Q4 2021 Summit Materials Inc Earnings Call
We detail on our Q4 performance, but let me highlight three key reasons for our strong full year results.
First and foremost is the pricing discipline that is now firmly established throughout the organization.
At the center of our commercial excellence capability is value pricing.
By taking a data driven approach to segmentation, we are making better pricing decisions at the local level to reflect market conditions and best serve our customer needs.
The second contributor to our 2021 success is related to operational excellence like others, we faced cost inflation throughout the year, but through a combination of pass through pricing standardization cost reduction initiatives and effective diesel hedging our teams did a great job controlling what we can control in 2021.
And finally, I'll highlight our ongoing efforts to drive growth and optimize the portfolio.
When viewed through a market leadership in asset light land, we have made several no regret portfolio moves in 2021, those moves better position us to expand our presence in priority markets and facilitate our efforts to obtain our horizon one targets.
I wanted to highlight these three key reasons for our strong performance because they're all self help initiatives and has been instrumental in helping to grow our 2021 topline while expanding margins.
That leaves us right into our elevate summit scorecard on slide five there.
There you will see our leverage continued to improve in Q4 moving to an all time low of two five times net debt to EBITDA, one half turn below our three times target.
ROIC and EBITDA margin improved by 80% and 70 basis points, respectively. In 2021 and relative to Q3, we have steady on return on invested capital and trailing 12 months EBITDA margin despite ongoing inflationary headwinds.
Now on slide six you see the four strategic priorities at the center of our elevate somewhat strategy.
I'll spend more time on market leadership and asset light pillars in a moment, but first an update on our sustainability and innovation agenda.
In April we plan to share our sustainability roadmap, which will present, our 2030 in 2050 targets to enhance our social impact and prove our land use practices and reduce and ultimately eliminate our carbon emissions.
That report will include a credible path to achieving each of those goals. We will also present some of our more recent accomplishments, including the commercialization of Portland limestone cement, our implementation of a dashboard to track and address fuel efficiency and consumption and every summit on vehicles and the launch of a summit wide water meters.
<unk> and conservation project the.
The report will show that we are pursuing both near term and long term strategies to become the most socially responsible integrated construction materials solution provider.
And on the innovation, we are in the process of building internal innovation model with the imminent addition of a chief growth officer, We believe pairing this internal capability with University and industry partnerships has the potential to really accelerate our strategic growth.
Returning to market leadership, where our progress on achieving number one or number two positions and strategically targeted rural and ex urban markets is most evident through the portfolio optimization work shown on slide seven.
Here, we identify underperforming or noncore businesses or assets that.
It did not meet or have no clear path to reach margin and return targets.
Find better owners for these businesses.
In Q4, we completed three divestitures and generated roughly $25 million in proceeds to bring our 2021 totaled two eight noncore divestitures, yielding approximately $128 million in proceeds.
We are currently progressing additional divestitures and have strong visibility towards reaching our horizon. One ambition of 10 to 12 divestitures and at least $200 million in total proceeds and.
And Furthermore, we bolstered our M&A pipeline, and we will aggressively pursue attractive opportunities that strengthen the portfolio and advance our market leadership strategy.
We field a lot of investor questions about asset light means in practice.
So to crystallize our approach we provided a real World example on slide eight.
The starting point for these projects is a diligent and objective evaluation against our five point asset like criteria.
First we assess whether there is an existing foundation of trust between summit on the counterparty and.
In our view, having mutual trust is a critical component and highly predictive of whether a partnership will ultimately be successful.
Next we look at the business case, we determined whether the proposed relationship advances our strategic and financial goals.
Specifically, we look at it aggregates intensity, whether it provides market entry or expansion increases our strategic flexibility and whether it reduces complexity.
In reality not all five of these criteria will be met 100% of the time, but by staying rooted in a disciplined approach we are increasing the probability of a successful relationship.
In this specific example, our assessments identified an attractive opportunity to move forward with an asset swap agreement whereby we exchanged one of our downstream businesses for aggregates quarry.
Then negotiated a long term supply agreement with the counterparty, thereby ensuring strong and reliable aggregates pull through.
Stepping back you can see that our asset light approach places a tremendous emphasis on strategic and financial fit.
The criteria, we apply a thoughtful rigorous and when executed our asset light partnership strengthen our market position in aggregates fortify existing customer relationships reduce capital deployed in our margin accretive.
This framework is not part of our organizational DNA and our continued focus on market leadership in an asset light operating model will play an important role in driving towards our ROIC target of 10% and EBITDA margin target of 30 plus percent turning to slide nine where we map out our elevate on the horizon. We are current.
