Eagle Materials Inc

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 a 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 EGLE for FY26. 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 EGLE. 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 am 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 were 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 non-residential construction make up about 80% of our heavyside and 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 and 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 1st 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 upward 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 two 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 two 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 highlighted on the next slide. In our heavy materials sector, which includes our cement and concrete and aggregate 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 non-residential 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 of 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%, 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 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 of 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 is 51% and our net debt to EBITDA leverage ratio is 2.1 times. 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.