, you know, and then in terms of, you know, post the quarter, October has been a little bit drier across, you know, certainly the middle of the country. And I've been very happy with the volumes here in October.

Good, good. That's encouraging. And then, so on the wallboard pricing, you know, it was up slightly last year-over-year down just a little bit sequentially. It seems like, you know, we can have these small fluctuations like this, you know, product mix, geographic mix, those types of things moving around. But, you know, you also pushed that new November increase out. So, you know, are you seeing any real, you know, like-for-like pricing pressure or anything like that in Wallboard? You know, and, you know, I guess what's the status there and maybe, outlook for the near-term pricing there in Wallboard, maybe 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, you have regional changes, those type of things. I've been very happy with The performance of that business, the resilience of pricing in what for the last 24 months has been a pretty tepid housing environment. And so as we look forward, as we mentioned, you know, it should be a more accommodative monetary policy, which should help continue to spur some single-family construction activity. And that's generally, you know, the formula for future pricing.

Yep. Got it. Just got a couple of questions about it. I 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. Our next question comes from Brent Thielman from DA Davidson. Please go ahead with your question.

Hey, thanks. Good morning. I just wanted to follow up on that, just the comment around the wall board price increase most likely delayed in the 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 in the next spring?

Yeah, Trey, you know, look, there's lots of factors that influence pricing and timing and magnitude. And so as we look at our wallboard business and pricing going forward, You know, it is driven by single-family construction activity. That's by far and away the largest driver of activity there. You know, interest rates have moved around over the last several months. So, yeah, clarity on the demand side. But, again, over a broader time period, we think there are some structural reasons why pricing and, therefore, our margins should remain higher. You know, just a matter of timing is the – That was the only question.

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

Yeah. Yeah. With, you know, looking at Brent, looking at our, you know, backlog, we really don't carry backlog as much on the cement side. We know projects and discussions with customers and stuff. Nothing has fundamentally changed there. You know, 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 hidden. Overall, we see a very positive demand picture across every market that we operate in. We're down a few percentage points, mostly affected by, as we said, weather and some delays in these projects, but these projects are going to go. We think that over this next Time horizon, be it six months, be it nine months with it, these projects are queued up to start off.

Brent, there's no doubt the 2024 construction season got off to a very slow start across much of the country. And then we've continued to face some of these weather headwinds even into the summer and fall. And it's a relative comparison from the prior year. I think if you point to the Portland Cement Association, 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 in the investments you're making here, lack of a better word, sort of cover you here for a while, meaning we should kind of get back to your normal maintenance cycle after this quarter.

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

Got it. Okay. Thank you.

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

Hi, this is Asher Sonnen 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, kind of maybe what could the cement business margins kind of look like in the long term?

Yeah, it's a good question. I'll handle the last part of that first. Because 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 been put in place that has really restricted new capacity from being added. It's been over a decade, well over a decade, since really the last greenfield cement plant was built in the US. And so you have some significant supply constraints. And today's demand environment is materially below where we've been in prior peaks. And so 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. And more specifically to our footprint, we've more than tripled our cement capacity over the last decade plus. And so the quality of the assets that we operate today are 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, make it more resilient. So we position the business very well. And in the industry at large, I think from just the supply and demand dynamics would favor a better margin business over the next – over the cycle. And then as you think about just this next quarter, you know, look, between what Michael mentioned, the Texas Lehigh facility and then the Tulsa facility that we're also working on the kiln, you know, that will have a $6 million to $8 million type of impact here in the third quarter. But then those projects will be completed.

Okay, great. Thanks. That's really helpful. And then just a second one on cement. It sounds like last quarter, basically, mid-years were kind of 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 an April, just kind of how those conversations are going so far?

As Michael mentioned, we've 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. 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 as you look at other potential additives, anything else that we should be on the lookout from an EGLE standpoint over the next three to five years in terms of other cement additives that could make sense?

Great question, Jerry. We announced the slag cement facility in early 24 or earlier this year. It's through our joint venture. It's down in the port of Houston. We'll be receiving slag granules over by ocean freight. That's similar to a business 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. And we continue to explore those opportunities. We announced, again, 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. But we continue to look to ways to grow our footprint and excited about that.