In horizon, one building capabilities, making no regret portfolio decisions and freeing up capital to support sustainable growth and thanks to the relentless effort of our people and teams over the last year I'm extremely pleased with our progress to date, having already achieved our horizon, one leverage target and well on our way too.
Reaching horizon, one targets for ROIC and EBITDA.
Now before handing off to Brian I'd like to acknowledge a transition underway on our cement leadership team. Following 25 years of distinguished service at Continental cement, including the last nine as president of Summit's complemented cement company Tombac will become an executive Vice president of summit materials.
Focusing on key strategic growth initiatives as part of a planned succession for cosmetic cement.
During his tenure at continental cement Tom's unwavering commitment to safety leadership and commercial excellence serves as a model to some of the employees everywhere.
Want to congratulate Tom for an excellent final year, leading our cement business and welcome them into his new role, where he can continue to maximize growth and deliver value for summit and our shareholders.
As part of this planned succession, David looms, senior Vice President sales and supply chain at Continental cement will become president effective March one 2020 to David.
David joined Continental cement in 2020. In addition to his more than 23 years of experience in operations and sales leadership roles with Med companies. David has been instrumental in developing the pca's roadmap to carbon neutrality and currently serves on the board of the inland Waterways Commission.
<unk> experience in depth industry knowledge as well as his proven leadership credentials will ensure a smooth transition and strong ongoing leadership of our cement business moving forward with that let me pass it to Brian for a financial review.
Thank you Anne.
I'll pick up on slide 11 by reviewing our Q4 performance.
And as expected.
Fourth quarter growth rates were negatively impacted by comparisons with a 50 <unk> week in the fourth quarter of 2020.
If you were to exclude this impact we would have recognized that year on year growth for net revenue.
EBITDA and adjusted cash gross profit as well as even stronger net income growth.
Similarly controlling for that impact wed also revealed year on year volume growth across aggregates cement and ready mix in the fourth quarter.
In fact, if you exclude the extra week impact cement volume growth in the fourth quarter with the strongest since the first quarter of 2017.
Solid volumes, along with strong pricing growth across all lines of business helped to deliver a fourth quarter net revenue was $553 4 million and adjusted EBITDA slightly above our full year guidance range.
Turning to slide 12, where we provide quarterly and full year price and volume performance by line of business.
Cause of the distortions are referred to in my opening remark, we will focus our comments on pricing trends and full year volume performance.
On aggregates Q4 pricing growth reflected higher up eight 6% year on year and up four seven percentage points sequentially with strong growth across both reporting segments, including double digit gains in British Columbia, Kentucky, Northern Kansas and Virginia.
Full year aggregates average selling prices increased three 6% in line with our expectations for the year and reflecting a heightened focus on value pricing.
Full year aggregate organic volumes increased one 8% and eight.
Eight 6% the tubing and acquisitions.
By market aggregate volume growth in the Intermountain, West, Virginia, Carolinas, Georgia, and British Columbia were partially offset by lower volumes in Kentucky.
And cement favorable market conditions in our key markets drove mid single digit volume and low single digit pricing growth in 2021 with price accelerating nicely in the second half of the year.
And three 4%.
2021 complement.
By one 6% volume growth on the full year.
Our 2021 ready mix performance, primarily reflects a strong demand environment and salt Lake city, but more than offset wet weather conditions during the second and third quarters in Texas.
And in asphalt average selling price increased four 2% in Q4 two.
Two 2% in 2021 and came in ahead of our expectations. When we began the year two.
<unk> 2021 asphalt volumes declined 13, 2% due primarily to a divestiture.
On slide 13, we provide an adjusted cash gross profit margin comparison by line of business there.
There Youll note that despite a positive price cost relationship adjusted cash gross profit margin deteriorated in the fourth quarter.
Strong in quarter pricing growth across all lines of business wasn't able to offset challenging variable cost conditions.
Relative to year ago levels fourth quarter labor costs, which account for about 13% of our cost of sales increased roughly 5% versus prior year.
Diesel, which makes up 3% of our cost of sales was up nearly 8% with additional cost pressures from higher natural gas and energy to us.
Our material costs were up more than 5% in ready mix and nearly 3% in asphalt. Although these costs are passed through to our customers.
The decline in Q4 adjusted cash gross profit margin was therefore, driven primarily by three factors.
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Unfavorable geographic and product mix compared to the year ago period spin.
