Q1 2022 Summit Materials Inc Earnings Call
Brian Harris, our CFO will briefly review financial performance.
And we want to return to provide some closing remarks, and then we will open the line for questions. Please limit your asks to one to two questions and then return to the queue. So we can accommodate as many analysts as possible in the time, we have available with that I will turn the call over to Ann.
Thanks, Charlie and good morning, everyone. Our plan for today is to keep our prepared remarks, rather brief as later this month, we'll be hosting an investor day to update you on our elevate somewhat strategy our accomplishments to date and our perspective on the path ahead.
I'd like to begin with safety, where we made solid progress across multiple safety metrics in the first quarter.
Our recordable incident rate was down more than 50% year on year, and we did not incur a single loss time incident in the first quarter. We've increased our use of proactive measures such as expanded participation in risk assessment reviews to maximize safety engagement throughout the business.
Fleet preventable incidents remain an important area of continuous improvement as we strive for a safer settlement both at our facilities and in the communities we serve and.
To help us accelerate our progress we've added a new senior Vice President of safety performance.
At <unk> under Brad's leadership with collaboration with all from a team members. We expect to make continued improvements to safeguard the health and wellbeing of all 5500 summit employees.
Before turning to our quarterly performance I wanted to frame up our view on how we see things today.
We continue to believe it's a tremendous time to be in our industry and a better time to be at summit the industry as well as our local summit markets are benefiting from strong underlying dynamics that has the potential to accelerate price and volume growth over a multiyear time period.
As we progressed through our elevate summit strategy, we are optimizing the portfolio and building a stronger more consistent summit materials.
Finally, the current cost environment, while challenging is accelerating our transformation and sharpening our collective focus on commercial and operational excellence.
Autumn line is that we're confident that with disciplined strategic execution will make further progress towards our horizon, one financial objectives and deliver sustainable growth for summit shareholders.
Now moving to slide four where youll see that our first quarter performance was consistent with the expectations. We laid out in February if you recall from our Q4 conference call. We said that we anticipated year on year declines in Q1 due to comparisons with the prior year period that were roughly double the contribution of our typical first quarter.
Notably, we benefited from unseasonably dry and mild weather in Utah, and the Mississippi River opening early to barge traffic as we return to more normal conditions. This year, our first quarter adjusted EBITDA as a percentage of our full year totaled normalized towards our historical average of roughly 4%.
I'm talking Q1 further you'll see that our performance was fueled by strong pricing gains across all lines of business led by double digit growth in asphalt and cement and consistent with our general view that the constructive demand environment should support continued pricing momentum in fact price increases were communicated across all markets and lines of business.
Effective between January one and April one depending on seasonality and therefore, we would expect to fully realize those impacts in the second quarter.
On the volume side growth versus the prior year was primarily impacted by the comparison factors I mentioned earlier as well as divestitures.
Bottom line is that in the first quarter, we were able to sustain momentum that we built in 2021, while at the same time, providing a solid foundation to build on as we head into prime construction season.
Turning to slide five for high level view on each of our reporting segments wet.
<unk> segment net revenue was up year on year on a combination of price and volume growth.
As for adjusted EBITDA the year on year decline was due to product and geographic mix divestitures as well as higher subcontractor costs relative to the year ago period.
Despite strong pricing growth in our east segment net revenue declined on lower volume as wet weather in the Midwest caused a slow start to the season and pushed some work into Q2.
With lower volumes together with product mix and divestiture impact led to the decline in adjusted EBITDA, albeit in a seasonally low quarter for the segment.
First quarter cement volume growth was positive up <unk>, 3% and price was up more than 10% of the period, we resumed operations. After our normal annual winter maintenance shutdown slightly later than expected, resulting in some elevated repair and maintenance costs that impacted adjusted EBITDA.
Let's turn to slide six for our elevate summit scorecard.
There Youll see we continue to maintain net leverage below our elevate some target of three times net debt to EBITDA.
At two eight times, our leverage improved year on year by 0.4 times and our balance sheet remains in a very healthy position to pursue high return opportunities such as margin accretive M&A and share buybacks.
Each of our three elevate somewhat metrics did however, moderate sequentially in Q1, as we lapped a very strong prior year period and took proactive steps to prepare for the prime construction season.
Reality was that we exited Q4 with low inventory levels and the right move for the health of our business was to take on some higher cost to adequately prepare for our highest in nine quarters.
