Q3 2021 Summit Materials Inc Earnings Call

Good day, and thank you for standing by and welcome to the summit materials third quarter 2021 earnings Conference call. At this time, all participants are in a listen only mode.

After the speaker presentation, there will be a question and answer session.

I ask a question during the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded.

If you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today Karli Anderson. Please go ahead.

Welcome to summit materials third quarter 2021 result 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 web site manager.

Our 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 vary 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 in our press release todays call will begin with a business update from our C E.

Oh Anne Noonan, then our CFO, Brian Harris will provide a financial review and Ann will provide concluding remarks. We will then open the line for questions. Please limit your asks to one question and then return to the queue. So we can accommodate as many analysts as possible in the time, we have available with that I'll turn the call over to Ann.

Good morning, everyone and thank you for joining our third quarter 2021 earnings call I'll start today as we start all things at summit with safety, we are striving for zero harm safety first mindset among all of them at 6000 employees as part of our safety Center of excellence, we have transitioned to a tech enabled risk assessment tool.

That should help with the process of assessing risk as well as for audit and oversight purposes. We are setting high expectations for safety performance and are committed to continuous improvement now, let's turn to slide four for an overview of our third quarter financial and operating performance.

Net revenue of $662 3 million reflected an increase of two 6% and adjusted cash gross profit margin expanded by 260 basis points versus the prior year period, the market leadership team and our elevate summit strategy is beginning to be reflected in our results Q3.

Adjusted EBITDA increased seven 3% I'll discuss three factors that drove this performance.

First is our team's ongoing commitment to commercial excellence, which is having a real positive impact on how we go to market, especially with respect to value pricing in Q3, we reported pricing growth in all lines of business.

Second is the strong and persistent demand dynamics in our rural and ex urban markets. This includes a resumption of more normalized letting in operating conditions in the markets that we serve such as Kentucky, and Missouri with continued strength in residential markets, such as Salt Lake City and Houston.

And third has been our ability to stay ahead of inflation, thus far through a combination of pricing actions, our energy hedging program and the pursuit of operational excellence to put a finer point on that topic. We are very mindful of the challenges presented by supply chain constraints and cost inflation in the current operating environment.

We are very focused on price execution of cost mitigation to ensure that we continue to expand our margins as we've done in Q3.

For example, we placed early orders for equipment purchase some energy forward and driven multiple price increases in targeted markets.

We acknowledge that summit is not immune to the challenges presented by the global economy, but we can assure you that summit will take every action possible to address them.

Q3 volume growth in materials was robust with aggregates volumes up nine 2% and cement volumes, increasing 2% ready mix volumes were slightly lower due primarily to wet conditions in Texas, where they had fewer than expected working days asphalt volumes were down 11, 3%, resulting primarily from a dive.

Best picture of the business.

We reported mid single digit pricing growth in aggregates cement and ready mix combined with more modest gains in asphalt stepping.

Stepping back to look at the Big picture, we continue to make progress across all elevate stomach goals first our leverage improved to 2.7 times net debt to EBITDA, an improvement of a 0.8 times versus the prior year. Our leverage is now well below our three times target as we retired our 2020 five notes and paid down.

300 million of death in the third quarter.

Next our adjusted EBITDA margin increased 120 basis points to 28, 7% in Q3, while on a trailing 12 month basis, we improved to 23, 3% summit is currently progressing several strategic divestitures. In addition to the five that were completed in the first half 2021.

Our part of Horizon, one of our elevate strategy, where you are in the process of exiting non core or non leading market positions generating proceeds for more strategic use of converting some of those businesses to an asset light model to drive higher aggregates pull through all of these activities are resulting in a meaningful improvement.

Oh I see now standing at eight 8% up from 8% at year end. So much asset light approach is grounded in principles of capital efficiency. In addition to the divestitures I. Just described our team has also surfaced asset disposition ideas upon which we are executing.

These asset dispositions contribute to reducing our capital base, helping our management team to narrow their focus to the highest returning parts of the business and serve our broader goal to increase so much return on invested capital as.

As we evaluate our full year outlook, we believe summit is organic growth profile and asset like conversion model.

<unk> the company to absorb the impact of the approximately $5 6 million and foregone EBITDA from those divested businesses.

Another consideration for our outlook involves comparing our 2020 performance.

Last year included 53 reporting weeks, which provided summit with approximately 10 million of incremental EBITDA by contrast, 'twenty 'twenty. One is a standard 52 week reporting here.

And then any fourth quarter. The construction season can be cut short by weather and we need to be mindful of that uncertainty. While we are very encouraged by our team's ability to control. What we can control in terms of staying ahead of inflation through price realization and self help and while backlogs are very strong we operate in some northern markets, where there is always risk of an early.

And to the season.

In consideration of these factors, we are leaving our full year 2021 adjusted EBITDA guidance unchanged turning to slide five for performance at a segment level, we saw a nice rebound in the east and cement segments in Q3, 2021 versus the year ago quarter.

