Q3 2020 Summit Materials Inc Earnings Call
[music].
Ladies and gentlemen, my name is Simon and I will be your conference operator today.
At this time I would like to welcome everyone to the summit materials third quarter 2020 earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the speakers remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
If you decide to withdraw your question. Please press the pound key.
We ask that you. Please limit your questions to one question and one brief follow up thank you.
Anderson you may begin your conference.
Welcome to the summit materials third quarter 2020 results conference call, we issued a press release yesterday afternoon detailing our financial and operating results.
The company's third quarter, 2020, investor presentation, and an updated supplemental workbook, highlighting key financial and operating data all of which are posted on the investor section of our website.
Managements commentary and responses to questions on today's call May include forward looking statements, which by their nature are uncertain and outside of summit materials control. Although these forward looking statements are based on management's current expectations and beliefs actual results may differ in a material way where it is.
Some of the factors that could cause actual results to differ please see the risk factor section of suburban.
<unk> latest annual report on form 10-K, I supplemented in our quarterly report on form 10-Q for the first quarter of 25, each of which is filed with the FTC you.
You can find reconciliations of these historical non-GAAP financial measures discussed the state call in our press release.
Today's call will begin with a business update from our CEO and our CFO, Brian Harris will provide a financial review and will provide concluding remarks.
We will then open the line for questions. Please limit your questions to one question and one follow up and then return to the queue. So we can accommodate as many analysts as possible and the timing of available with that I'll turn the call over to add more.
Good morning, everyone and thank you for joining our third quarter earnings call.
Before we begin talking about operating and financial results consistent with our normal practice is that something that I would like to start by providing an update on safety safety is the single most important core value driving the daily actions of old cement employees.
Enhance safety and distancing protocols are still in place throughout the organization in response to COVID-19. These measures are vital to our operations at summit is engaged in essential construction activity throughout all of its markets.
We see cases rice nationally somewhat has redoubled its efforts to ensure that we are vigilantly follow and best practices for the health and safety of our customers community stakeholders at or over 6000 dedicated employees.
We thank all of our employees for their commitment to us the real incidence safety culture.
Our focus is evidenced by our year to date safety metrics, which have improved in nearly every performance indicator for the first nine months of 2020.
We'll begin on slide three of the presentation with an overview of our third quarter.
The headline is that Americans are moving in large numbers to southern and western suburbs index or many of the highest growth markets are markets, where someone participate with the leading assets and strong operating companies. This migration requires new single family homes, and ultimately will require new roads schools distributions.
Centres and medical centers.
All of this new construction will create demand for the aggregates and cement that we supply directly to customers. It will also drive demand for the aggregates that will pull through our ready mix concrete asphalt and paving operations, where we capture margin at every stage of the value chain.
This migration scenario drove performance in Q3, particularly in our West segment, which posted record net revenue and adjusted EBITDA residential construction growth drove higher consumption of aggregates and ready mix in our high growth markets, such as Houston, and Salt Lake City single family permits increased by.
Well digits year over year in August we.
We recently closed on two acquisitions that will expand our materials based positions in important West segment markets. We are acquired multi source is located in Houston, Texas in July and in August we acquired Bobby gravel located nearby Hoover British Columbia both.
Both transactions have good strategic rationale as they are pure play aggregates businesses that bolster our presence and scale in attractive markets and increased existing reserves by more than 175 million tons. Each segment delivered mixed results, we reported higher aggregates volumes in Kansas in Virginia.
As we return to more normalized run rates after last year's Levy repair work and Kentucky completed last road repair work due to the fiscal challenges in that state.
Net revenue and adjusted EBITDA were both lower than a year ago, but if you exclude the onetime event of Levy work from 100 year flood in Missouri.
Each segment aggregates volumes of price were higher year over year.
The cement segment is reporting favorable demand trends in residential construction. So several of its southern markets on the Mississippi River had been a bit slower to recover in light of cobot outbreaks and the recent weakness in oil pricing lower demand in these markets led to lower net revenue and adjusted EBITDA relative to a year ago.
Despite achieving a price increase on June 1st 2020 year to date. This mess business continues to deliver strong free cash flow conversion, despite challenging conditions, our profitable greed America recycling facility operated on a limited basis in Q3 due to an explosion earlier in the year, which impacted adjust.
<unk> EBITDA by 4.3 million, we look forward to Green America resuming normal operations sometime in the fourth quarter.
Turning to slide four we've provided more details on our financial results for Q3 2020 relative to Q3 29 team as well as some early Q4 indicators net revenue was down 3.1% as of record West segment revenue was offset by lower cement and East segment revenue report.
Net income attributable to summit incorporated was up 63% on the reversal of an unrecognized tax benefits and adjusted diluted net income was up 10%.
Our adjusted EBITDA of 177.7 million was down 8% on a tough comp relative to the prior year period. However, quarterly cash from operations was up 6% our free cash flow was up 5% somewhat continues to prioritize cash flow and working capital management throughout the organization.
That focus on cash helped us keep our leverage ratio steady at 3.5 times in the third quarter, even though summit acquired two companies during the period.