Specifically in Q4 2020 are higher margin Salt Lake City operation.
Reported significantly higher than normal pull through of aggregates volume to the downstream, which boosted margins in Q4, 2020 and did not recur.
Weaker in Q4 2021.
Second.
Aggregate margins in particular were negatively impacted by seasonality compared to Q4 2020, we had one fewer working week in October which resulted in equipment utilization spread across fewer working hours from the year ago period.
Finally, one of our cement tons encountered unplanned downtime negatively impacting production volumes throughput on fixed cost absorption relative to the prior year period.
Taken together. These three factors drove Q4 adjusted cash gross profit margins down across all of our aggregates cement and products business and came despite the positive pricing net of variable cost relationship in the fourth quarter.
For the full year, despite escalating costs, we grew adjusted cash gross margins in three of the four lines of business is probably a very pleased with our full year.
Gross profit margin and adjusted EBITDA margin increased nicely in 2021.
And 70 basis points, respectively.
Versus 2020 levels.
We will focus on commercial and operating excellence together with our portfolio optimization activities more than offset cost headwinds in 2021, and with fourth quarter adjusted diluted EPS 2007.
Or <unk> higher than the prior year.
We believe our strategic initiatives, while delivering higher earnings quality to our shareholders.
Let me wrap up on slide 15, with a review of Summit's capital structure.
As Alan mentioned, our Q4 2021 leverage ratio declined to two five times net debt to EBITDA <unk> seven times from 2020, and a half turn better than our elevate so much target of three times.
At two five times this marks the lowest leverage ratio in summit's history, and further enhances the company's financial flexibility.
<unk> and recognition of our steady improvements in operating performance predictability of free cash flow and robust operating fundamentals, we were glad to see a recent credit rating upgrade by Moody's.
We remain in a very strong liquidity position closing 2021 with $381 million of cash on hand.
Our improved leverage means we have.
We're a much stronger balance sheet, and we will not hesitate to pursue the highest return opportunities.
For our business and our shareholders.
Lastly for the purposes of calculating adjusted diluted earnings per share. Please use a share count of $120 million, which includes $118 6 million class a shares and one 4 million LP units.
And with that I'll turn the call back to <unk> for our view on the year ahead. Thanks, Bryan as we consider 2022, our view is always needs to be informed by the operating conditions in Egypt.
Our end markets.
Therefore on slide 17, we provide our perspective on trends, we're seeing in residential nonresidential and public.
And while there are risks and uncertainties that could temper our outlook.
Headline takeaway is that for the first time in a long time, we are expecting growth across all three end markets in 2022.
Let's start with residential where we generate roughly 32% of our revenue.
While affordability and supply constraints or concerns to monitor the underlying fundamentals and our view that support long term growth in single family residential construction on the supply side, we have record low at aging inventories and on the demand side, we have low unemployment rising rents and a growing cohort of millennials.
Entering into the prime home buying age.
The residential growth was strong in 2021 with permitting up double digits year on year and while the pace of growth may moderate from 2021 levels. The underlying conditions point towards continued growth in residential construction.
On nonresidential recent spending trends as well as forward looking indicators are encouraging and what you would've expected following the persistent residential growth that we've seen.
That is to say private nonresidential construction, which typically lags residential growth by 12 to 24 months is building momentum we've seen non red band inflect higher in recent months and API as well as Dodge data suggests that nonresidential will experience growth in 2022.
That said, we expect nonresidential growth to be uneven by channel with outsized growth favoring warehouses data centers and green energy projects.
And in terms of public spend we are encouraged by and applaud the page seeing positive impacts to economic and job growth in 2022, but do not expect material benefits flowing through to our business until 2023 that said when we look at existing funding levels.
Appear to be on very solid financial footing, and well positioned to support public infrastructure growth in 2022.
We therefore see reason for optimism.
Across all three end markets and the rare opportunity for all three to grow in 2022.
Drilling down into key states on slide 18, we provide a snapshot of recent trends in our top five states, which together make up approximately 65% of net revenue and.
In Texas on the residential side, we see continued growth in our top three metro markets, Houston, Dallas, and Austin, They're single family permitted growth averaged nearly 13% in December . Furthermore, resale supply is at historically low levels and population growth is expected to remain strong creating a healthy back.
Drop for continued residential and nonresidential construction on.
On the public side, Texas, DLT is projecting letting estimates for fiscal year 2022 at $10 2 billion more than $2 billion above their long term targets.