As we have previously told you our progress would not necessarily be linear quarter to quarter, but over time with improved execution and more consistent operating performance. We will continue to progress towards each of our elevate on the targets.
Now on slide seven you see the four strategic priorities that are core to our elevate summit strategy market leadership asset light sustainability and innovation.
Our focus on market leadership within rural and ex urban markets continues to benefit from migration patterns of Megatrends impacting our end markets as new and prospective homeowners look for more affordable space. They are moving into so much geographic footprint.
In 2021 population growth in our top 20 Msas grew on average at nine times, the National average and projections are for those D urbanization trends to continue which should benefit our footprint over the long run.
Furthermore, as data centers distribution facilities, and Green Energy project spring up in America's Heartland, where summit has strong market leading positions, we stand ready to capitalize on our ex urban and rural footprint.
And in Q1, we completed our ninth divestiture closing in on our horizon, one target of 10% to 12 divestitures.
The nine completed eight were primarily in downstream assets and many resulted in long term supply agreements ensuring strong aggregates pull through this exemplifies our asset light operating model and is at the forefront of how we're reshaping the portfolio.
On slide eight you see how our portfolio optimization has progressed, we continue to divest non core businesses that do not meet or have no clear path to reach margin and return targets and find better owners for these businesses.
The divestiture, we completed in Q1 generated roughly $48 million and to date, our horizon, one divestitures have yields of more than $175 million in proceeds putting us on pace to exceed our $200 million target.
Because we are currently in the process of advancing Additionally, Noah breath portfolio moves we have reclassified an operating unit in our east segment as held for sale and we expect to close on the transaction in the second quarter.
And as is customary we will report on the transaction and if necessary adjust our guidance accordingly after we close.
On our sustainability agenda. So far 2022 has been an active a noteworthy year for summit materials.
To start we adjusted our short term incentive plans companywide to include ESG related objectives, which ensures full company alignment and emphasizes the collective importance we place on sustainability.
And then in April we released our sustainability roadmap with the ambitious and what we believe are achievable 2030, and 2050 goals that you see on slide nine.
Achieving each of these goals will enhance our social impact improve our land use practices and reduce and ultimately eliminate our carbon emissions.
For each of these three focus areas, we are taking meaningful steps towards each of our goals. For example, we recently announced the full conversion of our Davenport cement plant ported limestone cement with the full conversion Davenport, which produces approximately $1 1 million tons of cement annually will reduce its carbon emissions per tonne.
<unk> by up to 10% compared to traditional Portland cement.
Meanwhile, we are working hard to fully convert our Hannibal, Missouri plant to plc. This summer.
Together the conversion of our plants is expected to unlock additional capacity helped the size of the reduce our carbon footprint and have a positive impact on our business and the environment.
Overall, our revamped incentive plan, our sustainability report the commitments contained within it and the actions. We're taking demonstrates that we are committed to being transparent and aggressive in our pursuit of both near and long term strategies to become the most socially responsible integrated construction materials solution provider.
On slide 10, I'm pleased to report we have bolstered our team and innovation talent with the addition of a chief strategy and growth officer, taking Delaney taken joins us from Dupont, where he previously served as vice president of strategy growth and ventures of their water and protection business with over 25 years of experience.
<unk> corporate strategy and marketing functions taken brings a valuable background in corporate development market backed innovation and branding business development as well as growth strategy development and implementation under his leadership, we expect summit to develop a robust marketing strategy and initiatives to support our business.
Plans at overall strategic objectives.
We are privileged to have taken joined our summit family and in collaboration with our leadership team. We look forward to further expanding our growth strategy, while accelerating summit's innovation roadmap.
Wrapping up on slide 11, where we remain in horizon, one of our elevate somewhat strategy.
We've achieved our leverage goal and we are within striking distance of our divestiture proceeds target, we continue to optimize the portfolio and free up capital to support sustainable growth.
Our unwavering focus is squarely on strategic execution controlling what we can control and making further progress towards our horizon, one financial objectives of 23% to 25% EBITDA margins and 9% ROIC, which are well within our sites with that let me pass it to Brian for a financial review.
Thank you Dan.
I'll pick up on slide 13.
In reviewing our first quarter volume and price performance by line of business.
Q1 aggregates pricing was up four 8% led by the strongest gains in our east segment, and more specifically double digit pricing growth and northern Kansas and Virginia.