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 just to give us a flavor? I know you mentioned weather was an issue. Can we just expand on how that played out?

Yeah, Jerry, for example, so volumes are down for the whole group, down 5%. In Texas, we had a hurricane in July. So 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 of it is just a bureaucratic process to get money through the governmental system. In other cases, jobs get pushed for other reasons. But I would say I wouldn't necessarily highlight, you know, unique month because each market is very independent of each other. So, but certainly, and I think that's pretty much in line with what the Portland Cement Association has seen for calendar 24 as well as you think about a national average.

Got it. Super. And, you know, if we were just to apply normal seasonality to December volumes, you know, I think that would yield December semesterments that are down something like 10%, 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, you know, that makes, Craig, in terms of, you know, what's push out versus weather.

Yeah. 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, and then there have been other years that by Thanksgiving, you know, Chicago and Kansas City are winter has hit. So it's somewhat weather-dependent. As you think about 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. There is some adverse weather that was faced last year. Assuming we don't face that, you should have a better result this year.

I appreciate the discussion.

Thank you.

Our next question comes from Adam Thalmeyer from Thompson Davis. Please go ahead with your question.

Hey, good morning, guys. Just a couple 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 aggregate side with volume. In terms of the quarter, it's a little over 100,000 tons that came from that business. Longer term, it'll 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, and so 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, Greg?

Yeah, it was just incremental relative to those two projects.

Gotcha.

Okay, great. Thank you. And our next question comes from Filling from Jefferies. Please go ahead with your question.

Hey, good morning, guys. It's Jesse Brown 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 so on the cost structure within wall board you know again for us we're very fortunate that we either own or control our gypsum sources so that's not a significant cost of component for us and we have good surety around that so the other large pieces are paper and which, again, is sourced generally internally, and then natural gas. In terms of kind of the hedge position across all of EGLE for natural gas, we're right around 50% for the year, and that's at about today's levels. So feel good about where we are from that perspective. They haven't seen a lot of volatility in natural gas prices recently. On the cement side, you know, the larger components for costs are maintenance and energy. And in the energy side of things, it's a portion of that is fuels, which, as we've talked about, we generally have at least one- to two-year contracts for those prices, so they're relatively stable throughout the year. And then you do have electricity costs, which are subject to market fluctuations.

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

I'm sorry, you broke up on the second part of that question.

Just anything more that you can give on kind of the Denver and Casey issues that you guys called out in the quarter?

Yeah, so on the Denver issue, basically what we had is we had an acquisition in that market, so this is a newer business with us. We were probably a little overweighted in one sector, so when that sector went down, we had to pivot and move to other sectors, and they're 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 little bit more diverse than the previous owners had it. In the Kansas City situation, you know, that's pretty much resolved, and now we're just refocusing that business on the non-union work in that market. We'll be working to right-size that business and get that business back up and running with more volume here as we speak.

Thanks, I'll turn it over.

And we have an additional question from Tyler Brown from Raymond James. Please go ahead with your question. Hey, good morning, guys.

Hey, Craig, can you just talk a little bit more about the wallboard unit costs and maybe specifically about OCC? I know OCC kind of rose early in the year and it's 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 or just any color there?

Yeah, as I mentioned, paper is the largest component of our cost structure, and it fluctuates in terms of where OCC pricing is. It's a market-based price, not too dissimilar to natural gas or something along those lines. You're right. OCC has been elevated. It's really the first half of this year. And so we've talked about that. It does take a little bit of time to flow through into the wallboard business. I will tell you here in October, OCC prices were down. Again, the market was down. Now, that benefit takes a little bit of time to also flow through the business. But, yeah, I would say it's relatively elevated, but it hasn't changed a whole lot over the last several months.

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

Yeah, that's not a bad place to be. So we had previously given some guidance that was north of $300 million for FY25, just based on timing and flowing of payments. My guess is that number is somewhere between 280 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 something, and that is a multi-year construction project that will continue through fiscal 26. And so a good place to start is a pretty similar number. We can refine that as we get down the road, but that's not a bad place to start.

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 Hack 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 EGLE 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.