Looking at the early results from the month of October and the possible read through for the fourth quarter 2020 residential demand is strong, particularly in Texas, Utah and the central U.S. nonresidential activities being fueled by wind farms and distribution centers. However airport on retail projects have been delayed or deferred with answer.
Certainty around when those projects will resume.
Public activity remains resilient in Texas, Kansas, Utah, and Virginia, However, the fiscal situation in Kentucky, the Carolinas and British Columbia is still challenging.
While the budgetary conditions in those locations. Unfortunately hasn't changed there is optimism that we may see improvement in 2021.
Our executive summary continues on slide five with year to date results.
Despite uncertain economic conditions, so much year to date 2020 performance is in line with 2019.
This is an accomplishment that our company can take pride in as we have maintained business continuity throughout the pandemic has served our customers safely and without interruption we.
We also believed a year to date results provide a more fulsome picture since our year ago results include one time very profitable Levy work from 100 year flood.
Net revenue is up 2.5% year to date 2020 versus prior year net income was up substantially and adjusted cash gross profit margin expanded by 120 basis points as we achieved volume growth in aggregates ready mix and asphalt. We also reported price growth in cement ready.
Next an asphalt adjust.
Adjusted EBITDA is up 4% relative to the first nine months of 2019.
Pricing trends are favorable year to date, resulting in margin expansion in many parts of the business on a mix adjusted basis aggregates pricing is up 2.1% ready mixed pricing is up 5.2% and asphalt up 1.2% adjusted cash gross profit margin for products.
Expanded 240 basis points to 23.8% and for services the margin expanded 510 basis points to 29.2%.
On slide six we provided an update of the current market conditions, our top five states by revenue summits end use markets are roughly 38% public 31% residential and 31% nonresidential. The good news is that with the exception of Kentucky, which represents only 7% of our revenue.
We have not seen major disruptions and tax collections reported from most of the states that we serve however, each state approach is funding decisions differently. So weve done our best to highlight the latest data points.
In Texas Tech stuff is a boarding jobs and the backlog has not been interrupted they expect to receive their full prop seven allocation in fiscal year 2021, our public highway work is booked into 2021, most of which is served by our north Texas operation.
Houston is one of the country's most diverse and highest growth residential markets and single family home permits were up 13.9% in August year over year nonresidential construction activity has been resilient in many of the suburban an expert in markets.
In Kansas July through September tax collections were 5.1% higher than expected.
Hey, Doug has several 2021 projects planned.
Nonresidential projects, such as wind farms warehouses and distribution centers are typically less it completed in the same calendar year residential activity has been steady.
For the third quarter, our Utah operation delivered record results as the state attracts new residence with the second lowest unemployment rate in the country signals.
Single family permits in Salt Lake City were up 10% in August year over year. It is a strong in migration market and had very low new home inventory levels in September as well.
Well Missouri's Department of transportation initially estimated to decline in tax revenue of up to 30%. Its activity has been steady for now but the longer term impact is less clear as with Kansas. Most nonresidential projects are less and completed in the same calendar year. So our visibility into 2021 is live.
If it up this time residential activity is steady finally in Kentucky, the smallest of our top five states in terms of revenue.
State legislature continues to struggle with budget shortfalls, resulting from fiscal issues that preceded the COVID-19 outbreak was a Kentucky transportation cabinet has acknowledged that budgetary impacts to its road fund are less severe than originally estimated they are proceeding cautiously and let things have not rebounded to normal levels yet.
Yes.
On slide seven we provided an outlook by end market.
Residential end market is experiencing accelerated demand the National Association of Homebuilders reports that the supply of single family homes for sale is the lowest in three decades homebuilder sentiment is at all time highs and mortgage rates are near all time lows. Thus we believe the conditions are ripe for a period of expansion.
Particularly for suburban and ex urban homes and affordable markets such as both serve by summit.
The nonresidential market it has less near term visibility, but we are long term bullish the architectural billing index suggests that new project developments have stalled we've seen several airport expansion projects to be delayed or deferred like contra we've still been busy with wind farm and distribution center projects I've given.
The strength in residential we believe a corresponding period of growth in nonresidential construction shouldn't be far behind.
With regards to public infrastructure, we now have more certainty about the fast Act a continuing resolution to fund highway through 2021 was passed at 2020 funding levels. Each state is evaluating its own budget needs. The funding sources and revenue impact vary by state the outcome with the general election May also.
Influence infrastructure spending both the house and Senate infrastructure builds would increase federal funding significantly over current levels.
Including the business update on slide eight we continue to pursue our aggregate Greenfield investment strategy to drive future sustainable organic growth by aggregates Greenfield investments have been completed to date with another five aggregates Greenfield investments under development. It is estimated that someone who generate 45.
Million of adjusted EBITDA on an annualized basis by 2024 from these projects. Once they are all in full operation expected investment in Greenfields is 50 to 60 million in Egypt, 2020, and 2021 with that I'll turn the call over to Brian for a discussion of financial results.
Thank you Ed turning.
Turning to slide 10, I'll start with a summary of some its capital structure.