Led by a high single digit growth in Kentucky.
In our West segment aggregates pricing was up more than 10% in British Columbia with more muted pricing growth elsewhere, including Houston, where you would expect pricing to accelerate going forward.
First quarter organic aggregate volumes decreased <unk>, 8% as solid organic volume growth in Texas and other markets was offset by volume decreases in the east segment.
And cement favorable supply demand conditions in our key.
Key markets drove Q1 pricing up 10, 1% the strongest percentage pricing growth in company history.
Customer acceptance as well as price realization was stronger than the historical baseline and is indicative of a very tight supply environment.
First quarter cement volumes were up 0.3% and came despite comparisons with a strong prior year period.
In our downstream businesses ready mix prices increased seven 3% in the first quarter with strong growth in our <unk>.
Two key ready mix markets, Salt Lake City, and Houston year.
Year on year volumes were ready mix were down seven 2% due to divestiture impacts as well as more typical weather conditions and Salt Lake City.
And in asphalt average selling price increased 10, 2% in Q1 with pricing growth across the majority of markets.
<unk> volumes were down 45, 1%, reflecting the impact of divestitures.
On slide 14, we provide an adjusted cash gross profit margin comparisons by line of business in the first quarter adjusted cash gross profit margin declined year on year in each of our businesses and aggregates cost inflation, including higher fuel costs run ahead of aggregate price increases Q1 margins were also impacted.
A couple of atypical items, such as accelerated repair and maintenance in our east segment.
That should benefit the rest of the year.
Non recurring subcontractor expenses in our west segment that were incurred to address short term labor and equipment constraints had these atypical items not been incurred in the quarter. We would have reported a gross margin closer to 38, 1%, which is about 180 basis points higher than reported.
Furthermore, part of these cost increases related to preventative maintenance that we undertook to prepare for a strong upcoming construction season.
These higher costs combined with geographic and product mix as well as wet and cold weather in certain markets led to lower adjusted cash gross margins versus the prior year period.
Cement adjusted cash gross margins were negatively impacted by three factors first lower opening inventory levels. After an exceptionally strong 2021 limited sales leverage.
Elevated plant costs, including higher energy as well as repair and maintenance costs were incurred.
And third a slower startup after our planned downtime in the first quarter resulted in a greater reliance on lower margin import volumes to meet demand.
Taken together these three factors drove adjusted cash gross margins lower versus the year ago period.
Our product gross profit margin declined versus a year ago on lower volumes, resulting from more typically seasonal weather that pushed some work into Q2.
Slightly realization of high single digit pricing gains.
Recognizing the cost pressures have not yet moderated and have in fact accelerated since our February call. Our teams are focused on executing cost mitigation initiatives across the organization.
We continue to implement our flexible energy model by hedging diesel natural gas coal and swiftly, adding fuel and energy surcharges across the business. We're.
We are compensating for supply chain issues with preventative maintenance to extend the life of our assets as well as sharing equipment across our markets.
We're looking at optimizing usage of our subcontractors and we are exploring ways to fast track operational excellence initiatives all in an effort to improve performance.
<unk> inflation and upgrade the consistency of our operations.
Now moving on to slide 15 for a look at additional non-GAAP metrics.
<unk> EBITDA margin of five 9% was down from 10, 5% in Q1, 'twenty, one driven primarily by elevated cost inflation net of pricing. We should note that the prior year did benefit from insurance proceeds of $5 5 million that of course did not repeat in <unk>.
2022, and also impacted the comparison versus prior year.
First quarter adjusted diluted loss per share of <unk> 41.
Was <unk> <unk> below prior year levels.
Finally on slide 16 for a review of Summit's capital structure.
As I mentioned, our Q1 2022 leverage ratio of two eight times net debt to EBITDA is down 0.4 times from Q1, 2021 and below elevate summit target of three times, thereby providing the company the financial flexibility to pursue the highest return on capital allocation.
Acacia options that now includes Opportunistically repurchasing our class a common shares.
In March our board authorized a $250 million share repurchase program and in the first quarter, we repurchased one 5 million shares of class a common stock for $47 $5 million, we remain in a very strong liquidity position closing Q1 was $287 million of cash.
One hand, and the availability of an undrawn revolver.
Our liquidity position together with our improved leverage means we have a much stronger balance sheet, and we will not hesitate to pursue the highest return opportunities for our business and our shareholders.