In Utah, where more than 75% of our work is from private construction, we see continued strength in the Salt Lake City residential markets, noting solid growth in single family permitting and inventories that are well below historical levels.
Utah is one of some of the highest growth markets and is a great example of where our vertically integrated model is fully leveraged to deliver profitable organic growth and high returns on invested capital.
Moving to the Midwest, where public funding in Kansas, and Missouri as supportive of public end market growth.
The Kansas legislation approved a 2022 transportation budget that was $300 million above 2021 level and the Missouri gas tax when fully implemented is expected to generate approximately $500 million annually for roads and bridges.
Residential demand in both states is solid with December single family permits up 8% in Kansas and 14% in Missouri underpinned by renewed demand environments at Kansas City and Wichita areas.
And finally in Virginia, where the department of Transportation's fiscal 2022 budget calls for highway construction spending of $3 3 billion or $9, 6% above 2021 levels that together with steady residential activity in Virginia gives us confidence that Virginia will remain a reliable growth driver for.
Summit moving forward.
Moving to our Greenfield update on slide 19, as you know investing in green sales as a strategic imperative critical to sustainable organic growth.
As of today, we have completed eight greenfields and have three more currently under development in high growth target markets, primarily within our east segment.
Since 2014, we have invested roughly $230 million in Greenfield Capex with plans to continue to spend on strategic Greenfield projects in 2022.
It's because of this consistent growth trajectory that we now forecast greenfields to contribute more than $50 million in incremental adjusted EBITDA by 2024 on a run rate basis.
Let me bring everything together with our full 2020 to outlook on Slide 20, we currently expect full year adjusted EBITDA of approximately $535 million to $565 million in 2022.
We expect low single digit organic volume growth underpinned by strong fundamentals across all three end markets.
This growth however is partially held back by ongoing supply chain and labor constraints primarily.
Impacting residential construction by line of business, we expect growth in aggregates and cement to outpace asphalt growth, while ready mix volume is forecasted to be flattish due in part to the difficult first quarter comparison.
Our 2022 pricing outlook is for mid to high single digit growth as demand conditions support solid pricing across aggregates and cement followed by more moderate growth in ready mix and asphalt.
Our outlook does not include any benefits from the infrastructure build infrastructure related activity does accelerate into 2022. This wood river represent upside to both volume and price versus our current perspective.
Our view on the cost environment is for inflationary conditions to persist in 2022, driven by high labor cement and energy costs. Our outlook considers mid single digit labor inflation high single low double digit cement inflation and energy costs to remain elevated year on year.
Additionally, and because of global supply chain bottlenecks, leading to longer lead times on capital orders, we have budgeted for incremental repair and maintenance costs to extend the life of our existing fleet in the face of these cost headwinds it would be critical for us to maintain our agility execute on value pricing principles and control.
What we can control to get disciplined execution of our operational excellence initiatives.
To that end, we have several productivity initiatives currently underway, we will be investing further behind profit improving capex and consistent with prior years, we have hedged 50% of our diesel for 2022. These.
These steps and others like them not only provide cost offsets, but also provide the cost visibility necessary to price ahead of cost.
Bottom line is that for 2022, we would expect the combination of organic volume and pricing growth mix benefits and effective cost controls to more than offset cost inflation, leading to EBITDA margin growth in the year ahead.
I would like to note two important items concerning our outlook today.
First is around phasing for 2022, if you recall from our November call, we referenced uncommonly favorable conditions in Q1 2021.
Between dry warm conditions in Utah, and the early opening up the Mississippi River, our first quarter contributed disproportionate EBITDA relative to the historical baseline and resulted in first quarter EBITDA margins that were roughly 700 basis points above the historical Q1 run rate. This in turn has created.
Very difficult first quarter comparisons and we think it's fair to say that the more relevant reference points for the first quarter should be Q1, 2020, rather than Q1 2021.
A second item I'd highlight is around divestitures. The outlook provided today incorporates forgone EBITDA, a previously announced divestitures as we move through 2022, and we actually further portfolio moves we may need to update our outlook to reflect the impact of those optimizations once completed.
Finally, our Capex investments in 2022 is expected to be between 270 and $290 million, including continued greenfield investments.
Step up versus 2021 levels, primarily reflects three factors.
First a heightened emphasis on profit improvement projects that when fully implemented should have a quick margin enhancing payback second elevated repair and replacement spend to compensate for long lead times on equipment and supply chain disruptions.
And third is a project in Davenport, Iowa, where we are constructing storage stone that was the end of 2022.
