Q2 2021 Summit Materials Inc Earnings Call
Yeah.
Good day, and thank you for sending by welcome to the summit materials second quarter 2021earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during the session you'll need to press star 1 on your telephone.
Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero and now like to hand, the conference over to true speaker today.
Carrie Anderson. Please go ahead.
Yes.
Welcome to summit materials second quarter 2021 results conference call, we issued a press release yesterday detailing our financial and operating results. This call is accompanied by our investor presentation, and an updated supplemental workbook, highlighting key financial and operating data all of which are posted on the investors section of our website.
Management's 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 for a discussion of some of the factors that could cause actual results to differ.
Please see the risk factors section of summit Materials' latest annual report on form 10-K, which is filed with the SEC you can find reconciliations of the historical non-GAAP financial measures discussed in today's call and our press release todays call will begin with a business update from our CEO Anne Noonan, then our CFO, Brian Harris will provide a financial review and.
And we will provide concluding remarks, we will then open the line for questions. Please limit your asks to 1 question and then return to the queue. So we can accommodate as many analysts as possible and the time, we have available with that I'll turn the call over to Ann.
Good morning, everyone and thank you for joining our second quarter 2021earnings call. We'll begin on slide 4 of the presentation with an overview of our second quarter performance.
Before a brief you on our operating and financial results consistent with our normal practices at summit I would like to start by providing an update on safety.
Safety is the single most important core value driving the daily actions of all of summit 6000 employees. We are intent on driving a zero incident safety culture.
To further reinforce this commitment we've created a safety center of excellence that is focused on standardizing and upgrading safety protocols across the entire summit enterprise.
I'm pleased to report that first half 2021 sleep preventable incidents are significantly lower than the first half of 2020.
We remain fully committed to the safety of our employees and the communities that we serve.
COVID-19 related employee quarantines are up slightly from our last earnings call. So we are re emphasizing protocols and safeguards all.
I'll turn now to our financial and operating results today, we are reporting some its third consecutive quarter of record adjusted EBITDA. This performance reflects our team's commitment to operational and commercial excellence, which delivered volume growth and most lines of business and pricing growth and all lines of business day.
And fundamentals remain strong and our rural and ex urban markets well most of the departments of transportation and states that we serve have returned to typical letting and operating conditions.
We delivered record Q2, net revenue up 7.5% from the year ago quarter on higher aggregates ready mix concrete and cement revenue relative to a year ago and continued favorable market demand conditions and price growth and all lines of business.
Specifically volume growth was robust throughout the quarter with aggregates volumes up 14.7% cement volumes up 8.3% and ready mix volumes up $6.3 per cent aswell.
Asphalt was the only line of business with lower volumes, which were down 11, 3% largely due to a divestiture.
Q2 was the first full quarter of our elevate summit strategy implementation and we made strides on several fronts.
Our leverage improved to 3 times net debt to EBITDA and improvement of 0.2 times from the prior quarter and a full half turn versus a year ago.
And I conducted a listening tour and immediately after joining summit last year leverage was 1 of the most frequently cited points of investor feedback. It's 1 of our core elevate summit goals to be below 3 times and it will continue to be a priority for our team.
And as part of our elevate summit strategy. We have now completed a total of 5 strategic divestitures as we exit non core or non leading market positions unlock proceeds for more strategic views and convert some of those businesses too and asset light model to drive higher aggregates pull through.
We believe summit organic growth profile and asset light conversion model position the company to absorb the impact of the foregone contributions from those 5 divested businesses. So we are leaving our full year adjusted EBITDA outlook unchanged at this time.
On slide 5 I'll discuss our performance at the segment level.
Our West segment reported record net revenue up 5% and adjusted EBITDA in line with the year ago quarter, higher aggregates and ready mixed volume and price, partially offset fewer working days and Texas due to wet conditions and May and June.
Our east segment reported higher aggregates and asphalt volume and price, partially offset by lower ready mix concrete volume and fewer wind farm projects and a year ago quarter. We set records for net revenue, which was up 9% and had record adjusted EBITDA, which was up 7%.
Our cement business had a strong quarter with revenue up 13% and adjusted EBITDA up 11% from a year ago.
The Green America recycling facility is currently ramping up back up to full production and expansion of that facility is also well underway.
Turning to slide 6 we are in full implementation mode on our elevate summit strategy, our focus as a team is on continuous execution discipline and creativity to deliver better returns and sustained long term growth. We have 4 key strategic priorities. The first involves enhancing our market.
Leadership, our goal is to be number 1 or number 2 and ex urban and rural markets, where we can invest and grow our positions.
The divestitures, we completed in Q2 and vault businesses, where summit did not have a leading position and did not have a clear path forward to improve that situation or summit was simply not the ideal owner of the business.
Of the 5 divestitures year to date, 1 was in our West region and the other 4 when summit East region.
The divestitures included asphalt and paving ready mixed concrete and even and aggregates business that was subject to and unfavorable long term supply contract.
We converted some of the divestitures to and asset light approach, which is our second strategic pillar.
There were some asset intensive businesses, where we were not the ideal owner.
However, we still retained our strong aggregates position in those cases, we were able to negotiate long term aggregates supply contracts, thus strengthening and existing customer relationship, while reducing capital deployed and the complexity of our business.