And lastly for the purposes of calculating adjusted diluted earnings per share. Please use a share count of $121 million, which includes $118 8 million class a shares and $1 3 million LP units.
That I will turn the call back to Ed for our outlook and closing remarks.
Thanks, Brian .
Slide 18, as a reminder, that we continue to advance our aggregates Greenfield with three currently under development in our East segment, we see consistent and meaningful investments in Greenfields is critical to sustaining organic growth and our greenfields are on track to deliver over $50 million in incremental EBITDA on a run rate basis by 2020.
Four.
As we continue to prospect and pursue new Greenfield opportunities, primarily in the east and Midwest, We do so with the discipline and an understanding that the returns of these projects must be as good or better than traditional M&A as they complement our acquisition strategy.
Turning to our outlook on Slide 19, you will note that we updated our full year adjusted EBITDA expectations to include our recently closed divestiture. We now expect 2022, adjusted EBITDA of approximately 529 million to $557 million from 535 million.
To $565 million previously.
Also we're revising our full year G&A and now expect between $200 million and $210 million in G&A spend in 2022.
Now regarding the assumptions that underpin our 2022 outlook as Brian mentioned earlier, we are seeing and have incorporated higher levels of inflation into our year to go outlook that said, we firmly believe that our pricing strategy as well as internal cost control measures when executed will help mitigate these incremental <unk>.
<unk>.
As a result, the midpoint of our 2022 adjusted EBITDA outlook represents high single digit growth for the balance of 2022.
Which in light of the challenging cost environment, we see as very positive for our business and our shareholders.
Finally, before we open the line for questions I'd like to take a moment to invite everyone to join our Investor Day on May 24, you can find details on our Investor Relations website at our Investor Day, We'll update you on our elevate summit strategy and introduce you to the business leaders that bring that strategy to life every day, we're excited for you to join.
In us and thank you for your continued support of summit materials with that I'll ask the operator to open the line for questions. Please.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
As a reminder, please limit your asks to 1% to two questions and then return to the queue. So we can accommodate as many analysts as possible in the time, we have available.
Your first question comes from the line of Stanley Elliott with Stifel. Your line is open.
Hi, Good morning, everyone. Thank you all for taking the question.
A quick question on the cement maintenance.
In the quarter did you all pull ahead.
Some expected maintenance through the rest of the year, meaning that now.
<unk> done for the year.
Also was that kind of as part of the conversion to the Portland <unk> summit.
And Davenport, just any color there would be great.
Yes, Stanley so really good.
Good morning first of all thanks for your question on cement.
Our.
Cost issue there was the fact that we didn't returned from our annual turnaround as fast as we had anticipated and so it really wasn't a maintenance issue was it was multiple smaller issues and just we didn't get back online as fast as we thought they would there was nothing incurred from the conversion to plc and no pull ahead of maintenance there.
Just our planned annual turnaround that was a little slower coming back up.
Perfect and then.
Kind of thinking about the repurchase activity in the quarter.
I'm, assuming you all will say a little bit more about that at the analyst day, but curious how you're balancing that versus sort of M&A that you've talked about given that the balance sheet.
Better position than its been historically.
Yes, so our capital allocation priorities stay pretty much the same.
We very much hurt our shareholders and are committed to managing our leverage as our first and primary priority.
We have been very focused on investing well in our business and the point of sustaining capital.
<unk> profit improvement projects are greenfields as we've talked about in our prepared remarks, we have a rich M&A pipeline and for the first time in summit's history, we have a lot of financial flexibility.
We do a lot to the portfolio optimization and strategic execution that we've done and as a result, we now are in a position to have the financial flexibility to do opportunistic share buyback and as.
As Brian reported we did some of that in the quarter and will continue to look at that as a flexible option in the future.
Perfect. Thanks for the time and best of luck.
Thanks Danny.
Your next question comes from the line of Trey Grooms with Stephens. Your line is open.
Hey, good morning, and Brian .
Good morning training.
Could you guys talk a little bit about.
The margin path here, particularly in aggregates and cement.
As we progress through the year and any visibility into the <unk> margins would be helpful. I know you touched on several things that kind of impacted <unk>, but any.
Any additional visibility as we go forward.
Around the margins would be helpful.
Yes, so we talked a lot about our Q1 pricing both in aggregates and cement. So let me start with aggregates and Brian jump in here at any time so.