To close on slide 21, I wanted to reiterate my sentiments from earlier guided by our four strategic pillars, our elevate summit strategy is driving improved execution.
And in financial performance, we are certainly a stronger better equipped company today than we were one year ago and we are closing in on those horizon. One targets finally, I want to thank our shareholders for their continued support and feedback and make it clear that our teams are focused <unk>.
<unk> and confident that we will build on our momentum in the year ahead with that I'll ask the operator to open the line for questions.
As a reminder to ask a question you will need to press star one on your telephone.
Sorry, Your question press the pound key please let me ask you one question and then return to the queue. So we may accommodate as many analysts as possible in the time, we have available. Please standby, while we compile the Q&A roster.
Your first question comes from the line of Trey Grooms with Stephens, Inc.
Hey, good morning, Andy and Brian Thanks for taking the question hope you're all well.
Good morning, Jay.
No.
The volume strength in the cement business very impressive, especially for a seasonally slower quarter.
Can you talk about some of the drivers you're seeing there and then has that continued into <unk> and kind of I guess the.
The thought there is also how does that play into the inventory picture.
There as we kind of entered the busier spring building season.
Sure Yes.
Commence was very strong for us in Q4, Trey as you noted and in fact those levels were higher than <unk> have to go back as far as Q1 2017, so very impressive volume and supported by price also by the way. So the drivers there continue to be non nonresidential of resumption of demand.
And also continuing residential growth.
Inventory picture, we did have some downtime as I referenced in our comments in the fourth quarter. So our inventories already rather low we have augmented some of that in 2020 one but.
Judicious imports and we will continue to do the same thing as we go into 2022.
But as you know imports can have lower margin potential, but we are very keen on making sure that as we import material. We're protected by any long term contract pricing and stay laser focused on value pricing, but obviously, we're very focused on meeting our customers' requirements for demanded service.
Got it okay, well I've got plenty of follow ups, but I'll jump back in queue. Thank you so much.
Thanks, Craig.
Yes.
Your next question comes from the line of Courtney <unk> with Morgan Stanley .
Hi, Good morning, guys and thanks for the question.
And I think you mentioned that.
The guidance includes the foregone EBITDA from the previously announced divestiture I think you gave us the number for the five <unk>.
Last quarter or a quarter before but can you just give us an update on how much <unk>.
Total.
Headwind that divestiture.
Our annually and then also what tie in for that because there were a few moving parts on this one so that we have clarity as you would look at your modeling yes.
Yes.
Good morning coordinate the divestiture.
The EBITDA impact on a pro forma basis.
2021 would it be about $6 million, so on a reported basis and a bridge we built in about three.
Four.
For those divestitures.
Okay, and how about from a revenue standpoint, and I think.
Any guidance you can give on which.
Segments. It will most impact because I think oftentimes a thermostat a big impact on the asphalt division.
Any other color there.
Primarily going to be on our downstream businesses.
So asphalt obviously with the divestiture of <unk>.
Often fall business and we've also.
One or two of the smaller noncore ready mix businesses.
The main impact in the west.
Okay, Great and then just one more on the divestitures, if I may and I think I think you only had about.
25 million proceeds from the remaining three as we think about your targets of 10 to 12 and 300 million total.
We should be thinking about it given that it seemed like the proceeds for a little bit lower than the first site and are you targeting the number or the absolute proceeds when we're thinking about those goals.
And then as you think about them currently they are purely assets that we're selling on the basis of EBITDA multiple.
Others are on book value and because they basically are out.
That are more valuable to someone else than ourselves. So if you look at our first five you, but it drove a 20 times multiple which we've guided against not doing that for future divestitures.
The ones this quarter were primarily smaller assets I would say and the multiples range across the board. So we sold some on multiple and from on book value.
As we go into 2020 to complete our horizon, one divestitures, we face additional we will target our 10 to 12 and will continue to report our proceeds as we go.
Thank you.
Your next question comes from the line of Garik Shameless with Luke capital.
Hi, This is Jeff Stevenson on for Gary Thanks for taking my question.
Hi, Dan.
Can you talk about the assumptions at the low end the high end of the guidance and how we should think about the cadence for EBITDA growth during the year will be more back half weighted.
Yes, let me kind of step back a little bit and give you a kind of two elements that were thinking about when we think about our full year guidance for 2022, So theres really two elements. The first bucket is when we think about the three things that I've talked about is kind of ingrained in our culture right now the value pricing.