To recap our criteria for an asset light deal is that the business be 8 and isolated downstream asset markets, where we are not the number 1 or and number 2 player.
Be competing with different competitors and the downstream vs. He upstream.
C lacking a clear path to meet our financial goals of greater 30%, EBITDA and greater than 10 per cent ROIC.
And finally to have the opportunity to pull through our aggregates with a long term supply contract.
Roughly half of the businesses that are being divested have the potential for an asset like conversion, we've experienced a powerful shift and how our team evaluates the strategic efficiency of our assets.
Our leaders are proactively identifying the value generators and each region and line of business and we are allocating resources intentionally to businesses that will move the needle for us. It's a focus on capital efficiency that is helping summit to be more effective and its current business as well as and evaluating future opportunities for both.
Organic and inorganic growth.
For example leaders are looking at the asset utilization of their plants and mobile equipment to determine what is really driving value creation.
Then they are relocating reallocating or divesting what isn't driving value, we want to be deliberate and intentional on giving summit the opportunity to grow and invest in markets, where we can thrive.
Our third pillar of social responsibility is a vital differentiator because it does not only the right thing to do but it also has significant importance to all of our stakeholders.
We've completed our C O 2 water and waste baseline and we'll be publishing those results later this fall.
Just as important we're using that data to determine how summit can best drive value creation through enhanced social and human impact land use and emissions performance to help us achieve our elevate summit goals.
For example, our business leaders are strategizing on how best to retain and attract a diverse employee base that offers more growth and development opportunities and.
And they are looking at options to enhance our land use practices to ensure our existing operations and greenfield projects aligned with the interest of our stakeholders. We are measuring energy use to improve efficiency and our aggregates business and undertaking pilot projects to understand the most optimal path forward to address the emissions.
Impacts of our cement and ready mix concrete businesses.
Finally, our fourth strategic priority is our commitment to invest and innovation, we've developed and inventory of projects and products that we already sell or have been developing through industry and university partnerships. These opportunities will help summit be less reliant on 1 line of business or 1 geography and dry.
Us towards greater than 30% EBITDA margins for the long term.
We have created centers of excellence to enhance performance and critical capabilities across our lines of businesses safety operational and commercial excellence our areas of focus across the entire summit enterprise.
For example, we are leveraging our commercial excellence function to further heighten our focus on value pricing, which is essential as market growth value pricing provides summit, a greater ability to stay well ahead of inflationary impacts and labor materials maintenance and energy.
Additionally, we have committed to standardization to drive best in class practices across the business and improve consistency of results and agility up decision, making while optimizing our overall cost structure and productivity results. For example, we have rfps out to standardize on our purchasing activities that were.
And last coordinated and the past due to our decentralized operating company model. Our business leaders are also scrutinizing asset utilization adjusting their market plans and developing the tools required to optimize return on invested capital across all of our assets on.
On slide 7 and you'll see a graphic that we introduced during our elevate summit investor day that summarizes our strategic execution plan and deliverables over 3 horizons transfer.
Transparency and consistency are very important to us. So we will evaluate our performance in this context and update you each quarter along the way.
We're in Horizon, 1 which is depicted at the bottom of the page we've completed our portfolio review art and over and the process of divesting underperforming and non core businesses, while focusing on key drivers of value creation standardizing across the business and cultivating social responsibility and innovation expertise.
Our elevate summit quarterly update is on slide 8.
We're pleased to report that our leverage ratio has improved to 3 times and improvement of 0.2 times since last quarter. We believe our goal of less than 3 times is within striking distance this year, which.
Which we believe will enhance summit financial flexibility and improve investor confidence.
Our Rois sea of 8.5 per cent is a full half turn better than year end and in line with last quarter. We.
We believe our goal of greater than 10 per cent is achievable through a combination of divestitures maximizing asset utilization and pursuing an asset light model, where it makes strategic sense.
Our adjusted EBITDA margin of 22, 9% is still well ahead of our 2020. Actual however, it's a 30 basis point decrease from what we reported last quarter as I told you at that time, we are playing the long day and it may not be and linear upward trajectory each quarter, our Q2, adjusted EBITDA margin on and.
LTM basis reflects the impact of what conditions, and Texas, which were a drag on our largest segment. The west segment. It also reflects slightly higher G&A as we invest and the implementation of our elevate summit strategy that we expect will yield sustainable margin improvement through efficiency gains and the good news is that these and.
Pacts are temporary and we do not feel it detracts from our Northstar goal of greater than 30% adjusted EBITDA margin, rather it solidifies, our resolve to drive better performance and future periods.
As I also said last quarter, while we can't promise a perfectly steady climb towards our goals, we can promise transparency and a relentless focus on execution.
On slide 9 we've provided a snapshot of our elevate summit portfolio optimization progress.
Our portfolio review is focused on shedding noncore assets and dusting of REIT owner analysis, and converting businesses to asset light under the right circumstances, we're roughly halfway towards our goal to divest 10 to 12 of those assets as of July 3rd we've completed 5 with the balance of 5 to 7 divestitures all and.
Process to some degree.
While we have not provided a strict timeline for horizon..1 we are pleased with portfolio optimization progress to date as we continue to focus on maximizing value for our stakeholders.