Aggregates, we were at four 8% starting in Q1 and a lot. We pointed out that they were January through April price increases and particularly in our Houston market. It was April so as we go into Q2 Youll see the impact of <unk>.
Improved pricing and our pricing is very strong we have a very constructive demand environment in aggregates and as we move throughout the year Youll see that pricing accelerate now as we've talked many times on aggregates are pricing goes from.
Our east region, leading and double digit price increases to more moderated increases but across the board I would say, we have a very constructive environment for pricing. So as we go into Q2, you should expect that pricing to <unk>.
<unk> improve and then get flat to Q2 and that increase as we go through the year, we're very confident with our strategic plan our value pricing that we can continue to expand our margins.
Similarly, we had a very strong quarter intent with 10% here and continue to grow that over time and expect mid year price increases also in cement because we're battling inflationary environment now.
Now what I would say on cement as you go through you should expect it to moderate a little bit. This 10% is the strongest of summit's history and as you go through and get into Q3 and Q4, because it's just in July that increase comes in it will moderate on a pure percentage basis, but overall as you look at our business today, you can expect us to increase.
That margin as we've committed to over time as we go through the rest of the year and we're very confident in both the demand and pricing environment.
Great got it.
And sorry, just a.
A point of clarity you mentioned when.
When you were talking about aggregates, you said something.
Being flat in <unk>, what were you referring to there.
I would say and sequentially as we go through our overall margins. They will improve from Q1 to Q2. However, if I just look at step back from the whole business with aggregates and cement driving most of our margin obviously from increased.
Increase perspective, we expect Q2 to basically catch up to last year, but then as we go through Q3 and Q4 expect the second half much bigger increase in our margins as we move through and Thats, just the compounding effect of both price and volume as you move throughout our seasonality of our business, Yes got it okay. Thanks for the additional clarification.
There.
That all makes sense to me.
And on.
Let's see on for Matt.
<unk>.
Youre submit volume, we had a very tough comp in the first quarter, Mike you talked about.
But your volume was still up slightly there.
This is typically.
When seasonally you can build some inventory for your network.
With this seasonally I would still say correct me, if I'm wrong, maybe still seasonally strong volume given the very tough comp.
How are you feeling about your inventory.
Throughout your.
Network here as we're kind of entering the busy you're building season and.
I think it's clear what what any tightness there means for pricing, but any comments there would be helpful too.
Cement.
As you recall in Q4, we had some unplanned downtime as well. So we ended the year in cement with pretty low inventory levels and in fact in Q1, one of the things that impacted our margins was the fact as you know we had to use more import than domestically produced switch from $1. EBITA perspective is the right business choice, but actually does result in a little bit of margin compression because.
It is not as high margin as our ongoing business I would expect typically in a year, we do roughly about 5% import will be north of that this year. There is no doubt, especially because we had a little bit unplanned downtime that being said, we're being very judicious in how much import we take and the contracts. We signed so we don't get cost.
And upside down on price versus cost because it is additional cost to bring that in and any of the contracts. We signed are not very long term in nature most of our businesses within the year. So we can manage it.
Overall inventory levels as I said, we are really quite low.
On the overall business that was a choice we made to take incurred cost in Q1 and that was very much to be ready for a high season I feel our business is in really good shape going into the prime construction period right now.
Great. Thank you for that and then good luck as you kind of go through get into the busier season, and look forward to seeing you in a few weeks.
Likewise <unk> take care.
Your next question comes from the line of Garik <unk> with loop capital. Your line is open.
Thank you.
You mentioned, an additional subcontractor labor, particularly in aggregate. So I'm just kind of curious if this is something you're going to need to take on.
Moving forward in a more substantial more substantial way and if theres any additional cost or margin headwind, we should think about with respect to labor costs.
Yes, good morning, Gary Thanks for the question, it's Brian here, Yes, we did have some additional subcontract costs in the quarter, primarily getting ready for the start of the season as you know theres been some labor shortages in certain.
Functional areas so.
We just have to take on some additional sub contract labor to in order to offset that.
Of course, it is at a higher at a higher cost.
We feel though that we've got most of that behind us now.
As we prepared ourselves for the start of that.
Higher level construction season, which for us in the northern markets really gets going underway at the beginning of May.
Don't expect this to be a significant factor in the months ahead.
Okay.
Got it thank you.
My question was just some volumes.