West reported third quarter, net revenue and adjusted EBITDA down three 7% and three 3% respectively versus a year ago quarter.

Revenue growth in aggregates and ready mix was more than offset by a divestiture driven decrease in asphalt and paving revenues. Moreover, what conditions, primarily in Texas resulted in fewer days available to complete ready mix and asphalt jobs.

Net revenue in the east benefited from higher aggregates and asphalt volumes as well as pricing growth across all lines of business. This growth was partially offset by lower ready mixed concrete volume up your wind farm projects relative to the year ago quarter. Despite this our east segment delivered excellent performance for <unk>.

Revenue and adjusted EBITDA, which were up 10, 7% and 21, 3% respectively and.

And finally, our cement business had a strong quarter as organic volume gains at 4.4% pricing growth helped drive 9% higher net revenue and 15% adjusted EBITDA improvement are.

Green America recycling facility, which provides alternative fuel for one of our cement plant is now operational and ramping up to full production turning to slide six you will see the four key strategic priorities that we laid out earlier this year as part of our elevate summit strategy.

First is enhancing our market leadership as we aim to be number one or number two in ex urban and rural markets, where we can invest and grow our positions. The divestitures. We completed through September of this year into the businesses, where summit did not have a leading position and did not have a clear path forward to improve that situation or summit.

Simply not the ideal owner of the business. We currently have several more divestitures and process and we will update you on our progress each quarter when we report financial results.

We converted some of the divestitures to an asset light approach, which is our second strategic pillar. These were asset intensive businesses, where we were not the ideal owner. However, we still retained our strong aggregates position in the coming quarters, you will start to see the impact of those asset light deals I'd say have a favorable impact on.

Both ROIC and margin our third strategic pillar is social responsibility as our vision is to be the most socially responsible integrated construction materials solution provider. We recently took a critical step towards reaching that goal with the release of our first ads B compliance sustainability report and that report you'll find we are.

Our value creation and innovation approach to social responsibility that we believe presents significant opportunities to grow our business, including several initiatives aimed at reducing the emissions from cement production and although it's still early we have some notable early accomplishments to point too, including completing our first test to be compliant.

Baseline for emissions water and waste impact we are capturing methane gas at our landfill business in Kansas with scoping underway to potentially expand that solution to additional landfills in the network and we have achieved gender parity on the board and among executive officers.

While it's still early in our sustainability journey, we are encouraged by the progress thus far and eager to tackle the challenges in front of us as we plan to publish our future impact production targets and strategy in 2022, and finally, our fourth strategic priorities around innovation utilizing industry and University Park.

The ships, we plan to enhance our products and services portfolio to help move us to achieve our adjusted EBITDA targets underpinning. These strategic priorities are critical enablers, including our centers of excellence and standardization efforts together. These enablers will enhance business performance and advanced business critical.

[noise] abilities across the summit enterprise on slide seven you'll see a graphic that we introduced during our elevate summit investor day that summarizes our strategic execution plan and deliverables over three horizon, where in horizon, one or we are building tomorrow summit with a focus on shedding underperforming <unk> noncore businesses.

Advertising best practices across the business are cultivating social responsibility and innovation expertise on slide eight you'll see the full elevate somewhat scorecards.

Our leverage ratio of two seven times net debt to EBITDA exceeded our target of three times in Q3, and we believe with continued strategic execution. There was room for even further improvement achieving our net leverage below three times what cited as one of the primary investor priorities. When we conducted our listening tour of Europe.

So we hope our progress in this area will enhance financial flexibility and Investor calls, our third quarter ROIC of 8.8% is 80 basis points better than yearend and up 30 basis points versus Q2, we believe that by conducting enacting on regular portfolio reviews maximize.

Asset utilization and actively pursuing an asset light model, where it makes strategic sense, our goal of greater than 10% return on invested capital is achievable.

Our Q3 adjusted EBITDA margin of 28, 7% was up 120 basis points versus the comparable 2020 period, and 220 basis points sequentially, reflecting strong pricing gains volume growth and lower G&A expenses versus the prior year quarter.

On a last 12 month basis adjusted EBITDA margin is 23, 3%, a 40 basis point improvement versus the trailing 12 month period as of Q3 'twenty 'twenty. This performance was driven by strong pricing trends and a resumption of normalized letting activity that more than offset the impacts of course.

Inflation and wet conditions in Texas.

While our Q3 results are getting us closer to our elevate summit objectives. We continue to play the long game, although we have notched good progress the future path may not always be linear. However, we can promise that as a team we view steady improvement and net leverage ROIC.

ROIC and adjusted EBITDA margin as a central to how we operate the business and align our interests with shareholders.

On slide nine we provided a snapshot of our portfolio optimization progress what we remain on track with our horizon. One goals, we're roughly halfway towards our goal to divest 10 to 12 noncore or underperforming assets we.

We have several divestitures currently in process and we will update on completion each quarter when we report.