The divestitures have generated $103.6 million and proceeds to date. So we are also roughly halfway towards our stated goal of $200 million and total gross proceeds from horizon 1 divestitures.
Our use of proceeds will fall within our capital allocation priorities, which center on maximizing strategic flexibility, reducing our leverage entering or expanding into priority markets and ultimately serving our goal to achieve our long term growth objectives.
Wrapping up on slide 10, we are pursuing and aggregates Greenfield development strategy focused on priority markets underpinned by strong growth fundamentals that will foster sustainable organic growth.
We congratulate our east region team on a successful launch of the Jefferson Quarry and the Atlanta, Exurbs, which began operations in July that location has favorable migration trends and job growth and a state with a strong D O T funding profile and a major from mobility program.
Our Greenfield development and the Carolinas is also advancing and we will expand our presence and 1 of the fastest growing markets and the country.
It is estimated that summit will generate $45 million of adjusted EBITDA on an annualized basis by 2024 from these projects once they run full operations with $18.7 million generated in 2020.
Expected investment and Greenfields is $25 million to $35 million in 2020, 1 as part of cumulative capital spending of approximately 200 million and Greenfields.
These greenfield projects complement our existing business and provide another avenue for long term sustainable organic growth with that I'll turn the call over to Brian for a discussion of financial results.
Thank you Ryan.
On slide 12, we have provided a net revenue bridge comparing Q2.2021 to Q2.2020.
So much net revenue increased $43.3 million or 7.5% and the second quarter of 2021 to $618.5 million compared to $575.2 million and the second quarter of 2020, and higher aggregates ready mix concrete and cement revenue.
2 a year ago due to continued favorable market conditions.
Our west organic revenue was essentially flat versus the prior year quarter as growth and the Intermountain West and British Columbia was offset by wet conditions in Texas that resulted in fewer working days.
We also benefited from an incremental $14.3 million and revenue associated with acquisitions of operations in Texas, and British Columbia, but closed and the third quarter of last year.
Each segment's organic net revenue was up $17 million on higher aggregates asphalt and paving revenue relative to a year ago, reflecting higher volumes and parts of Kansas, The Carolinas, and Georgia, as well as improved letting and market conditions and Kentucky.
And our cement segment net revenue was up $10.2 million and Q2 relative to the prior year quarter on higher volume and price.
Turning to slide 13, we've provided a Q2 adjusted EBITDA Bridge, we ended the quarter and $163.8 million up 2.4% from a year ago on organic growth and our east segment and and cement West segment. Adjusted EBITDA performance was flat relative to a year ago.
And similar proportion to its net revenue contribution.
Turning to slide 14, you'll see key GAAP financial metrics, we reported operating income of $95.9 million and the second quarter of 'twenty..1 a decrease of 4.1% versus Q2, 2020 is higher aggregates cement and ready mix volume and price increases across the business well.
Set by a $7.7 million increase and G&A expenses, and a $4.3 million increase and DNA.
On a year to date basis. However, the first half of 2021 operating income is up nearly 22% over first half of 2020, reflecting strong volume and price trends in most lines of business offset by a $17.7 million increase and G&A and and 8.9 million increase and.
And D DNA as well as the impact of what conditions and Texas.
If you exclude the impact related to our elevate summit implementation that is included in our G&A operating income would have increased 4% and the second quarter 2021 over prior year quarter, and approximately 30% and the first half. This is the key takeaway because we are in.
Tensely focused on driving price and ahead of our cost of revenue.
Q2, and first half results once you remove the impact of higher G&A reflect those efforts.
And when we set our 2021 outlook, we assumed labor costs up 2% to 3% labor is roughly 13% of summit as cost of revenue and.
And the first half of 2021, we've seen it play out more or less as we expected with slightly more pressure and areas where labor markets. So tighter.
However, pricing has kept pace and many of those same markets as our Q2 organic aggregates and ready mix pricing is up 5% and 3% respectively.
In terms of other input costs, we are passing along our cost of materials, which is 1 third of summit as cost of revenue and the single biggest driver of our cost of revenue as is standard practice for.
Finally total energy dollar spent are actually down 2 million year to date 2021 relative to year to date, 2020, but that's partly a function of selling and asphalt business. So dollars are spread across a lower volume on a per unit basis, we are experiencing higher cost for liquid asphalt and diesel.
To provide more context energy is only 2% to 3% of our total cost of revenue. It includes things like coal where the cost has decreased substantially and also and natural gas where prices were lower in Q2.
And we evaluate the quality of our business over the period of and entire fiscal year, rather than an individual quarter that can be impacted by temporary events, such as reduced selling days or whether it and individual point and time that do not reflect the value created by the business over an entire reporting year.
Reported second quarter 2021, net income attributable to summit, Inc of $56.7 million or <unk> 48 per share is slightly behind a year ago. When we reported $57.1 million or <unk> 50 per share. However, the year to date trend is very strong as we have generated.
$34.1 million and net income and increase of 183% over the first half of 2020.
Turning to slide 15, we've presented several non-GAAP financial metrics when you compare the second quarter of 2021 to the second quarter of 2020, there has been a slight contraction in our adjusted cash gross profit and adjusted EBITDA margin of 90 basis points and 130 basis.
Points, respectively. However, on a year to date basis, our adjusted cash gross profit and adjusted EBITDA margins have expanded by 140 basis points and 110 basis points respectively.