Wondering if you could speak to.
The bidding environment.
<unk> positive maybe provide a little bit more color on what youre seeing.
Forward.
Maybe just speak to the low single digit volume guidance that you have.
And if there's any opportunities to grow off of that.
Our guidance level of Oxycodone.
Yeah Garrick so.
We're very positive about our demand environment never have we had concurrent growth as high as it is right now and our backlogs are really across all three end markets I would say residential the reasonably had this low single digit outlook was primarily because of supply chain constraints and residential not because of lack of demand more of the.
Next were elongated over time and so we remain believe that residential is going to be very resilient.
Candidly when we look at Dave amount of permits versus starts there is a backlogs there that has to be filled so residential even with high mortgage interest rates. There is a gap there has to be filled in that.
And then if I look at nonresidential moving forward and we've definitely seen a big pickup in that I wouldn't have told you that this time last year and we're seeing that in projects in our Charleston areas, our Georgia areas, where there's increased warehousing et cetera, and all the indices. The Abi index was up to 58 in March versus 51 and fair.
Europe , we're seeing that in the Dodge momentum index. So overall, we're very bullish on nonresidential and seeing the projects come to life as we speak and then public.
Despite the fact that we have nothing in our guide for the infrastructure impact. The funding is just really strong overall in public with respect to Covid relief dollars and increased tax receipts and every one of our top eight states is very strong funding.
I would say with respect to answer your question about Lettings.
In March we saw double digit growth in many of our key states and year to date transportation contract awards for our top eight states are up 50% year on year with some real large projects, we've already realized in Colorado, and Virginia, So very strong demand environment overall.
Thank you very much.
Thanks Garik.
Your next question is from the line of Phil <unk> with Jefferies. Your line is open.
Hi, This is actually calling on for Phil. Thank you for taking my questions I just wanted to dive into the guidance a little bit.
You lowered your expectations for G&A by about $20 million at its midpoint from your initial guide.
Which should be pretty nice tailwind to your prior EBITDA guidance, but youre lowering to the mid <unk> mid point by $6 million on that EBITDA Guide I was just wondering if you can walk us through really the puts and takes there.
That gets you to that down $6 million.
Yes, the $6 million is really from the divestiture, we completed and the low end of its six the highest eight in the guide. So that's one factor in the guide and that's directly as a result of our ninth divestiture that has a full year impact. So that one is a pretty clear number the other thing I would say at a high level in the guide you should.
We have assumed our price and controlling what we can control on cost and our continued portfolio optimization will more than offset high single digit cost inflation. Additionally, in the guide we see additional adding to our results the greenfield impact, which we've been investing in and our Green America Reese.
Cycling expansion.
What we have not put in the guide and these are both positive and negative positive we could have some uptick if infrastructure spend began in 2022, we're not assuming that in our guidance. However, there are a lot of taxpayers, who want to see those dollars put to play and we do tend to play in the repair and rebuild and thats the $1st put into the ground.
That's a positive could happen to that guide on the other hand up point is something we're watching very carefully as well that isn't in the guide as you know, we're a buyer and a seller of cement supply demand dynamics are very very tightened cement right now and so we're very cautious of watching for cement shortages and additionally, spare parts are becoming law.
Longer and longer and their cycle, we're being very proactive with our procurement team and buying ahead, but we are watching those things very carefully on the guide Brian maybe you want to talk to the G&A, a little bit as well, yes on the G&A, which I think is the focus of your question is why the G&A guide.
It came down.
And it was really due to an administrative error that we made when we first issued debt guide last time around we.
Missed forecast.
Split between the G&A and some costs that was in the margin.
<unk> for that but we've corrected that now with this latest guide so it didn't affect the overall EBITDA outlook, but it did shift costs between the G&A line and the margin line.
Okay. That's helpful color. Thank you and then just a follow up question on aggregates pricing a lot of your competitors are talking about mid year price increases and I believe you guys talked about setting the table kind of last quarter with your customers for those is that baked into your guidance and have you started to implement those in any of your markets and any color as to the magnitude and timing of price realization.
On those would be helpful as well thank you.
Yes, as you know we've been going through very keen focus on value pricing since the end of 2020 and since we launched our strategy and we continue to have that focus which is pricing to our markets and pricing due to inflationary environment. We have the difference I would say between when we talked to you in February and now we have built into our guide.