To date, the divestitures have generated one O $3 6 million in proceeds. So we are just over halfway towards our stated goal of 200 million or use of proceeds will follow our capital allocation priorities, which center on maximizing strategic flexibility, reducing leverage entering or expanding priority markets.

Through M&A and ultimately, enabling our long term growth objectives.

And finally on slide 10, we are pursuing it in aggregates Greenfield development strategy focused on priority markets underpinned by strong growth fundamentals that will foster sustainable organic growth picture on slide 10 as of our Jefferson Quarry, where we hosted an Investor tour in September strategically located in northern Georgia.

It's aggregates are marketed as Georgia dome product and its position as a terrific example of a stomach location that provides that connective tissue between rural and ex urban markets.

At Jefferson, we put a very labor efficient plant in a high growth market, giving us several benefits. The plant design is flexible. So we can adjust production to address demand changes quickly and optimize inventory turns to best manage working capital.

It was also designed to optimize LOE unit cost production and a clean well situated environment for employees and customers.

The entire plant site, its graded undeveloped to minimize waste and maximize usable acreage minimize water run off and plant water discharge. It is estimated that summit will generate 45 million of adjusted EBITDA on an annualized basis by 'twenty 'twenty four from these projects once they were in full operation with approximately <unk> <unk>.

18 million generated in 2020 one.

Expected investment in Greenfield is $25 million to $35 million in 2020, one as part of our cumulative capital spending of approximately 200 million on Greenfield. 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 our financial results.

Thank you Anne on Slide 12, we've provided our net revenue bridge comparing Q3 2021 to Q3 2020.

How much net revenue increased $17 million or two 6% in the third quarter of 2021 to $662 3 million compared to $645 2 million in the third quarter of 2020 on higher aggregates ready mix concrete and cement revenue relative to a year.

A year ago, due to pricing growth and favorable market conditions.

Our west organic revenue declined $17 2 million versus the prior year quarter, as higher volume and price, but aggregates and ready mix were offset by fewer working days in Texas, which impacted asphalt and paving volumes.

We did benefit from an incremental $4 2 million in revenue associated with acquisitions of operations in Texas, and British Columbia that closed in the third quarter of last year.

We still see strong demand for aggregates and ready mix, particularly across most of our residential markets with the strongest demand still being reflected in the Houston and Salt Lake City areas.

Each segment's organic net revenue was up 21.4 million on higher aggregates asphalt and paving revenue relative to a year ago, reflecting higher volumes, most notably in Kentucky, Kansas, and Virginia, as well as strong pricing gains across all lines of business.

This growth was partially offset by lower ready mix concrete revenue, primarily driven by 2020, Kansas Windfarm project that did not recur in 2021.

Our cement segment net revenue was up $7 6 million or 9% in Q3 relative to the prior year quarter on mid single digit pricing growth and higher volumes.

Turning to the Q3 adjusted EBITDA Bridge on Slide 13.

We ended the quarter at $193 million up seven 3% from a year ago, reflecting growth in our eastern cement segments.

More than offset lower west segment, adjusted EBITDA relative to the comparable 2020 period.

Not shown but what can be inferred in our Q3 EBITDA performance is an intense focus on pricing ahead of our cost of revenue.

In some instances we are executing standard pass through pricing for our cost of materials, which is the single largest cost component at roughly 37% cost of sales.

In other areas like labor and energy, which together comprise roughly 15% of our cost of revenue market conditions are without question challenging.

Whether it's tight labor markets driving higher levels of turnover or escalating diesel coal and natural gas prices. We have used the full complement of tools to manage through these cost headwinds.

For us that means sourcing productivity offsets smartly hedging key exposures and above all moving swiftly to take price.

To be clear, we think that many of these cost headwinds will persist and could intensify as we exit 2021 and head into 2022, especially in the light of global supply chain issues that remain unresolved.

It is therefore critical that the commercial excellent muscle that we've built as part of our elevate summit strategy continues to evolve that we operate with agility and that we continue to make wise investments in our people and capabilities.

Turning to slide 14, where we provide year to date price and volume trends by line of business Q3 pricing inflected higher consistent with the normal seasonality of the business.

Year to date organic average selling prices have increased across all lines of business with aggregates cement and ready mix concrete pricing growth of 3% to 3.5% while asphalt price is up 1.6% year to date Likewise volume growth has been strong with mid single digit organic.

Growth in aggregates cement and ready mix, while asphalt was down eight 6% due primarily to a divestiture.

Turning to slide 15, we've provided an adjusted cash gross margin comparison by line of business. There, you'll see we've driven significant quarterly and year to date adjusted cash gross profit margin expansion across materials and services, which more than offset contraction for our product line of business.

Notably <unk>.

Margins expanded by 410 basis points in Q3, and 170 basis points year to date.

Likewise, our cement margins have expanded by more than 200 basis points on both the Q3 and year to date basis relative to the comparable 2020 periods.

On slide 16, we provide a summary of our non-GAAP financial measures.

We achieved significant margin expansion in the third quarter with adjusted cash gross profit margin and adjusted EBITDA margins, expanding 260 basis points, and 120 basis points, respectively versus the year ago period.