In July we strengthened our balance sheet by redeeming all of the outstanding 650 million six and one eighth notes due 2023, which was our nearest term maturity with proceeds from 700 million a five and a quarter notes due 2029.
We ended Q3 with 289 million in cash an increase of over 100 million from the year ago quarter.
Combined with our Undrawn revolver summit had over 617 million of available liquidity at the end of the third quarter.
Our leverage ratio is now 3.5 times net debt to adjusted EBITDA, which is a good improvement from 4.2 times a year ago.
By completing two strategic acquisitions totaling 123 million in the quarter, we demonstrated our ability to balance M&A with efforts to improve our liquidity ratio.
We reported $124.3 million of free cash flow for the third quarter Twentytwenty, an increase of 5% from the year ago quarter as we continue to improve our working capital management.
On slide 11, we provided a bridge showing an updated 2020 capital expenditure guidance, we increased the projected range to $175 million to $185 million from 145 to 160 million.
The projection for 50 to 60 million spend on Greenfields in Twentytwenty remains unchanged increase.
The increased capex is being deployed to invest in reserves and to add additional equipment in some of our highest growth markets.
On Slide 12, you will see the net revenue bridge comparing Q3 Twentytwenty to Q3 2019 net revenue decreased 3.1% to 645.2 million.
Performance was led by our West segment, which contributed an incremental 10.6 million organic net revenue on high I agree gets and ready mix volumes, particularly in Utah. While we also benefited from an incremental 9.4 million in revenue associated with recent acquisitions.
Our east segment net revenue declined by 27 million, which reflected a very difficult comparison relative to a year ago. When flood repair work in Missouri contributed an outsize proportion of volume and price relative to the normal product mix in that region.
Tequila is also part of our East segment, we're letting activities still far below typical levels.
Flood repair work and Kentucky aside the east segment, Nonetheless posted strong performance from Kansas, where nonresidential wind farm and distribution center projects contributed to higher aggregates volume and price.
Our cement segments net revenue was down 14.1 million in Q3, 2020 relative to the prior year quarter on lower demand, particularly in the market sense of Memphis.
Turning to slide 13, we've provided a Q3 adjusted EBITDA Bridge, we ended the quarter at 177.7 million a decrease of 8% from a year ago. The.
The decrease was driven by lower East segment, and cement segment performance relative to a year ago, partially offset by a record performance from our west segment.
Turning to slide 14, you will see key GAAP financial metrics net revenue decreased 3.1% in the third quarter due to lower cement and asphalt volume, partially offset by higher aggregates volume and higher cement and ready mix price.
On a year to date basis net revenue has increased 2.5% due to strong performance in our west segment in aggregates ready mix and asphalt volume and price.
Q3 operating income of 100.6 million decreased 30.3 million as compared to the third quarter of 2019, due to lower revenue and higher general and administrative costs in the third quarter associated with approximately $10.6 million of CEO transition and related.
Stock compensation adjustments, along with other quarter end accrual true ups for health care and workers compensation.
Excluding these one offs our year to date DNA costs are running roughly in line with the prior year.
On a year to date basis operating income is up 4% on higher revenue.
Reported Q3 net income attributable to submitting of 90.7 million included a reversal of an unrecognized tax benefit totaling $32.9 million and is the primary source of the increase relative to 55.8 million reported net income in the prior year period.
Turning to slide 15, we presented several non-GAAP financial metrics, where we compare Q3 2020 to the prior year as well as year to date adjusted gross profit margin contracted by 10 basis points in the third quarter, yes expanded by 120 basis points year to date.
Based on a combination of volume and mix adjusted price improvements from aggregates and ready mix.
Adjusted EBITDA margins contracted 150 basis points to 27.5% for the quarter on tough comps relative to a year ago, but on a year to date basis. We're at 22.7%, which is 40 basis points ahead of the first nine months of 2019.
Adjusted diluted net income is up 10% over the prior year quarter and up significantly year to date Twentytwenty versus the first nine months of 2019 due to non cash adjustments impacting our effective tax rate turning to slide 16, we have provided a comparison of price and volume year to date.
Great organic.
Organic average selling prices increased 0.6% for aggregate, 1.1% for cement, 5.2% in ready mix and 1.2% in asphalt organic volumes increased 1.3% for aggregates, 4.5% for ready mix concrete and remain consistent.
Our asphalt cement volume contracted by 7.4%.
Turning to slide 17, we provided adjusted cash gross margin in the quarter and year to date in all lines of business.
Aggregates margins contracted by 440 basis points in the third quarter on tough comps relative to Q3, 2019, which featured flood repair work at a higher volume and price than our normal mix of business. However year to date Twentytwenty, our aggregates margins are unchanged from the first.
Nine months of 2019.
Products business expanded by 100 basis points for third quarter, and 240 basis points year to date as we experienced both volume and pricing growth in residential markets for our downstream businesses, particularly in Utah in Texas Mark.
Margins in our services business expanded by an impressive 480 basis points in Q3, and 510 basis points year to date on pricing gains lower fuel and trucking costs in Texas, and Kansas as well as volume in North, Texas, Kansas and Virginia.