Mid year price increases across all lines of business and Thats due to supply demand dynamics as well as high inflationary costs, which I'll have Brian kind of talk you through a little bit here, which I think is an important factor we want to get out but our teams are actively discussing price increases, particularly in aggregates and in cement with.
Mid year price increases and I would say our downstream business versus if you look at our Q1 results have done a very nice job of passing through the increased materials costs that they've had and in our ready mix business managing to suddenly actually a little bit expand our margins. So you will continue to see price increases from us due to.
The environment, we're in and Brian maybe you could talk a little bit to the cost assumptions that we have changed as well, yes, so from that.
Prepared remarks, though you would approach that we've seen.
Accelerating cost inflation, most notably in hydrocarbons from our first.
Forecast and outlook, we've seen diesel costs will increase then this latest outlook by approximately.
$20 million over where we were thinking they would be.
And obviously, we need to recover that.
Selling prices were.
Scene, but to a lesser extent increases in other areas of natural gas and other energy components.
Components of our cost base.
Which we're also going to recover.
Higher selling prices.
Of course, our biggest input cost as cement you've heard the outlook for cement of at least one to two price increases in an eight to $12 range and as I just mentioned.
We will be very.
Active in passing along.
Input costs that we incur in cement.
Flow through our ready mix business so.
<unk>.
Pressure on cost, forcing us to be very active on the areas of cost that we can control.
Great. Thank you very much.
Thanks, Tom.
Your next question is from the line of Anthony Pettinari with Citigroup. Your line is open.
Hi, This is Ashley <unk> on for Anthony Thanks for taking my question and just following up on those comments you just made around smart pass through during the quarter your organic pricing for cement was about 10% while in our ready mix of about 7%. So just over the next couple of quarters, how do you see the cost pattern pass through mechanism and ready mix.
Yeah.
The delay basics et cetera, and then given how well telegraphed cement inflation is at this point are you may be able to get out in our ready mix hikes ahead of cement increases maybe shortening that pass through the window.
I'll just speak to the fact that Q1 I was very encouraged by how our team executed in both ready mix and asphalt as you correctly pointed out our ready mix went to about seven 3% price increase on.
Very effectively pass through.
All of this demand costs and that I would say, it's a bit of a mixed bag, though our Utah business was well ahead and double digits in doing that and our Houston lagged a little bit. So that's kind of the value of having a portfolio.
However that being said Houston has started to pick up and so our two leading markets are effectively passing through cement price increases to their customers as we speak and we will expect that is just a model we expect that to happen right throughout the year without a lag as we go through then looking at asphalt we've had record double digit price increases and some it's hit.
Three here and our team has done a very nice job of passing through.
And at a minimum in our downstream, we expect to hold margin if not expanded over time.
So I think the teams executed very well would be my summary on this one.
Great. That's very helpful. Thank you I'll turn it over.
Your next question comes from the line of Ciena Tenors with Wolfe Research. Your line is open.
Yeah, Hey, good morning.
Just wanted to follow up on that <unk> side with regard to just one clarification point I think we heard from a competitor there.
The April price hike in July price hike up around $12 a ton just just confirming that that's also your experience roughly and if there could be another wonder if that would be unprecedented and then on that Devin part it looks like that upgrade your backup to full running just wanted to make sure and a reminder, on where you'd be full run rate once.
Those two up.
Grades are complete.
Okay. So let me address just the pricing question then.
A clarifying question around your Davenport comment so the April and July you, probably heard from a competitor specific to the Houston market.
I would say on cement, we blend with the January price increase and plan to go with a midyear July price increase as well and there is a little bit of difference between how you price in the various markets. We play along the Mississippi River. So if you look at what we did we went with $10 price increase the team's worked very closely with our customers to try and pass that through to make sure.
That we're working very carefully to meet their high demands with high quality of service over time, while investing in our plant as well.
As we go into July now, we're out actively having those discussions with our customers to make sure that they are prepared to pass that price right through the value chain.
I'm not 100% clear on what your question was around Davenport was it around the plc conversion or was it around are coming back from our turnaround.
Oh on that to come back coming back from China I just wanted to confirm that you are back to full run rate now and in the second quarter and just some thoughts on what that full run rate will be production wise once both of those are converted and what the timing is.
Yes. So we are both our plants are back up and running and we're very focused on operational excellence. As you know sedan plants are high fixed cost plant where capital intensity. So our goal is always to have.