On a year to date basis, you'd see similar margin trends with adjusted gross profit margin and adjusted EBITDA margin expansion of 170, and 100 basis points respectively.

This margin growth primarily reflects the pricing relative to input cost inflation I, just mentioned as well as favorable demand conditions in our end markets.

And Q3, 2021 adjusted EPS of <unk> 68 cents was 13 cents higher than the year ago period, driven primarily by operating performance.

Turning to slide 17, you'll see a summary of summit's capital structure.

Our Q3 2021 leverage ratio is two seven times down 0.8 times from Q3, 2020, and 0.3 times from Q2, 2021 marking the lowest leverage ratio in summit's history and falling below our three times net leverage target.

Opportunistic debt pay down using divestiture proceeds together with solid financial performance has allowed us to reduce our interest expense by over $15 million annually and rapidly improve our balance sheet our quarter end cash position was $258 1 million that together with our.

The Undrawn revolver means summit had nearly 600 million in available liquidity, placing summit on strong financial footing from which to grow the business, while providing the flexibility to pursue a broader range of capital allocation opportunities.

And finally, a housekeeping item for the purposes of calculating adjusted diluted earnings per share. Please use a share count of $119 9 million, which includes $118 3 million class a shares and $1 6 million L. P units.

And with that let me turn the call back to them to close.

Thanks, Brian.

Slide 19, we provided our outlook for the year, which is unchanged and the guidance. We provided on our last earnings call. We believe our organic growth profile and conversion of certain businesses to an asset light model support our current adjusted EBITDA outlook. Despite wet conditions that impacted Q3, the divestiture of five business.

And a few smaller assets this year and the difficult comparison, the next for reporting week in 2020.

For 2020, one we expect to generate adjusted EBITDA of $490 million to $520 million, which at its midpoint represents growth of 5% over 'twenty 'twenty, we expect to spend 200 to 220 million on capex of which $25 million to $35 million will be related to greenfield.

2021 thus far has played out more or less as expected and we see those trends continuing through year end. We continue to expect low to mid single digit pricing increases for aggregates cement and ready mix and low single digit volume increases in 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 our outlook for our end markets has become incrementally more positive.

Regarding residential construction, we don't see any slowdown on the horizon as demand dynamics remain strong and nonresidential, we're seeing some green shoots emerge as activity, which typically lags residential is picking up and.

And on the public infrastructure side, we are starting to see stimulus dollars flow through to states as is the case in Kentucky and remain bullish that federal spending will have the potential to positively impact both volume and price.

<unk> on slide 22.

Since announcing the elevate strategy earlier this year, our employees have really stepped up thanks to them. We have successfully navigated very challenging economic conditions labor market constraints and the Covid pandemic to drive significant progress against our three metrics net leverage return on invested capital and EBITDA margin.

This progress is evident that we are laser focused on commercial and operational excellence and are motivated to close 2021 with strong exit velocity that we can carry into 'twenty 'twenty. Two our teams are aligned behind our strategic objectives and collectively we are committed to making our goals a reality we.

Firmly believes the elevate summit approach of market leadership asset light social responsibility and innovation.

<unk> build the future fit summit up tomorrow, and deliver greater and more consistent returns to our stakeholders over the long run before opening Q&A I wanted to extend a special thanks to those who participated in our recent perception study. We believe that it's very important to have a continuous feedback loop with our stakeholders, we value your opinions and look forward to continuing the.

Dialogue now we'd be happy to take your questions. Operator. Please go ahead.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.

Limit you were asked to one question and then return to the keys. So we can accommodate as many analysts as possible in the time that we have available. Please standby, while we compile the Q&A roster.

And your first question comes from Stanley Elliott with Stifel.

Hey, good morning, everyone. Thank you all for taking the question.

Given what we're looking at with the strong demand outlook you improving more it gets into next year, one would assume that the pricing momentum that you're seeing here would can continue curious if you had any early thoughts on how to think about pricing into next year.

Good morning Stanley them, when we think about pricing clearly, we're very encouraged by the pricing growth that we had in Q3 across all lines of businesses and sequentially and we continue to see strong demand in all of our markets. So as we look into 2022, we are.

We are not at a position, where we're going to actually give guidance on pricing at this point in time I will say our pricing is working at Q3 exactly as we said low to mid single digit pricing in Q3, we saw aggregates really increased double digits in some of our eastern regions and across the board we had strong.

Price execution by the team driven primarily by our commercial excellence as we go into 'twenty 'twenty. Two we will continue this strong focus and I think were underpinned by very strong demand dynamics as well as execution. So if I take into account the value pricing the backlogs and demand support I think you can expect continued price.

Momentum and I'm really proud of the focus of our team in this area and this has been something as they faced a lot of headwinds throughout 2021 on inflation et cetera, they've managed to not only expand margins through their price execution and cost management, but also have had very strong strategic execution.

Perfect Great news and congratulations on the success of somebody of the elevate strategy. Thanks.