Cement margins contracted only slightly in the third quarter, reflecting well managed production and cost control methods year to date cement margins have contracted by 200 basis points, which reflects winter storage costs early in the year together with the impact of the explosion at the Green America recycling facility.
Materials and products comprise 86% of our Q3 adjusted cash gross profit and we continue to expect that the contribution from materials will be an increasing proportion of our EBITDA as we pursue our greenfield strategy experienced organic growth in our markets and engage in M&A.
We're currently modeling purposes for the fourth quarter Twentytwenty, we estimate that interest expense should be in the range of $25 million to $26 million, we anticipate paying minimal state and local cash taxes and know us federal income taxes. In addition to minimal cash taxes, we do not expect.
To have any significant GRA payments until 2025.
For the purposes of calculating adjusted diluted earnings per share. Please use a share count of 117.2 million being 114.1 class a shares and 3.1 million LP units and with that I'll turn the call back to and for her closing remarks. Thanks, Brian.
I'll conclude my prepared remarks, with the management outlook on slide 19.
In a world where more people can work remotely they desire single family homes in locations offering a more affordable cost of living.
Americans are migrating towards many of the markets where someone has an established presence.
We are well positioned to benefit from the homes being built today and the roads Windfarms distribution centers and data centers. They will need in the future summit is vertically integrated in both high growth markets and uniquely positioned to capture value across aggregates ready mix asphalt and paving.
I recently joined summit, and I feel humbled and honored to lead the company through its next phase of growth and value creation.
Immediately after being appointed CEO on September Onest I embarked upon a listening tour of employees customers current and former investors sell side analysts and other important stakeholders to get an outside in view of the business feedback is important to those of you who provided your valuable time and insight or.
Participated in our perception study we thank you.
I'm sure. Many of you on this call are eager to hear about our vision and strategy for future growth and value creation at summit materials.
The answer is that it is still early days, what I can tell you from our initial analysis is that some of these markets are growing our financial position is strengthening and we are focused on free cash flow conversion. We are aligning our business to maximize returns on invested capital ROI season up part of our compensation.
Land and we will use that framework as a key component to evaluate our performance.
We are conducting an in depth strategic review of the financial and operating performance of our portfolio and its future growth potential leveraging the feedback that youve generously provided today.
And finally, we are focused on consistent organic growth with investment in Greenfields and summit end markets that are underpinned by strong growth fundamentals sustainable organic growth serves as a foundation to support strategic acquisitions, while continuing to de lever the balance sheet with increased focus on cash.
And returns generated across the entire summit portfolio with that I'd like to turn it over to the operator for questions operator.
Thank you at this time I would like to remind everyone that in order to ask a question. Please press Star then the number one on your telephone keypad again.
Again, we ask that you. Please limit your questions to one question and one brief follow up we'll.
We'll pause for just a moment to compile the Cuban their roster.
Your first question comes from the line of.
Kathryn Thompson with Thompson Research your line is open.
Hi, Thank you for taking my questions today first focusing on the cement segment and knowledge.
Expecting some tough comps go through the quarter, but still the volume drop.
Little bit more than expected could you give color on the Delta and then also because it's a follow up on the cement segment puts and takes on margins, including.
Any impact from higher plant costs in the quarter. Thank you.
Okay, well, let me just address the cement volume so as we said in our prepared remarks, most of our volume decline within our southern markets and that had an impact overall on the overall volume of 7% negative growth.
The puts and takes on some edge moving forward.
If we look at I'll have left Brian referred to the margins on cement, which were pretty close if you look at year over year most of our reduction from was from fixed cost coverage.
Just by the volume decline, but also the one we pointed out also was the Green America recycling, which has been down and had an impact of 4.3 million in the quarter.
Yeah, I don't really have much more to add to that on the cost side Kathryn.
The Big impact obviously was the was the girl.
Explosion impact that the plant is still not up and running we expect that to happen during the fourth quarter based on current timing estimates. So we're likely to have an impact in Q4, as well, albeit probably lower than it's been in Q2 Q3.
Otherwise the plants were running well.
We did lose a little bit of ground because of.
Under absorption of overhead from those lower volumes, but otherwise the plants ran well and costs were well controlled.
Okay, and just to clarify on that the increasing Capex is this all related to Greenfield expansion are there other initiatives that made up a lot.
No, it's actually not related to the Greenfields the spend on the Greenfields. We've kept in the range of 50 to 60, that's unchanged. So the increase that we that we have identified has come from a couple of sources. The first is that we.
Opportunistically purchase some aggregate reserves.
In the Utah market, where aggregates are scarce and so the opportunity to purchase those came.
It came along we took advantage of that and then second part of it was really that in many of the very high growth markets.
We added some additional equipment, so yellow iron and interest to take advantage of the growth that was going on in those markets.
Your next question comes from the line of Phil Ng with Jefferies. Your line is open.
Hey, guys.
Be helpful. If you could provide a little more color on how volumes track intra quarter and certainly appreciate all the color you guys provided on October trends, but any more specific guidance on your core business is is it seems like trends softened in the quarter.