Our constant focus on operational excellence and our portfolio optimization to rich and the mix. We believe those three factors were more than offset any cost inflation that we have so that part is an element. The second part I would encourage you to think about is around the fact that we have Green America recycling that we fully opera.
<unk> were in 2022, so that will add an additional $7 million to $8 million to the bottom line in 2022, and we also have the impact of our Greenfields, we feel that those two.
Two things combined will more than offset any increased spend we havent G&A, which may be high returning as a result, now that's kind of what's baked in from a puts and takes into our overall outlook. The thing we have not thought in there as we think about pricing, we're very encouraged by our pricing leaving 2020.
We've got really strong momentum, but we have not put into our guidance any multiple price increases and I definitely would not rule that out because we are assuming continued cost inflation and we're assuming continued very extreme focus on value pricing our operational excellence as we move through the other thing that could be an upside which.
We have not baked in and we're not counting on anything we might get from the infrastructure Bill ahead of time.
As you think about that overall, that's kind of how we're looking at our guidance now to your question on cadence.
As I said, we're not when I sit here with a crystal ball and say hey, things are going to improve in the second half that's not where our heads are Jeff we are assuming cost inflation. Our team is focused on <unk>.
Price price price keep price ahead of cost on an ongoing basis.
We'll tell you we don't like to give guidance on Q1, but in my prepared comments. We did talk about Q1, both in our last report out and today because we have this unusual thing where.
Generally 3% to 4% of our full year EBITDA sits in Q1 and.
In 2020, when we actually had 8% of our total dollars of EBITDA in Q1, and so we've guided you to go to more like Q1 2020, as you think about the cadence of that the other cadence I would give you as we think about it is all three of our end markets are growing and we've pulled back a little bit as we said on residential because we do believe supply chain constraints.
Going to elongate that cycle and then the other point I would say is we're very confident in this guidance from self help initiatives that we've called out in our operational excellence, our procurement practices and our continued portfolio optimization as you think about the cadence of 2022.
Very helpful. Thank you.
Thank you.
Your next question comes from the line of Phil <unk> with Jefferies.
Hi, this is actually calling on for Phil. Thank you for taking our question.
So in the aggregate and cement business in the fourth quarter you guys did see some gross margin declines.
And in your helpful and outlined some of those larger drivers in your prepared remarks.
But it sounds like Youre expecting some margin enhancement in 2022 with the support of higher prices and volumes. So just given the inflation headwinds can you just help us think about the magnitude of the cash gross profit margin improvement you're expecting in the aggregates and cement businesses.
Well, let me talk a little bit about just the momentum we have with respect to going into 'twenty, two and aggregates and cement that might help a little bit and then we can add any additional color beyond that so if we think of that aggregates and Q4 on a full year basis, we've increased prices by eight 6% and quarter to quarter.
We've actually increased from Q3 to Q4, another four two percentage points. So very strong momentum in aggregates driven largely by our east region, where we've had very strong double digit price increases so as we go into.
2022, we're confident now on moving that guidance more mid to high single digit price increases. So that would give you. If you remember last year, we said low to mid and we came in at about 363, 9%. So we're upping the game pretty much on pricing because we feel we have very strong momentum as we go into that as we think about <unk>.
<unk> filling into Q2, we've got more than low single digits into 2022, excuse me and there we're talking about aggregates.
<unk> strength on our aggregates.
So we have pulled back on volume, but we're I would say, it's more end market driven where we've pulled back in residential we see strength in acceleration in non res and continued strength in public overall.
Of course, I'll have Brian talk a little bit about what were assuming in cost inflation, but we believe that we can continue to expand the margins as I said in my opening comments because of the strong pricing our operational excellence and you will see more of these portfolio divestitures, which are underperforming assets that will expand the margins and that's going to be the main can.
Tributary, keeping ahead and expanding that margin to your question column, Brian you want to add a little bit of color on the cost curve. So.
So we're not going to give you specific numbers for what the margin could get to but you can see where we closed the year in aggregates 51, 7%.
Cement just slightly under 40%.
<unk>.
And our goal as we've said is to make sure that we stay ahead of the price cost curve here and we've got a few.
Chart number that I can.
Quote to you that we're kind of baking into our assumptions that are in the guide.
We do have some quite nice.
Mitigation efforts.
Energy costs, because we've got our diesel hedged about 50% of our estimated consumption.
As already hedged there.
Also pre purchase some of our natural gas and our coal.
We do expect that there'll be some inflationary pressure on.
Labor.
Probably.
Between 3% and 6% depending on.
The individual markets, we expect it to be and.