Thanks Stanley.

Your next question comes from Trey Grooms with Stephens, Inc.

Hey, good morning, everyone.

So.

First off I guess the.

My question is around the.

Cement pricing, where we saw a sequential improvement there in.

In the quarter.

Was there some mix impact there or was there some.

Maybe slight benefit from the August increase that you had.

I'd put out there and then of course.

We've heard of some pretty healthy announcements for the for the January timeframe as well can you talk about.

You know what youre doing for cement pricing.

Pricing announcements as we look into <unk> and into January or into the early <unk>.

Two timeframe.

Sure Trey and you know, we're we're very encouraged by the cement pricing and again. This is a testament to the execution by our team as we talked about in our last quarterly report, we had announced the mid year price increases and $6 and our northern region and four in our southern.

And you know there was some pushback in some competitors chose not to take price increases at that time and push it onto a January increase we did continue with a very heavy focus on our commercial excellence and again to cement team did very well here and that there was a heavy focus on customer segmentation and on driving value.

And so what you saw here, which we were very encouraged by is basically a year to date increase of 3% and most notably in Q3 year over year or four 4% increase which is actually the best pricing performance. We've had in cement for 19 quarters. So we're very encouraged by the execution by our team.

Here and as we go into 2022 as you said, there's healthy price increases across the board supported by very strong demand dynamics in cement and we've gone out with a $10 price increase in addition to the mid year price increases that we've done.

Again, we're early in the season to announce on that but our teams very focused on your January price increase and the continued price momentum in cement.

Well done and thanks for taking my questions. Good luck.

Thanks Terry.

Your next question is from Anthony Pettinari with Citigroup.

Yeah.

Hi, This is Asher stone and sitting in for Anthony Thanks for taking my question. So your EBITDA margin.

At the close ended up the horizon one range.

Towards the bottom of it and then so when you first outlined your horizon, that's kind of the timing flexible I was just wondering if maybe you had any additional visibility on the timing of when youre going to be finished horizon wanted moving onto horizon, two or is that still up in the air.

Yeah, I think when you look at the four strategic priorities of our overall strategy, which is as we remind us market leadership asset life, our ESG and our innovation, they're all moving at different paces right. So what we said from the beginning that our horizons will actually overlap a little which is.

Ben our reluctance to put timing on each horizon, because let's think about market leadership for example, our focus here in horizon. One has been about divesting dilutive businesses are non strategic non core businesses as we move into horizon. Two there it's much more about continuing to have that portfolio discipline, but really driving.

That market growth to be number one or number two in rural and ex urban areas asset light has been an absolute critical focus for us in horizon, one that will continue to be a focus whether through small asset dispositions as I said in my prepared remarks, or divestitures that makes sense to drive shareholder value.

As we look at the timing of the other two strategic priorities, they're really just getting going as I said in our ESG.

Really hit a major milestone here for horizon, one and getting our baseline of number one the first in our industry to get US has been compliant baseline up we really look forward to getting to you on our strategic priorities with ESG in a much more targeted results oriented strategic roadmap as we go into 2022 and innovate.

We're just building capabilities. So if you want to think about at ash or think about how we think about it as their horizons overlapping and what we haven't done as said one horizon ends and the other starts because it's a continuous strategy over a three to five year period is how I would think about it.

Okay. Thanks, that's really helpful I'll turn it over.

Your next question is from Courtney.

Again Stanley.

Hi, Good morning, guys and thanks for the question maybe if we can just go back to the you know, leaving the 'twenty one guidance unchanged.

You know after you know kind of beating our numbers for the quarter. It seems like it's implying a.

A step down in EBITDA growth year over year I'm. If you can just kind of walk us through I know you called out you know the the lapping of the 50.

Three week here and you know obviously of the divestitures, but if you can just walk us through some of the dynamics that are impacting the fourth quarter and how that would compare to how we should be thinking about you know EBITDA growth in 2022.

Sure and thanks for the question Courtney as we think about our guidance for the rest of the year, we really believe it's realistic and objective if you take our year to date numbers there at $395 8 million in EBITDA.

That would imply $110 million in the fourth quarter. If you went to a midpoint of our guidance.

Now there's three factors that kept us within this realistic rage, one we've talked about in our prepared comments, we're comping against the 53rd week that we had in 2020 that we won't have in 2021 that accounts for $10 million of EBITDA.

Secondly, our divestitures that we completed we've said before is $5 6 million on an annualized EBITDA basis, and that actually accounts for about $80 million of revenue as well. So we're basically absorbing the impact of those without changing our guidance and then the other factor which is always a factor in this business is.

Weather is a wildcard, particularly in Q4 and so a cold snap can cut short our season. So we just thought that it was realistic and objective to keep our guidance where it is that being said we are very encouraged by the momentum that we have both in pricing.

<unk> at execution by our teams so I would not read into it any kind of negativity around how I believe the business is performing and how we can execute moving into 2022.