Yes, Phil Thanks for the question, yes, they did weaken a little bit just towards the very end of Q3, we had hurricane Lora came through.
That lost as a few days with weather in Houston market and many swept through up through the center of the country and over into the coast. So we lost some volume in our high margin high price markets in the Carolinas and Virginia.
So that was a little bit disappointing towards the end of Q3 kind of just to.
A good bit of the luster off.
But other than that.
The cadence of the volumes was pretty much as we expected through.
July August and September.
Got it and then anything you think you touched upon earlier.
Early days in terms of.
Yes.
Okay.
Yeah.
Uh huh.
They should just yet.
Reassess your portfolio.
Okay, and I guess, what do you think longer term Buffalo.
From a philosophy standpoint, how important is vertical integration and I guess, what's your ability on any great any markets that you deemed non core on the downstream side of things.
Phil I find it very hard to hear the front end of your question. There if you wouldn't mind repeating it that would be very helpful.
Yes sure.
Early early.
So your process in terms of your strategic review.
Three takeaways.
Good.
It is worth the spot.
Oh.
Okay. This is the fourth.
Hey, I'm really sorry, we couldn't quite make that out what if maybe we can catch up with you later offline.
No problem you broke up on that one I heard hard to your question and that was right you Burberry, Florida that Phil.
I think that lasted into your question came through of that vertical integration and I think I would point you to the strength of our Houston and Salt Lake City markets.
If there's ever an example of where vertical integration is an asset for summit. This record performance that we've had this quarter and year to date really does demonstrate that for our model.
Your next question comes from the line of Jerry Revich with Goldman Sachs. Your line is open.
Oh, yes.
Yes, hi, good morning, everyone.
You're welcome.
Oh, thank you.
I'm wondering if you talk about how your approach to return on capital is.
Triggered from column.
And.
Prior teams.
Obviously, the team's done a good job of acquiring assets at attractive multiples. So.
What's that we can think about.
Your strategy and the way you look at returns on capital for first the way the team had looked at it.
Yes, what are the key differences to approach.
Yes, I think one of the key differences, we've now added it to our incentive plan right to really increase emphasis on that and Weve referred to the fact that we're doing a normal course portfolio review as part of our strategic review and isn't that were really going to look at all the elements of our business and all the sub segments.
So look at the returns the growth potential and the cash over time and cash needs as we will define and optimize our portfolio moving forward. So I would submit up let's say increased emphasis on a normal basis running the company and then when we look at our portfolio, having very active portfolio management and optimization.
Moving forward.
Okay, and then turn into more trouble you expand on on the last point in terms of increased focus on running the company obviously, the company's Oh water for acquisitions. Historically can you talk about how the structure is changing.
I know, it's early days, but any broad strokes there would be helpful. If you could expand on that point.
Yes, it is really early days.
We've been going through a very clear process here and again. Thank you for all your input on the outside in view of the company that was kind of stage one in our process secondarily Weve been you know near term focus has been resiliency of our business in any coal that scenario, making sure. We're ready and then the third part is our in depth strategic review, which is.
Really ongoing and the teams working very hard to get to some answers there, but we really don't have any conclusions we hope to share that at.
At least an update on that our next earnings call.
Your next question comes from the line of Stanley Elliott with Stifel. Your line is open.
Good morning, everyone and welcome to the call.
We talk about kind of the portfolio optimization, you've just done two acquisitions here do we think that the M&A environment gets put on hold as you continue to work through the mechanics of the portfolio or.
I would love to hear that in context of up leverage at three and a half times.
Sure when you talk about our capital allocation priorities, obviously, focusing on de levering and we've succeeded in that year to date, but we continue to focus on cash and organic growth of our company and putting capital into invest in the organic growth portion of the company, Yes, we did due to strategic acquisitions.
So I would not say acquisitions are on hold I would say, we're being very selective and work and returns in doing that and the two acquisitions that we did a really pure play aggregates that have been ongoing for six to seven years as my understanding is and these are strategic acquisitions that we feel will really strengthened our wes.
Segment, moving forward, which is our high growth segments. So I.
I would not say on hold I would say just selective acquisitions, but why we continue to de lever and we hear to all allowed it to your own math that you would prefer lower leverage on the company.
And then kind of switching gears, a little bit you're thinking about how strong the residential markets have been really nationally, but especially in the two key markets you all highlighted.
How long before the nonresidential market typically would pick up in those markets as kind of one off or whether it's retail or or like commercial things of that nature would end up following what looks to be a pretty.
Nice growth trajectory on that residential market side.
Well, if we look at the residential typically and this does vary a little bit.
And I guess the rate of in migration to these market segments will determine that but generally we would quote quote 12 to 24 months on that and.
On the like commercial so it is a bit lumpy and when we look at other non res, but on the light retail I would say and that low rise Abbott you typically a 12 to 24 month lag, which is why we are you know really strong nonresidential on nonres. Following that in that you know as we continue to grow in the West segment.
Your next question comes from the line of Adam Thalhimer with Thompson Davis Your line is open.