On a similar note our adjusted diluted net income has expanded on a year to date basis significantly to $19.1 million and the first half of 2021 versus $2.6 million and the first half of 2020.
Turning to slide 16, we've provided a comparison of price and volume trends on a year to day basis.
Organic average selling prices and the first half of 2021 increased 2.7% and aggregates, 2.1% and cement 3.4% and ready mix concrete and 1.6% and asphalt while most of summit geographies reported higher average selling prices for aggregates and the tube.
Percent to 6% range and the first half of 2021 higher volumes of base materials, and the product mix and our Kansas and North Texas markets early in the year are also reflected in that year to date total.
Furthermore, it is typical for quarter on quarter price increases to improve as the year progresses due to the timing of price increases and the seasonality of the business.
Organic sales volumes and the first half of 2021 increased 4.6% and aggregates 9.9% and cement 6.9% and ready mix concrete and contracted 6.1% and asphalt due mostly to a divestiture.
Turning to slide 17, we have provided adjusted cash gross margin comparisons, while we experienced contraction in all lines of business and the second quarter 2021 versus Q2, 2020. We believe the first half of the year comparison in all lines of business presents a more meaningful comparison the margin declines in Q.
You too can be attributed to a number of factors, including rain days, which not only resulted in lost revenue, but negatively impacted aggregates productivity, we also experienced higher input costs and labor and hydrocarbons and.
<unk> margins have expanded by 40 basis points and our cement margins have expanded by 210 basis points and the first half of 2021 relative to the first half of 2020.
Our products margins contracted by 40 basis points, while our services margins expanded by 430 basis points on a first half of the year basis in 2021 versus 2020, we continue to experience sustained volume and pricing growth for our downstream businesses, particularly in Utah to the extent.
There are cement input price increases those increases get passed along to customers.
On slide 18, and I'd like to recap some modifications to our reporting structure for fixed production overhead and transaction costs, which resulted in changes to our guidance for G&A expenses that we announced last quarter.
As we told you on our last earnings call. Beginning in 2021, we are reporting fixed overhead expenses related to production and cost of revenue previously reported fixed production overhead expenses as general and administrative costs transaction costs, which were previously included in operating income or loss have been moved.
Into G&A, we believe these reporting changes will foster greater transparency and comparability to our peers as we measure our performance.
For quarterly modeling purposes for 2021, we estimate that interest expense should be and the range of $22 million to $24 million. The G&A will be and the range of $50 million to $55 million and DD&A should be $54 million to $57 million. These estimates are unchanged from the guidance provided on our first quarter <unk>.
Earnings call for.
For the purpose of calculating adjusted diluted earnings per share. Please use a share count of $119.3 million, which includes $117.4 million class a shares and $1.9 million LP units.
Turning to slide 19, you'll see a summary of summit's capital structure. Our Q2.2021 leverage ratio and 3 times was down by 0.5 times from Q2, 2020 and we are now at the lowest leverage ratio in summit as history proceeds from our elevate summit strategic divestitures.
Combined with our strong financial performance allowed us to significantly improve our net debt to EBITDA. Our closing cash position was $469.1 million, which was an increase of over $215 million from Q2.2020.
Combined with our Undrawn revolver summit had over $800 million and available liquidity at the end of the second quarter our.
Elevate summit goal is less and 3 times leverage and we believe that is within our sites in 2021.
And with that I will turn the call back to and for her closing remarks. Thanks, Brian.
On slide 21, we've provided our outlook for the year, which is unchanged from the guidance. We provided on our last earnings call. We may revisit this forecast as the year progresses, but for the moment, we believe our organic growth profile and conversion of certain businesses to and asset light model support our current adjusted EBITDA outlook.
<unk> wet conditions that impacted Q2 and divestiture of 5 businesses this year.
And for 2020, 1 we expect to generate adjusted EBITDA of $490 million to $520 million, which at its midpoint assumes growth of 5% over 2020, we expect to spend 200 to 220 million on capex of which $25 million to $35 million will be related to greenfield.
We continue to expect low to mid single digit price increases for aggregates cement and ready mix and low single digit volume increases and those lines of business on a full year basis.
We expect asphalt pricing to be relatively flat on lower volumes due to a divestiture.
And while residential construction remains very strong we haven't seen nonresidential numbers returned to pre COVID-19 levels, nor have we seen stimulus dollars move in a meaningful way into state budgets, yet that change our view on the funding picture from the beginning of this fiscal year.
In fact, we are seeing 2021 play out more or less the way we originally forecasted.
We continue to monitor the nearly 1 trillion proposed hard infrastructure package that includes a 5 year surface transportation reauthorization Bill.
Senate indicated strong support for the package earlier this week and we look forward to next steps as the legislation moves through Congress, concluding on slide 22.
After the first 4 months of implementation of our elevate summit strategy summit leveraged position return on invested capital and EBITDA margin have all improved over where we started.
As we progressed through the third fiscal quarter, we are laser focused on our commercial and operational excellence to support price and volume through our busiest season of the year, we have aligned our team to drive us closer to our goals of less than 3 times leverage greater than 10% ROIC and greater than 30% margin.
We're putting the elevate summit portfolio objectives into action and are halfway towards our horizon, 1 goal for divestitures and proceeds.