Okay. Thanks, that's helpful. And then you you didn't really call out cost headwinds at all on the material side or in energy.

Is it safe to say that those are also coming in line with your expectations given the reiteration.

So if we talk about 2021 we believed that we were prudent in some of the estimates that we made in our original budget and guidance that we gave to you and what cost would be and Brian can talk us through some of the cost elements here and give you a little bit more comfort around that what I will say is looking into 2022.

As I said in my prepared remarks, we are very vigilant around this and our whole goal has always been and will continue to be driving commercial excellence to keep price ahead of inflation focused on operational excellence, Brian will talk you through some of the hedging that we have we've also bought some energy ahead for our cement kilns and we continue to have low.

Lead items on our supply chain that we're proactively buying ahead to make sure that our team is doing everything to mitigate cost as well as do value pricing. So a couple of things that we would point you to in 2022 just to share our thinking as we kind of put our budget together is around one is more an impact of Q1.

So if you recall in Q1, we had a very strong Q1 in 2021 if we step back and look at our typical Q1 performance it normally accounts to 4% of our EBITA.

On an annualized basis in reality in 2020 one it was 8% and that was driven by two main factors one Utah basically didn't have a winter.

And the second factor was the Mississippi River opened up two weeks earlier, so we were able to move product faster to our markets in cement.

Those factors really did drive a huge Q1, so we're considering that as we think about going into 2022.

The other factor that we're thinking about I made reference to a supply chain constraints. So in our capital orders in particular.

If our products and our mobile equipment gets delayed we have to think and we are actively thinking today about how we look at preventative repair and maintenance costs moving into 2022, and what impact delays might have on that cost factor and on our growth from new equipment that we happen to supply chain. So that's just kind of sharing our thinking with you.

I'm going to turn it over to Brian to give some specifics on our costs that might help you Courtney. What's your question yeah. Thanks, Ken and thanks for the question Courtney So our biggest.

Food cost is for materials is 37% of our total cost of sales on a large portion of that is the cost of cement.

We purchased from third parties and as you know.

Our goal is always to pass on those cost increases and we've seen some pretty significant ones from the from the cement producers this year in the markets, where we can.

We purchased cement, primarily big purchases third parties in Salt Lake market.

And the Houston market. So we've been successful I think in passing those cement price increases on wages and salaries is about 13% of our overall cost and again, we've managed I think quite well there obviously, our challenges there, particularly into very strong markets.

The demand for drivers, who said each peak again, notably in the Texas market.

Salt Lake.

Others, where there is a I think a national shortage of drivers right now and we've had to respond to those demands and then on the fuel and energy side, you know we manage our.

Fuel costs through our forward purchase hedging program that doesn't necessarily give us the lowest possible cost, but it gives us a lot of certainty around what our cost is going to be the peak months in the.

June through to September October time frame, we have about 70% of our.

Diesel already purchased we've got about 40% for the whole of 2022 pre purchase so we have certainty around our cost and we think that's an effective way to manage what can be volatile input costs and then on things like natural gas coal.

Again, we utilized contracts.

Contracts with our vendors and we're working very hard with them to.

To try to manage these input costs, which are which can be quite inflationary in the current environment. So hopefully that gives you a little bit of color behind how we're managing that cost base.

Very helpful. Thank you.

Yeah.

Your next question is from Gary Smalley suites of loop capital.

Oh, hi, Thanks for taking my question I'm, just wondering if you could expand a little bit more of your thoughts on different end markets that you're serving residential jumbos.

Public you know it looks like you're.

You're maintaining your broader volume guidance and the commentary seems pretty consistent with prior quarters, but just curious if there's been any incremental.

Change in trends across the different end markets.

Sure Garik, let me kind of bring you through our various end markets. So let's start with residential overall.

Bottom line summaries residential continues to be very robust if we look at you know.

National U S homes.

Sales records have been hit they're at all time lows between the gap between supply and demand is at 5.24 million of homes.

And that was 1.4 in 2019 as a point of reference if we take our states, which we look at very keenly August year to date, you know just to give you a few stats salt Lake City is up 24% Houston, 19%, the Dallas forth worth us into 30% ranges.

We look at Virginia, it's about 18%, Kansas City, 25% and there are top five all of our other growth states in the Carolinas in Kentucky are all in double digit above 20% growth year to date on residential so we're not seeing a slowing and we continue to have both national and state averages and we're seeing that our numbers and we.

Believe that will continue into 2020 two.

I kind of shift gears, then to non res, we're seeing some encouraging indices around the a b I nonresidential construction activity, which is up to $56 six in September from $55. Six in August the Dodge September non res was up 15% versus year to date trends of up 7%. So we've talked about now.

Conrad before and said it's lumpy, it's our hardest to predict it happens within the year. Indeed in 'twenty. One we are lower in our wind farms and we were in 'twenty one.

But we've always said that we believe this light nonresidential followed a residential understand enough of a lag that we believe that that will be positive going into 'twenty 'twenty. Two so we remain long term bullish even medium term bullish on non res.