Hey, good morning, all I wanted to see what's your outlook, specifically for Utah, and Texas, just because there's such important markets for you.
Well, if we look at Utah in Texas.
I'll start with Texas very strong on textile so our public spending continues to be strong we have backlogs into 2021.
Residential very strong so I would say you know and both our Houston and North, Texas, We continue to see that in migration and considerable growth if.
If we talk about Utah and low unemployment residential very strong and again you know the public spending there's been pretty steady. So all all indicators are pretty strong in those two areas.
Okay, and they and how about the southern.
Sippy River markets have been kind of a thorn in the side, a cement where do you stand there.
Well you know, we can't predict because a lot of that was driven by cold weather and lower oil pricing, we're not seeing that return to any significant level in the near term. We're estimating that we don't and so that drives behavior on our behalf, which is control what we can control and our operations as Brian Rick.
For two earlier, the guar expansion will come back into place that will recover.
You know into 2021 on this loss that Weve had in Q2, a 4 million Q3, 4.3, and Q4's likely to be a hit depend on how quickly we ramp up so we have that plan to play so that'll be an uptick to slant, but then when we look at the demand, which we can't control, we do have a number of initiatives.
Really focused around commercial excellence.
Supply chain excellence and operational excellence in the case of commercial excellence throughout price execution, staying close to our customers as we continue to do in this business.
Supply chain, we brought in some new talent to really look at our logistics and distribution costs and make sure. We continue to optimize and this team is very strong on operational excellence, but we're never done and we will continue to focus on our cost containment moving forward.
Your next question.
Question comes from the line of Trey Grooms with Stephens. Your line is open.
Hi, good morning.
So.
I'm going to try a.
Maybe a bigger picture one here so we're going into the election here are just a few days out and you know if we were to get a blue sweep which.
Some folks are saying that there is a pretty good chance of that.
How and when do you think that starts to impact your business.
Well, we can't really predict future on that.
I will say that you know in 2016 Trump talked a lot about it infrastructure bill, which even though he on the Senate never came to pass. However, we do believe it will be an uptick to the busy at the time, it's very hard to predict right.
Got it yeah.
Understood.
And then I guess kind of circling back on.
The summit margins, just just briefly so I can understand the sequential.
Sequentially. The change that you saw there and I understand there were some benefits in the Twoq period.
That that maybe didnt repeat but both periods did incur that cost that you know from the explosion.
But had very different EBITDA margin. So can you dive in a little bit maybe it and not look at it year over year, but sequentially.
Maybe some of the cost differences there and how we should think about those is there anything.
You know ongoing there outside of what we what we've already talked about.
Yeah, Trey Thanks for the question I think really was it was down to some of that overhead absorption recovery that we mentioned there from Catherine's question that with the volumes being.
And as you know guys cement has quite a high fixed cost base, we just didn't get a recovery on the overhead.
Due to that that wouldn't be the primary difference between.
Q2 and.
In Q3 also in Q3, we did have the.
Shutdown the autumn shutdown of one of the plants and the second one will happen Inc.
In Q4.
So we have some lost days because of that we don't have in Q2.
Your next question comes from the line of Garik Shmois point with loop capital. Your line is open.
Oh, hi, Thanks, just wanted to ask about pricing just given some of the negative price mix in the quarter. If you provide a little bit more visibility on how we should think about pricing moving forward and just given the volume backdrop are you seeing any change to the competitive landscape is getting a little bit more times, just given some of the volume challenge.
Just a couple of your markets.
I'll have Brian address the specifics on the pricing, but on the competitive landscape, we're not really seeing any significant changes I will tell you garik that one of the things that was a surprise to me and coming into this business does have different competitive dynamics are between regions that drives our pricing.
But we're not seeing a fundamental change in any of our markets yes.
Yes, Gary on the aggregates pricing.
Organic pricing was actually positive in the quarter.
And the main reason for the for the reported decline was.
Due to.
The comparison with the prior year, where we had that very high.
Highly priced levy repair job in Missouri, and then on the multi source is acquisition the average selling prices on that product line are lower than the averages that we have elsewhere in the business. So that was a little bit of a drag on the average selling price, but I would I'd ask you to do is not just look at the.
It gets pricing in a vacuum, but keep in mind the margins because they do go hand in hand, you can have product lines, which have lower selling prices, but actually have very good margins on them and if you look sequentially, you'll see that our aggregates margins actually increased.
Quarter on quarter.
The LCD margins are up by 1.6%.
And even with the difficult comp.
Year to date margins are the same as they were in the prior year. So a few moving parts there, but you really have to look at price and margin.
Together.
Okay.
Thank you Brandi these prices were strong up 4.5%.
5.2% year to date and even on a year to date pricing on aggregates makes adjusted that's positive by about little bit over 2%.
Great No quick fix for for all the detail just want to ask on logistics as well, if you're seeing any bottlenecks or anticipating any bottlenecks are moving into next year, just given some reported.
Capacity constraints on the trucking side.
Not at this time, I think actually in Texas with oil pricing being down Weve actually had a better availability of truck drivers.