We believe this approach market leadership asset light, social responsibility and innovation will deliver better and more consistent returns for our shareholders over time with that I'd like to turn it over to the operator for questions operator.
And as a reminder, in order to ask a question that is star then the number 1 and if you would like to withdraw your question press the pound key.
These limit you're asked to 1 question and then return to the queue. So we can accommodate as many analysts as possible and the time that we have available.
And your first question comes from the line of Stanley Elliott with Stifel.
Good morning, everyone and thank you all for taking the question.
Can you talk more broadly about what you're seeing on the pricing side. I mean, you mentioned a low to mid single digit price increases.
How are the discussions going with your customers do you see pricing accelerating into the year and really just trying to get a flavor for how we might exit this year given the strong demand, it's pretty pervasive across the U S. Thank you.
Yeah, Good morning Stanley.
And on pricing as you know most of our price increases went through in April and you see some of the impact of that coming into our Q2 numbers and we will continue to see that impact as we move through the rest of the year and our cement business. We went for a second price increases across all of our markets at different points through the second half of the year.
And the teams currently executing on that and trying to get price realization and their key markets on.
On aggregates, we have ore right on track with where we thought we'd be on that mid low to mid single digit pricing across all of our areas and the first price increase and we are being very deliberate and strategic about putting additional price increases and aggregates and markets that allow us.
But we are pushing very heavily and diligently on price and aggregates and ready mix and asphalt business as you know we pushed through any cement and aggregates.
And price increases as we go through that so you're absolutely correct Stanley demand is high and we are laser focused on pricing through our commercial excellence efforts and will continue to be so both from the quality and service we bring to our customers, but also to make sure. We stay well ahead of inflationary impacts.
Thank you all.
Thank you our next question.
Your next question comes from the line of Trey Grooms with Stephens incorporated.
Hey, good morning, and thanks for taking my question.
So I guess the first.
A question here and there.
This is <unk>.
And you touched on it definitely and the comments and this is around the guidance.
So your first quarter very seasonally strong came in better than expectations and the <unk> and <unk>.
Biggest question, we're getting from folks since last night really is.
You Werent revising the full year guide up at this time.
Understand there's some time here still.
You know to go before year and I understand there's some weather uncertainties and also U.
Call out divestitures.
So if you could maybe low.
And with that give us some bit of an idea on the impact of these divestitures and and.
And more along the lines of just the thought process of kind of a whole.
And the guide as it is given what we've seen thus far this year.
Okay, well I'll give you kind of at the high level thought process and our guidance and then maybe Brian to take us through some puts and takes so that we could kind of.
Give a little bit more depth on that Trey. So overall as I've said before we look at this business on a year long basis, and that's why we give annual guidance.
The key area, where we don't see a lot of visibility right now and it's a bit of a mixed bag as nonresidential as we called and our first quarter earnings Nonresidential has been lumpy, we predicted we'd be down in 2020, 1 versus 'twenty because of our wind farms and that was about 5 million and EBITDA. In addition to that if you'd look at what we.
Just reported and you hit right on it Trey we had an impact of divestitures.
Which we were able to turn to asset light and a lot of cases, but it had an impact on our Q2 earnings obviously and our guidance and has an EBITDA impact on a full year basis up about $5 million and then the wet conditions and Texas.
Was in May and June and we had wet conditions and that was somewhat of a detract or away from our Q2 results. However in saying that.
We're very confident about our overall full year guidance and Q3, and if and thing I would say you should read our book.
Lack of bringing guidance up or down as confidence because where we're sitting today with divestitures impacting our bottom line and Texas starting from more of a challenged position in Q2, we believe that we will still reach that guidance and we will revisit as the year goes out and maybe Brian If you want to give some puts and takes to get.
More specifics to it would be great. Yeah, Trey I don't have a whole lot to add to Ann's comments, but just keep in mind. We did have the 53 week year last year so that this.
And that doesn't repeat that's a $9 million to $10 million impact that we get in the fourth quarter. It was in October last year.
2 a 5 year to date, we've got 300 to go to get to the midpoint.
Still got to continue the ramp up of the Green America recycling Q3 is our largest quarter of the year and.
September was the largest.
<unk>.
The year so.
Given that a little bit of uncertainty around and nonresidential and we feel that its appropriate just to.
Not increased guidance, but as we said we will we.
We will revisit that as the year progresses.
Great.
And that all makes sense to me and thank you for unpacking that for US very helpful and I'll pass it on and good luck. Thank you.
Thanks Terry.
Your next question comes from the line of Paul Roger with Exane BNP Paribas.
Yeah. Good afternoon, well good afternoon from me on and fly and and colleague and I'll, just focus a little bit on the margins and they in the portal business.
Clearly obviously they are in parts in Q2.
But is it possible to quantify and talk a bit about from the headwinds and the second half and thinking about raw materials and energy.
And I guess the broad question is whether you think you can keep slop margins and the second half and the product business compared to last year.
Okay. Paul if you feel there with me what I'd like to do is to kind of address your question by stepping back and sharing.
We are value like the underlying performance of the business and we have 4 key factors that I'd like to kind of point out when we look at margin expansion, which as you know is a key element of our elevate summit strategy. The first factor is 1 time impacts, which we called out and our prepared comments and if you look at 1 time impacts really year to day.