Public across the board has shown continued strength I would say, we're seeing a lot more confidence in our states as we look across the board So Texas one of our biggest states their fiscal Lettings are estimated for 2022, a $10 billion. That's a 20% increase over 'twenty 'twenty. One you dot had a surplus budget and that was it.

The legislature in March and $870 million of that was a lot of to Yudof, Kansas has gone from $700 million in 2021 to 900 2025, Missouri gas taxes put in that will result in $500 million per year of additional spending on roads and bridges, Virginia is up 16% year on year.

And then if we take our growth states, where we're very focused around our Greenfield North Carolina has a gas tax total spending of 5 billion South Carolina has excess surplus budget total spending of $3 1 billion, Georgia has is $10 billion of major mobility program, where we will be in a great position.

With our Jefferson inquiry as we quoted in our prepared remarks to really exploit that and continued growth organic growth in our business and Kentucky is one we've talked about all year long, where we've had you know reduce spending but we're definitely seeing some strength in backlogs and increased lettings in Kentucky. So bottom line is demand is very resilient right now and we see.

That continuing into 2022.

Great. Thanks for the rundown.

Thanks, Gary.

Your next question is from Phil <unk> with Jefferies.

Hi, This is actually calling on for Phil. Thank you for taking my question I just wanted to touch on the aggregates gross profit margin in the quarter you guys did a great job expanding that despite that right those rising inflationary costs at everyone's seen can you just walk us through some of the puts and takes to that gross profit bridge and maybe quantify some of those drivers.

And just how we should think about aggregates gross margin and cash gross margin per ton improvement going forward. Thank you.

I'll just give you some high level comments that Bryan bring you through kind of a bridge on this Colin so overall as I've said the team has done a great job on price execution and our ranges are very strong in the east we've had double digit year on year price increases in aggregates. Additionally, our team's focus on operational excellence and cost.

Reduction plus cost containment has been huge and then underpinned by demand. We've had that continued strength that has allowed us to expand margins over time, So Brian maybe you want to bring through a little bit more color to that yes, Colin thanks for the question it's really.

When you get that combination of both volume and price.

We choose but we hope and what typically happens when we get to the third quarter, that's our biggest season.

Of the year and September is usually the biggest months in the biggest quarter. So we saw over 9% volume growth in aggregates, a 4% average selling price in that 4% is an average so there are pockets of our business in certain locations, where we had a significantly higher than that.

And what is the fact of the matter is that we ended up with incremental margins on aggregates of about 83.

Percent in one of the strongest quarters, we've seen for a long time.

And of course that volume really is helpful. Not every variable cost is truly variable and so when you start to see.

Just kind of high single digit volume growth, that's what really drives those incremental margins on the underlying margin so volume and price is really what what drove those higher.

Okay.

Thank you.

Your next question is from Timna Tanners with Wolfe research.

Yeah, Hey, good morning, I wanted to zero in a little bit on the cement market. So it sounds like the conditions are as tight as we've seen them in a long time. So I wanted to see if you could actually expand a bit on the supply side elaborate on your potential for expanding supply and what you're seeing from any competitors is this.

Do you also see this as unusually strong and continuing to be strong just a little more detail would be great.

Yeah.

Yeah, as we said when we look at the cement market definitely supply demand dynamics are rather tight right now we've seen that evidenced in strong volume demand. We've also seen that evidenced in <unk>.

Rice execution and stickiness on price and our numbers reflect that as we think about the supply side.

We are continuing to work on an operational excellence focus to get every single ton out of our plants every single incremental piece of capacity that's been a key focus of our team and that's been ongoing since last year. Additionally, working through so the supply side to do that our supply chain to make sure we're optimizing our entire network.

A key area. If you think about further expansion we have bought a small amount of imports to supplement our volume to meet our ongoing customers demand that being said import volume is not as profitable as what comes out of our plants. So we are limiting that to the point, where we can absolutely secure the margins that maintain our.

Margin profile over time, so if you think about our emphasis our emphasis around commercial excellence pricing the volumes, we have and being operationally excellent and our current plant to get to any additional form of capacity.

Expansion, we would have to see a much broader expansion in margins in this market I do believe supply demand dynamics will continue to be strong and we will continue to drive improvement in our business. Additionally, in our cement business, we didnt speak to it too much on our comments here, but our greed America recycling facility is back up and running and we're.

The expansion of the Green America recycling facility, which we think is very important from our ESG, but also for our ongoing improvement in our business. We also have the Portland Portland cement.

Installation that we've been doing that's going to help supplement our additional capacity in our cement and that's to the order of about 8% overtime and so that will help improve capacity as we move through that but really our focus is on very much on value pricing and operational excellence.

Yeah. It's helpful. It's tight before that infrastructure stimulus happens, assuming it happens and it could be a long runway ahead. So.

So thank you for that yes.

Thank you.

Your next question is from Brent Thielman with D. A davidson.

Hey, great. Thank you.

On the Greenfield the incremental contributions here, you know get to be pretty interesting relative to the EBITDA base.