It may be 5%.
Underlying materials.
So those are some of the <unk>.
Cost buckets that we have in <unk>.
In our business and Thats, the kind of assumptions that we're making around.
Around those costs in 2022.
Great. Thank you for the color.
<unk> with Citigroup.
Hi, This is the asset comment on for Anthony Thanks for taking my question and just looking out to 2023 do you think you have the capacity to satisfy the anticipated increased infrastructure demand that is not.
How should we think about the competitive dynamic evolving do you maybe see shared other players or maybe pricing accelerate further or if at all.
Could it be an opportunity to maybe drive further customer rationalization things on that.
Let me, let me kind of address your question overall, we are confident we will have the capacity to support the ongoing.
Growth from the infrastructure Bill, let me break that down a.
A little bit clearly go backward integrated to aggregates, we have years and years of reserves. So we're ready enable we're investing in greenfield critical for our sustainable organic growth. So on the aggregate side extremely confident we continue to be able to build our fleets out on the downstream side. So we'll be able to meet that need on the cement side.
We're running tight theres no doubt about that but we have several self help initiatives that add capacity to us over time to be able to support. It. So one thing is keeping our plants up and running being extremely focused on operational excellence, which we are and continue to be but another big factor that needs to be factored into when we think about additional.
And cement is the introduction of <unk>.
Portland limestone cement, which will add another 5% of capacity into the market and if you think about where the PCA is talking about their estimates on the impact of the infrastructure Bill on cement.
They are predicting basically a 9% annual growth per year.
And talking about that comes in 2019, and 2020 levels and so that will add about another 40 756 million metric tons to the market. We believe Portland, <unk> meant additional capacity and augmenting that with some judicious imports will be able to meet our customers' needs. So.
Will it be tight yes, but is there capacity to meet that demand. It's meant in both aggregates and our downstream absolutely.
Thanks, that's very helpful I'll turn it over.
Thank you Ashley.
And your next question comes from the line of Gary Roberts with Goldman Sachs.
Yes, hi, good morning, everyone.
Jerry.
I'm wondering if you folks can just expand.
No.
Jerry I think we lost you.
Broken up.
And then Im sorry, Mike Terry <unk> line has disconnected.
Onto our next question <unk>, which is Kathryn Thompson with Thompson research.
Okay.
Hi, Thank you for taking my question today.
I'll focus a little bit more on the policy side for my questions.
First on there's some talk in D C about temporarily.
The federal gas tax to help lower prices.
Essentially to the general fund transfer offerings in slots revenues any thoughts on that particular platform and then.
Kevin.
Good news.
With Russia and Ukraine.
There's always the potential domino effect, even though youre primarily focused spot.
Have you thought at summit, and how you might manage the business around that particularly as energy prices move up thank you.
Yes. Thanks for your question, Katherine I think youre, probably talking about the hub.
The gas tax it's a very nascent concept right now so it's hard for me to really respond with any strength to that question I will say, we're not supportive of that $8 being diverted away from every any public infrastructure spending and because our roads and bridges me that a lot more than we think it would only provide temporary relief at the pump and kind of a bigger problem from.
And economic perspective, so thats kind of our high level thoughts around it right now maybe more of a we'll have a more informed answer for you on Russia, and Ukraine, clearly that's happening in the here and now I would let Brian talk a little bit. The first thing I ask Brian . This morning was what does that do with our natural gas with where our portfolio sits today.
Or do we think that's going to impact us.
Brian Why don't you give the answer you gave me that yes, sarcastic nor running obviously is going to be very volatile you can see from oil prices. This morning.
The good thing from our standpoint is that we do have a number of.
Hedging.
<unk> has been placed grows versatile obviously, we have 50% of our estimated consumption of diesel already pre purchased at low tin prices.
Actual gas prices going up.
Thanks.
Cement business on our asphalt plants, but we do have alternative sources of energy alternative fuels in the cement business we can.
Utilize up to about 45% to 50% of our energy requirements from alternative fuels and we can switch between.
Coal and natural gas there so that will help us.
And then.
I guess the other thing would be that we do have an offset from a landfill facility in Kansas, where we've got.
Methane production.
<unk> recapture.
With natural gas prices go up so too does the does the methane price so that gives us a little bit of an offset.
There as well, but in a rising hydrocarbon market, we're just going to stay.
We're really focused on that cost pricing equation.
I would say Kathryn if you look at the portfolio optimization work. We've done we just refer to that prior question we have.