And it's been around implementation of our elevate summit strategy and that's been a 17 million head into Q2 was $8 million. If you exclude those away from our operating income line, which is what we look cash.
If we look at Q2 year on year, we've actually increased margin by 4% and if we look at year to date year on year, we've increased by 30%. So we feel pretty comfortable on the operating income line. When you take out the 1 time effects. The next thing. We do is we drill down to our line of business, which is where you are asking your question and.
The gross profit margin by line of business were up and all of our lines of businesses, except products as you correctly point out so and acts were up 40 basis points services up 430 cement up 210 basis points and products were just down about 40 basis points on a year to date basis now the impacts and Prada.
<unk> are 2 things, 1 we have divestitures, which effects, both our ready mix and our asphalt because we did a number of divestitures and Q2, so that added some noise to our margin as you might imagine and the second was the last day as we head for already picks and Texas, which is 30% of our volume and so that had an impact where basically our price.
<unk> was lagging the volume because we just couldn't get out and literally sell so that's really the impact if you look at year to date and Q2 numbers. The third thing that we are obviously as Brian pointed out and we talked about earlier and Stanley's question very focused on price execution.
Our commercial center of excellence is focused on value pricing, both to cover inflation and get the value of quality and service that we provide.
April price increases were good and you could see that and our Q2 numbers, our organic price and eggs were up 4.7% ready mix, 3% and cement 2.9, and asphalt 0.7, so that gives us comfort and we're starting to execute and secure and that price.
If we look then to your point on the second half as I said and my comments to Stanley cement, we're going for price Ag's, we're looking for additional price ready mix. We're confident we can move to cement price as along as long as we don't get more like the weather, we had and Texas, but we have a proven track record and our Texas business of passing that cement price right, along and we do it.
And all of our other businesses and asphalt to the extent where index. We can pass it along also so on pricing how I would summarize we're extremely focused were intentional and strategic about keeping that price ahead of raw material escalation and we've been successful in doing that so far the fourth bucket, which I think I'd like to spend just a few.
And it's explained them because I get a lot of questions about our cost and so first of all we do everything to mitigate costs have a separate work stream and our strategy plan to standardize across our procurement to make sure that all of our input costs and capital is being optimized but controlling what we can control. If you look at our cost of materials there about.
30% are actually a third of all of our total cost of sales and it's been our standard practice to pass those right through and our pricing and we've done that labor. Then is our second biggest element, which is 13% of our costs and if we actually look at day labor wage rate year to date, it's up 5 per se.
And but actually our labor costs, our actual labor cost per hour is flat year on year and what's driving that is the big volumes. We've had to your point and first half versus last year and our team's done a wonderful job at driving efficiency and productivity to offset that labor escalation. So very proud of the team.
And doing that.
The third element of cost that I called out as energy because we get a lot of questions around this in fact energy is only less than 3% of our total cost and if you look at impacts year to date 2 million. We've had year to date on net dollars increase from energy and actually if you look at Q2, it's down because of the divestiture.
And where we divested a business, which had a large asphalt impact so the conclusion I'd like people to take away around this whole margin question is that our pricing is ahead of our cost escalation, we're very focused on commercial and operational excellence and we stand ready to continue to drive our operating costs down and.
And our capital base optimized so overall I hope that answered your question Paul on the actual products with respect to flat margins that would be what we would at a minimum expect as you saw at year to date. We've increased so we continue to push this as part of our elevate strategy.
Perfect. Thank you very much.
Your next question comes from Kathryn Thompson with Thompson Research.
Hi, Thank you for taking my question today.
And somewhat related to operational and those initiatives given the increase and M&A activity and how the materials industry. How has this changed or influenced your portfolio optimization and importantly, how has this changed your conversations from the field and light of increased activity. Thank you.
Thanks Catherine.
You know from M&A, we step back as you know on March 16th and said, we were going to be very strategic and deliberate about our M&A pipeline and we're very active and we're looking at a number of targets with the goal always being a number 1 or 2 and our chosen markets wishes that rural and ex urban and so nothing's changed there from our strategic direction.
We are we are horizon, 1 divestitures are exactly the same list. We had when we started off we're in the process of the valuation our horizon to.
Portfolio optimization and that includes obviously, what we're going to acquire to increase that market leadership position and potentially what could be on the divestiture or more importantly, the asset light list I would say, we're seeing increased activity, but it hasn't really changed our landscape, obviously valuations are running higher and as we're seeing from.
Both upstream and downstream assets, but I would say from an overall how it effects have summit materials is operating it really hasn't had a material effect because we anticipated some high activity at this point and the year anyway.
Okay, great. Thank you.
Your next question comes from line of Garik <unk> with loop capital.
Hi, Thanks for having me on just wanted to ask just around the weather impacts that you saw in the quarter Harvey sticking about the pent up demand and the back half of the year.
And the timing of the projects and.
If these projects that had been deferred.
Yes.
The expectation should be the bigger completed before the end of the year.
Yeah, we've been looking its a great question Garik because we've been looking at that ourselves I will say you know, Texas is where we had our primary wet conditions and we have plenty of backlog and I will say that and our business is standing ready to move as fast and as furious as we can and the team's doing a great job at managing cost.
And the interim and we have really staffed up and are ready to.