Yes, Steve So no impacts on the business that we're seeing here in the near or medium term.
Your next question comes from the line of Rohit, Seth with Truest Securities. Your line is open.
Hi, Thanks for taking my question.
The first question building on the infrastructure questionnaire came earlier, if there was a name.
Infrastructure Bill that was passed.
Yeah.
I think you know the shovel ready projects would probably be repair and maintenance type work and I'm. Just curious on you know given your focus has been on the less.
On the smaller jobs is it fair to say that you guys might be in the earlier beneficiary of.
He a pickup in spending.
Come from that.
Yeah, I think that would be a correct assumption because a lot of our work is repair and rebuilds. So we would expect to see some uptick from last really.
Okay, and then second question, Brian on the TRP.
No.
From the elections taxes corporate taxes go up I do recall.
When taxes came down there was a revision to the t. or pure reliability the.
We moved the other way.
Does that.
Does that unwind or what would the impact be on up here.
Yeah. So hypothetically what would happen is the TRT liability would go up and the same way as it came down but when the corporate tax rate was reduced.
But it would not change the timing on when any.
Payments are likely as we mentioned in the prepared remarks, there. The earliest we expect to have any.
Payments under the Tiara is 2020 five and that date is constantly shifting as the result of any other tank.
Tax attributes that are generated along the way whether they be from accelerated depreciation or step ups in basis that we get from acquisition. So.
Hypothetically, yes, an increase in the tax rate would increase reliability.
Your next question comes from the line of Anthony Pettinari with Citi. Your line is open.
Hi, good morning.
Okay, and you talked about ROI see being added to compensation, which is I think is great.
Possible to talk about expected returns for the incremental Capex investments and then just generally what returns you'd expect from aggregate greenfields versus acquisitions like multi source Isabella gravel.
I think we said before on returns from.
The actual.
Ongoing acquisitions, we target in the mid teens.
With Greenfield I think Greg you for specific format, yes, the greenfields.
Yet to play out as to precisely what the returns would be certainly the entry multiple is significantly lower than you would pay if you will you know if you're paying for high quality.
EBITDA through acquisition, we know that the aggregates multiples paid can be in the mid teens and sometimes even higher so the entry point is much lower but obviously it takes a little longer to actually realize the EBITDA from those investments.
We'll know more as the.
As the each of the projects unfolds, but based on the $45 million of EBITDA and Twentytwenty four we'd expect those returns to be.
In the in the mid teens IR.
But then the other thing I'd ask as you know Anthony when we look at our strategic review were not complete through that so we haven't really set a target on ROI see at this point in time, so that will be something coming out of our in depth review.
Okay. Okay. That's helpful.
And then Brian you gave US an impact you gave us an update on the impact of weather in the quarter can you talk about what kind of weather comp for Q is set up for you know for modeling purposes is there anything we should keep in mind or that you've seen so far in October.
Yes, it's I think most of the weather patterns that we've seen in the different parts of the country have held up pretty well.
In October or have followed a similar trend. So we're going to see some wet weather continuing and we've lost a lot of days in the southeast so and.
You know.
Myrtle Beach, Wilmington, Columbia Roanoke.
Lexington enable had significantly more rain days this year, but elsewhere, it's been drives the Kansas, Wichita, Columbia, Missouri Salt Lake.
Kind of Intermountain west as being particularly dry you probably seen all the fires that we've had but it's bdcs being dry so at the moment, we kind of have seen thats similar path.
Whether unfold in October.
Your next question comes from the line of Sheldon Clark with Deutsche Bank. Your line is open.
Hey, Thanks for the question I apologize. If this has been asked I had some.
Service issues as well earlier could you just provide a little bit more context.
On the impact from recent M&A on profitability in pricing.
Looks like there was a bit of a mess.
Negative drag on aggregates mix in the quarter I know you said margins held up decently well, but can you just maybe talk about how pricing differs in these markets versus your existing markets, maybe just help us frame up what the potential opportunity is there to either improve pricing or margins in.
In those markets.
I have a comment on our multi source this acquisition, which was done as a pure play aggregates.
Just on that acquisition and we're in the process of starting the integration so as Bryan correctly pointed out earlier, there was some lower pricing, but the margins were strong.
As we look to integrate we always look to have one to one and a half turns of improvement and also you know the back office, our sourcing integration and also as we look to apply our commercial and operational excellence, we expect to be able to get to the pricing targets that we do for the entire portfolio.
And John I'd, just add to that we delivered that you saw on the bridge. The EBITDA bridge. The contribution was about 2.3 million of EBITDA in the quarter, there really wasnt anything from valley sand and gravel up in Vancouver. It was late in the quarter, but Multisource is contributed by 2.3 million in Q3.
Okay. That's helpful. Thanks, and then just kind of a broader question.
I don't know if you have a timeline around around it but when you do complete your strategic review should we expect any sort of investor day or analyst day presentation or or is this sort of something that you know you'll just string in the earnings calls over time.
Well, we are in early days and we don't have a specific timeline I will tell you. The team is working very hard and we're doing a very comprehensive review to make sure that when we do come out with a revised strategic road map, it's something that is very well thought through.