Jeff's question is.

Are you exploring or have you identified more of these opportunities. In addition to what's already sort of components here for the next few years that arent in the slide deck, I think about that especially with some of the freed up capital you should have.

Any thoughts there.

Yeah, you know, it's a great question, Brett because as we think about our capital allocation. It continues to be a focus for US obviously, our first focus is on managing our leverage and we've done that.

But you know investment in Greenfield is very important in a depleting resource to continue to sustain organic growth and the Jefferson for he is a great example of that in a market that is high growth high margin potential strong pricing dynamics, where we can continue to expand our margins and I will say we are constantly exploring.

New Greenfield opportunities as we look through our business and we'll continue to do that and as we continue to refine our strategic plans Greenfield investment continues to be that over time.

As we look at the contribution in 2020, one, it's $18 million and by 'twenty 'twenty four it should be $45 million per year, and we will expect and continue to add that on that over time. As this is a constant focus of sustainable organic growth for our business.

Thank you.

Your next question is from Jerry Revich with Goldman Sachs.

Yes, hi, good morning, everyone.

Congratulations on hitting me.

<unk> ratio target I'm wondering as you look out ahead, what's the pipeline look like for you folks.

At this point.

If you're unable to find.

We should meet your financial criteria, you know what sort of timeline would you look at before you really ramp up stock buyback et cetera could you just give us your updated thoughts are around those items.

Thanks, Jerry and you know we are very encouraged by our leverage ratio will continue to improve upon that based on the performance that we've had you know when I think about capital allocation I mentioned, our Greenfield. We're obviously very focused on sustaining capital, but we are an M&A company and we continue to have a very robust M.

In a an acquisition pipeline and continue to develop that over time and continue to grow out to our team. So what we will continue to be a key focus inorganic growth and we have a number of targets in our sites that we're actively working.

We have always tried to position ourselves as the buyer of choice with our model and our focus on rural and ex urban markets to be number one or number two continues to be that so we would rather put that cash to use in that regard. However that being said, we look at all forms of capital allocation to drive value to our shareholders over time, So there's no.

The timeline on that Jerry because we believe we have a lot in the pipeline right now to the last question I got a lot on Greenfield investment and continued growth of our business is a key focus for us while managing our leverage.

Hopefully that addressed your question.

Your next question is from Adam Thalheimer with Thompson Davis.

Hey, good morning, guys great quarter.

Similar question I guess I was just curious if the dispositions are done by the end of next year and then how surprised should we be if we see you announce.

Mall, but just a tuck in acquisition.

You know I wouldn't be I wouldn't be surprised we have nothing that we're ready to report on at this point in time, but we're very active on the M&A side.

Truly in horizon, one we have been our teams have been very focused on deals.

Deleveraging getting these divestitures, having some proceeds so we have strategic flexibility to drive increased shareholder value and drive growth of our business. So.

We will report on them as we have them and we as I said, we're about halfway through the divestiture part, but all very actively in progress and we look forward to giving you more report outs in Q4 and Q1 on those divestitures and continue just asset disposition discipline within our organization, but over time, we will hopefully.

Some acquisitions to also talk about that or would range anywhere from bolt into significant ag's led acquisitions that feed our fit our criteria of discipline and being number one or number two in rural and ex urban markets, where we play in Adjacencies.

Thanks, Dan.

Thank you Adam.

Your next question is from Mike Dahl with RBC capital markets.

Thanks for taking my question and I appreciate the details so far.

Brian I wanted to go back to the comments you made around cost and some of the hedging and it's helpful.

But for US and then for planning purposes to.

Have some of the hedging I was wondering if you could talk a little more about you know as these hedges roll presumably that the cost is still gone up so what would you expect your average.

Cost to be.

And based on your 22 hedges versus 'twenty one.

Uh huh so on.

On the on the.

A portion of the material that we've hedged.

So far which is roughly.

A 40%, we're probably going to see about a 10% to 15% increase in in cost for the part that has already been hedged obviously, the unhedged portion, which we continued to buy spot is is unknown at this point in time.

But that would be approximately the range for.

The portion that we have locked in.

Okay, great. Thank you.

We have reached our allotted time for Q&A I will turn the call back over to Ann for closing remarks.

Okay.

First some of it is in the right place at the right time Megatrends are coalescing in summit's key ex urban and rural markets and all require some form of aggregates ready mix concrete cement asphalt and paving and a combination thereof.

Second we are reporting our third consecutive quarter of progress towards our elevate stomach goals. It may not be a linear upward trajectory each quarter, but our leverage ratio ROIC and EBITDA margin are all markedly improved today versus where we started and we are now more than halfway towards our horizon, one goals for divestitures and proceeds.

We are finishing the year strong continuing with a sharp focus on price execution and cost mitigation with the business underpinned by strong growth fundamentals with continued strategic focus we are setting our company up for success in 2021.

With that I'll conclude our call and thank you for your continued support of summit materials and thank you for your questions.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.