Continue to do that work. However, I do think some may bleed into 2020.2 given the 2 months of wet conditions.
And.
I know our Texas team is very focused on catching up as fast as they can but there is definitely a lag now that will occur based on that demand that being said as I look across the rest and this is a nice thing about having a portfolio of businesses and geographic diversity as was evidenced in our Q2 numbers. We believe that we still have a very strong year and stick to our guidance.
Just on demand conditions that underpin our business.
Makes sense, thanks again before.
Thanks, Gary.
And your next question comes from the line of filling with Jefferies.
Hi, This is actually a calling on for Phil. Thank you for taking my question can you walk us through and potentially quantify the different drivers of the 360 basis points of gross margin decline you saw and the cement business and just how youre thinking about the magnitude and those headwinds through the rest of 2021.
Yeah. It's.
Thanks, Colin and nice to meet you.
Basically if you look at our cement overall in our Q2 numbers you saw volume up 8.3% of price up 2.9%. So the business is really performing well and that's and the backdrop really what drove it's 1 key element that drove our margin step and that was really some downtime, we had and 1 of our facilities that call.
And as lower production and lower overhead recovery. So that was a slight impact I would say a temporary impact on our margins I think the efforts that this team's done around their commercial excellence are evidenced in our volume and price success and.
And also on some of the supply chain initiatives that we have are starting to come out and reap benefit to us. So overall, we're pretty pleased with where cement businesses and we're past that the operational issue that we had and the teams up and running well at this point and time, we're still waiting for full and.
Implementation and production of our Green America recycling facility, and we hope to get that done as the year progresses here and.
But we've made good progress year to date with the team.
Thank you for the color.
Your next question comes from the line of Brent Thielman with D. A Davidson.
Hey, Thank you.
The inner Brian Youre, obviously off to a fast start and the divestiture program and about half of what you identified Don and thank you and your and your golf West from 3 times leverage pretty quickly I guess I'm wondering about how much time youre thinking about this horizon to particularly these prioritized markets.
Book too.
And invest in and you know whether those markets align with the current footprint or perhaps some new geographies that haven't been and emphasis for summit historically.
Yeah, Brian Thanks for the question I would say, we've we're well into our discussions around horizon, 2 and fine tuning and.
Our activities from an investment perspective, both organic and inorganic.
We are pretty much where we said we would be we believe theres a lot of opportunity around our 5 to 6 primary target markets, where there is still enough fragmentation and the market that we can continue our core strength of M&A and do bolt on acquisitions and we're actively working a number of those so that Hasnt changed. We also said on March <unk>.
<unk> will look at Adjacencies around those core markets to spread our reach and leverage off the infrastructure that we have in place already and we're actively doing that and that is a key element to your point and our horizon 2 analysis.
We've never said, we won't look at other geographies, but we are very.
Particular about them, achieving our goals, which is being number 1 or 2 market leadership, Earl ex urban and reaching our goals over time, a 30% EBITDA margins and greater than 10% ROIC and I've been very pleased frankly with how the teams really applied this discipline and our discussions to date.
So more to come on horizon 2.
Okay. Thank you best of luck.
Thanks Brent.
Your next question comes from the line of David.
Yes, good morning, everyone.
Just from my first name I presume, it's my turn.
And I guess now and is open. Please go ahead.
Yes.
Okay, Paul just any other David's on the call.
And I guess, you know between now and the next time, we talk presumably there'll be an infrastructure bill So I guess.
As you look through the proposals on the infrastructure Bill as it stands today.
Maybe by geographic region or by product would you expect to see the most immediate revenue opportunities for summit and I guess, just how quickly you would expect that to begin coming true.
Yeah, David I wish I had a great answer to that I will say, we're very encouraged by the progress made and the Santos and look forward to seeing it passed through Congress clearly the 1 trillion proposed hard infrastructure package.
With the 5 year surface transportation authorization Bill.
Give us a nice bump versus current fast funding from 46 billion up to 55 billion. So we see that as raising all ships frankly.
Now what the exact details would be we need to understand over the coming weeks and months and how it specifically impacts our businesses and geographies, but in general I would say, there's 3 factors 1 all of our state funding is very robust, it's providing confidence and all of our states secondly, it should be constructive to volume and the near term and price.
And over the near to long term. So the raise all ships that basic funding increase we see is extremely positive and look forward to nickel and through Congress.
But the exact geography and state we'd love to know the answer to that right now, but we're still working through the details.
Thanks very much.
Thanks, David.
And your next question comes from the line of Adam <unk> with Thompson Davis.
Hey, Good morning, guys. Just a quick balance sheet question that cash is piling up and probably growth gross further and the back half just your thoughts on deployment of cash going forward.
Adam Thanks for the question good morning.
So, it's obviously a healthy cash.
Cash position that we have right now.
And talk to in her prepared remarks about capital deployment.
For the Capex needs that we have and to stay flexible.
We are we obviously want to maintain that liquidity position.
So that we can deploy it and the most effective possible way.
We're comfortable with the cash position that we have right now though.
Yeah.
Okay and you Adam.
Yeah.
And your next question comes from the line of Anthony Pettinari with Citigroup.