We have our normal course discussions with Buyside cell site and our ongoing earnings interactions. If we feel that we're not getting the full coverage for our strategic road map when it's ready, we obviously would consider an investor day at that time, but we haven't made that decision up to now Sheldon.
Your next question comes from the line of David Macgregor with Longbow Research. Your line is open.
Yeah. Good morning, everyone I had a question about cement and just looking at the pricing up 50 basis points and you talked about south of Memphis. So I appreciate that color maybe.
Maybe think about the rest of the river system, you know going north from there and you know I think its common knowledge, it's always been a tough market on pricing.
But just trying to get a sense of what was the most recent price increase just you weren't able to get much traction north of Memphis or is the traction just a maybe a little bit slow in coming through and we see that more evident in the fourth quarter numbers, but any kind of color you can provide on just market conditions across that segment of the market would be helpful.
Yes, the northern portion demand has been pretty steady and really our demand challenges where in the southern part, which when you put the two together it really boils down to customer mix that resulted in the 0.5% increase so it's not a lack of execution on where we said we will get the price increase is just customer mix I would say.
It would explain that up.
And so how does that play into fourq or what should we be looking for there.
Does that mix correct or more I think more of the same because I don't see our southern markets, particularly rebounding. So I think you could probably just carry that across from where we are today and Peninsular isn't an incremental benefit from further traction and for Q.
Just across the geography.
Okay now because the mix should not change Oh, okay. Thanks for that and then the second question is just you were addressing earlier questions about the balance sheet and leverage and you know the important striking a balance between investing in the business and and repurchasing stock and buying and paying down debt I guess I'd just be interested in your plan.
Sort of looking a little further forward than just the next quarter, but you know through the next 12 15, 18 months, where do you see leverage getting to from three and a half times and do you get there by using cash or is that just EBITDA growth or is it a combination of both but any color there would be helpful.
Yeah, I think you know we are undergoing our strategic reviews. So we do not have concrete numbers that we've rolled out as a result of any change in strategy I will say, we have ongoing focus to de lever and the team has been working diligently upon that working on working capital really doubling down on our organic growth making sure.
Operational excellence is strong so we will continue to de lever no any significant step changes what's come out of our strategic review and we will review that at the time.
Your next question comes from the line of Mike Dahl with RBC capital markets. Your line is open.
Hi, Thanks for taking my questions. Just wanted to ask first question on the Acs margins I understand from.
From a year on year standpoint, the tough comp.
Comp with the levy repair work, but.
Anything you can give us on unit costs in the quarter because presumably.
Diesel would have still been a.
A tailwind for you guys and just so any color around unit costs and in Threeq, you and how to think thinks about that and for Q.
Yeah, the diesel costs were a tailwind bars, they have been all year.
Where.
We obviously hedge by forward just as a portion of buddies by diesel and then we pick up the balance.
Spot the diesel has been a tailwind for us throughout the year not just on the AG business, but throughout the entire organization, particularly actually on ready mix, where we do a lot of.
A lot of.
Mileage.
So that has been a tailwind there isn't really anything specific on the.
On the underlying cost side of the equation in a in aggregate that would have affected the margins, it's really more to do with that mix.
Nice thing I'd say is a known mix adjusted basis in Q3, we would've been up by but said and to 2% a little bit over 2%.
And the you know the sequentially were 64% in Q.
Q3, 64.2, and actually LTM is now above back above 60% so.
He just the pricing mix that.
It was the biggest factor.
And in in Q3, and obviously Q3 of 2019 was a very tough.
Where we had margins of over 68% which is.
Normally high for the normal run rate of this business.
Alright, Okay. Thanks, Brian and my second question and I know it's early.
Perfect Crystal ball here, but you know there is obviously a debate around public and non res as we as we head into 21, I think what Youve outlined is certainly helpful going through kind of the state by state break.
Breakdowns in terms of.
Current state of play.
If we look at your comments across your your markets that make up the majority of your your business. Yes. There are some puts and takes in places with headwinds on the public side, but overall it seems like your view is potentially that public side remains more resiliency in the markets that matter to.
You and same with the combination of kind of private rest versus non res.
I guess where I'm.
Trying to get to is when you're thinking about next year do you think your position to actually have a euro volume growth.
Not in 21 based on what you're seeing early signs.
Well I think we haven't rolled up overall I would say that.
Lastly, any further impact from coal that is uncertain at this time like any other business I would say, though that there's one factor on the residential side and as you know we talk about public but all inventories are low across all our major markets. So we would expect that to continue to grow if its consistent with this year in interest rates stay low on the public side.
We pointed out each area and you know it's on our strong market clearly in the West segment, we expect that to continue Kansas very strong, Virginia strong and where we have I don't believe Kentucky, both particular, the rebound, but that will be each state makes their decisions differently. So we'll just have to wait and see on that.
Ladies and gentlemen, we have reached our allotted time for today I will turn the call back over to Ann for any closing remarks.
Thank you operator, and thank you all for joining us today that concludes our call good day.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
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