Exited several asphalt and downstream parts of our business that were underperforming. So we're in a much stronger position than we were a year ago for this in addition to all of the commentary that Brian gave you. So that's a good thing about being in a business, where you back really integrated into your own product.
But these things don't impact you as much as it might be in other sectors.
Okay. Thank you very much.
Thanks Catherine.
As a reminder, if you would like to ask a question. Please press star one to enter the queue. Your next question comes from the line of Mike Dahl with RBC capital markets.
This is actually Chris on for Mike. Thanks for taking my question.
Chris I was hoping to touch on.
Your margin expectations embedded in your guide you guys are on track to achieve horizon. One this year.
Targeted range you had there was about 23% to 25% of EBITDA.
'twenty three basically this year and you mentioned year over year expansion I was wondering if maybe put a finer point on.
What youre thinking up today is in terms of the magnitude of year over year expansion in margins this year.
But we haven't I will talk more to our assumptions because we don't actually.
There if you look at.
The key elements of that right. So price, we're very bullish on price, particularly in our aggregates and cement we think the situation around.
Our internal focus on value price and working with our customers supply demand dynamics for AUM across all three of our markets continue to be very constructive pricing and we have upped our price guidance from last year from low single to mid single digits to high.
Mid to high single digits. So that part continues to be robust, which obviously will expand margins.
<unk> residential.
We are moderating we still see continued strength in residential you just won't see the growth you saw in 2021, and that's where we pulled back a little bit from the point of view of volume. However, we do see non res increasing and in particular that lag that comes after residential that 12 to 24 months timeframe. That's we're right in that sweet spot.
Right now and we're also seeing continued.
Investment in data centers, warehousing, green energy, which actually suits helmets footprint really quite well. So we see accelerated growth in non res and then I've talked a lot about our public funding across all of our key states.
But the excess money left for Covid released and tax revenues that are in really solid strong funding. So you take that combination of price volume.
Look as our product mix, improving and AG, increasing over time, and our cement that materials part being stronger we really feel that the margin profile will improve over time, an employee or expecting as I said very clearly in my open commentary that between value pricing operational excellence and our product mix improving.
We are going to continue to expand margins in 2022.
Understood I appreciate the color.
Thank you.
Your next question comes from the line of Jerry Revich with Goldman Sachs.
Great. Thanks, sorry about that I thought were pass connectivity issues.
I wanted to ask regarding.
Regarding the asset swap comments really interesting I'm wondering if you could just expand.
On behalf of you folks.
We are able to receive what the market position looks like.
How optimistic are you on additional asset swap opportunities within the remaining portfolio.
Is there anything.
Out of the remaining divestitures that you've earmarked, but could also fit this description.
Yes.
Jerry Thanks for the question, Yes, we were particularly pleased with this one we referenced.
In our commentary because it was a great example of where we had downstream assets that are strong assets, but we've learned in our number one or number two position in the market. There was an industry partner, who we were competing against frankly, who had a stronger position how exactly the way we want our asset swaps to work and if you think about <unk>.
Several of the divestitures that we've done to date at least half of a non-profit lower my estimation. There have resulted in long term aggregate supply agreement. So the divestitures went with a long term AG suppliers. So that's what's rich thing our product mix overtime, and allowing us to really drive towards that more materials focused portfolio and with respect to <unk>.
Additional opportunities every time I think that we've exploited our pipeline here Archie.
Team comes up with more and more opportunities at the local level and it's really become a part of our organizational DNA to look at assets. They are re the rightful owner, we could improve lowest since it's become an extended for our regional presidents and their teams, they're very focused on this metric and it's really for.
Dividends and book value for our shareholders over time, so I'll never say never on it I thought we had a lockdown in the first horizon, but we will continue to look for that as we move through it's just part of what we do right now Jerry.
Terrific. Thanks Man.
Thanks Terry.
We have reached our allotted time for Q&A I'll turn the call over to Ann for closing remarks.
Let me deal with the following comments so first powered by our employees and guided by our strategy. We are very pleased with our 2021 execution and financial performance and we plan to build on that momentum in 2022 and make further progress against our elevate from its strategies.
Currently we know what works and the plan is to double down on our proven elevate some of the playbook in 2022 that means a sharp focus on value pricing investing in capabilities optimizing the portfolio and executing on our operational excellence initiatives and finally, we think it's a great time to be in our industry and <unk>.
Better time to be with summit.
We are in position to benefit from the rare concurrence of growth across all three end markets plus we have unique self help margin levers that will continue to leverage in 2022.
You for your time today.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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