Hi, This is asked yourself and enough sitting in for Anthony and I. Just want I was wondering you know understanding that you don't like to give out utilization rates, but just with some end markets tightening and maybe from your competitors operating near full capacity just looking at 'twenty, 1 and moving into 'twenty..2 does your cement capacity and you put any kind of upper limit on what volume growth could be or do you have.
From there.
Okay.
Well, you're correct, we don't talk and capacity utilization rates, because it's very hard to get them all and actually.
But in general demand is very strong and Asher and we continue to assume that there's high utilization rates across our entire footprint and we have high utilization rates.
We deliberately are very focused on value pricing as this business needs to continue to expand its margins. However, we are also laser focused on meeting our customers needs, which means we need to make sure. They have the right amount of supply at the right time. So we do a limited amount of import which is at a lower margin. So we balance that very carefully to meet our customer needs.
And to get the value pricing to encourage that so overall I would say that as we look into 'twenty, 1 and 'twenty 2 if you'd look at PCA forecast et cetera demand is forecasted to.
Remained strong and infrastructure build that I expect utilization rates will be high across the entire industry.
No.
It'll be a matter of meeting our customers' needs and getting value pricing for the service we provide.
Thanks, that's helpful I'll turn it over.
Your next question comes from from the line of Mike Dahl with RBC capital markets.
And this is Chris kalata on for Mike Thanks for taking my questions.
Just another 1 on capital allocation priorities and the capital deployment, given your kind of set to naturally delever below your 3 X target from here.
Where you're sitting today, how are you thinking about.
Kind of point that $200 million and divestiture proceeds and whether that be towards the internal investments versus kind of more meaningfully taking down that leverage target.
Well.
Clearly, we remain very focused on our commitment to reduce leverage right and to manage our leverage and we're in the process of doing that we're proving that and we see our job as continuing to evaluate our capital structure to bring the lowest cost of capital and to drive the highest return. So when we think about the best use of cash clearly debt repayment is.
1 of those opportunities, but I also look at a couple of other factors so sustaining capital. So what does that mean it means our greenfield investment we have a depleting resource so continuous investment and our Greenfields is critical to sustainable organic growth. In addition to that investment and our fixed and mobile equipment to keep our plants operating to.
Port earnings growth is critical under the sustaining buckets secondly, M&A is still a core strength of this company and we are going to deploy capital to grow and meet our overall targets as we've identified and our elevate summit.
And be very judicious with our use of capital to be number 1 or 2 and our market leadership positions and then I would also say from a capital allocation strategy and what our team is doing on being this focused on our ROIC is really bubbling up opportunities for us to increase returns to our shareholders. So overall when I think of our capital allocation.
And you can measure us is reduced leverage.
Expanded margins accelerated inorganic and organic growth.
And improved ROIC and so we've set the aggressive targets, we're committed to doing them. So we'll balance we have to be good stewards of our shareholders' cash.
Understood I appreciate the color.
Thank you Chris.
And your last question comes from the line of Jerry Revich with Goldman Sachs.
Yes, hi, good morning.
And I'm wondering if you just expand.
And the asset light.
Solutions, you've reached the exit.
So some of those businesses.
And you know why the buyers were essentially able to give a better owners of those assets and.
More importantly, does this mean that going forward for acquisitions, you folks might be able to take our vertically integrated business.
Put it up out of the gate.
And if it fits a similar profile.
Thanks, Jerry Great question, Yeah, you know as we said and our prepared remarks over 50% of our divestitures. We believe will result, and asset light and the reason we're confident in saying that is that when you look at the criteria that I talked about you know generally we look for asset light, where we're not number 1 or 2 we don't have.
At the same competitors, we have an opportunity to partner with our customers our industry partners to strengthen and existing partnership while also bringing aggregates pull through for us on a long term basis, and bringing value back to our shareholders and each of the asset light approaches this quarter, which were 3 of the 5 divestitures we talked.
About.
All fit into that category in fact, they all fit into either industry partner in 1 case and 2 customers and together so great opportunity to pull through our aggregates. So we're pleased with that and that's we've stuck very much that criteria great part of your question is the acquisition of and vertically integrated it'll be the exact same criteria with an acquisition if we buy.
Something and we know we have to invest way too much to be number 1 or 2 and a downstream vs. In upstream we will stick to that criteria and remain very open to partnerships and or divestitures on the downstream where it doesn't meet our targets and our and our primary markets.
And the team's been doing a great job of free to putting net lands on everything that we do.
Okay. Thanks.
Thanks Jerry.
We have reached our allotted time for Q&A I will now turn the call over to Ann for closing remarks.
Thank you operator, and thank you all for joining us I'd like to leave you with 3 messages first summit is and the right place at the right time Megatrends are coalescing and summit as key ex urban and rural markets and all require some form of aggregates ready mix concrete and cement asphalt and paving or combination thereof.
Second we are seeing signs of early success towards our elevate summit goals. It may not be and linear upward trajectory each quarter, but our leverage ratio ROIC and EBITDA margin and are all markedly improved today versus where we started and we are now halfway towards our horizon, 1 goals for divestitures and proceeds and finally, we are creating a culture.
True of safety operational and commercial excellence across the business to support volume and price through the busiest season of the year and long term to drive sustainable growth that is not dependent on any 1 market or geography. Thank.
Thank you that concludes our call and I appreciate your time today take care.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
Okay.
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