Limited to minimal downtime and we actually upgraded a lot of our operations folks in both plants to make sure we continue to do that.
Operating well right now the plc conversion will give US 5% capacity addition, which is a key way for us to be able to add capacity without impacting current customers and then we'll use imports to augment our capacity, we do not release capacity and run rate information on a real time basis in our business for competitive reasons.
And just the timing on that sorry, but the timing on when youll be complete with the 5% addition.
In fact, we're compete completed Davenport and we are actively converting most of our customers in Hannibal, Missouri I don't have an exact date on that because it's very much reliant on how customers can get that done we would hope to be late third quarter.
In that timeframe, but.
It's very dependent on customer conversion rates.
Gotcha Okay.
Okay.
Your next question is from the line of Brent Thielman with D. A Davidson your line is open.
Great. Thanks, good morning.
<unk> Brian .
A little difficult to see the effects from the divestitures just on the surface.
In terms of margin just given the cost inflation impacts from the industry is there is there some things you can point to or a way for us to think about the underlying improvement profitability youre seeing.
Just sort of taking away inflation.
Let me I will jump in at a high level on what our goal is around the divestitures and why we think we've made such good progress. So a key part of our overall portfolio optimization program, which is both divestitures and M&A is to be very aggregates and cement, let so richness the mix in that.
Quality of our earnings through our portfolio optimization activities.
We're actually very pleased with eight other benign divestitures, we've done have been in the downstream and with that we have exited businesses that frankly would never meet those quality of earnings targets that we've had over time and they had rightful owners. We've also guarding gotten multiples <unk> book value for our assets that exceeded.
And where we were in returns great value to our shareholders, allowing us to have the financial flexibility to move forward and really as we move from horizon, one to horizon to expect more M&A and less divestitures as we continue to rich and that mix, Brian have you anything to add.
I think the other thing just to keep in mind here is one of the agenda items for our Investor day is to provide more clarity around.
EBITDA.
Elevate summit goal of 30% and a bridge to get there obviously portfolio optimization is.
A critical part of that and we'll provide more detail around that.
Thus you just to be a little patient until until we have that investor day, when I think you'll see the kind of clarity that you are looking for on the impact of the divestitures.
Okay Fair enough I may ask another one.
Investor day, but the actions around share repurchase activity is obviously, yes.
Yes, new plays in the allocation philosophy, which is great to see and obviously see value in your shares here.
Does it say anything about the opportunities in multiples you see for potential transactions in the market today or is that something youre looking.
No I don't think its either or by any stretch. We just saw we felt frankly that our shares were undervalued and we could return value to our shareholders at a time when the stocks traded low and we still by going with a $250 million repurchase plan, we felt that that did not overly weight us onshore.
Share repurchase we're still an M&A machine, we're still very focused on acquisition targets and have a very rich pipeline.
We set up our strategy as part of our elevate some its strategy on the types of businesses we would.
Target and we've stayed very disciplined around that and so we are multiples are quite high which is why our divestitures have been very value, creating for our shareholders, but it has not stopped us entering into multiple processes and evaluating high value targets.
Okay very helpful. Thank you.
Thank you Brent.
Your next question is from the line of Jerry Revich with Goldman Sachs. Your line is open.
Yes, hi, good morning, everyone.
I'm wondering if we could just talk about.
And.
The aggregates line of business.
Just comment on the cadence of inflation that you folks.
Hep C.
Over the course of the quarter and what youre expecting into year end.
And you mentioned that you expected margin expansion back half of the year on a year over year basis, maybe you could just expand on what's the assumed price cost to get there. Thanks.
Yeah. Thanks, Jerry it's Brian here, Thanks for the question.
Yes, we are seeing the pace of inflation.
Is probably accelerating its come in a little faster, even although we had some fairly what we thought were lofty assumptions at the beginning but as I mentioned earlier on a previous question.
Hydrocarbon costs are coming in higher than even although we do hedge and thankfully, we do hedge a portion of our volume.
For diesel purchases Q1 is the lowest volume.
Hedging that we have so theres more purchased spot in that quarter than any other quarter.
But having said that we do expect the self help initiatives essentially excellence together with.
Price increases to offset some of that increased inflation, that's coming at us so as we get into the season and the volumes increase you see a bigger proportion of our higher priced product and the mix.
Than you do in Q1, which is a very low quarter you see the benefit of the volume throughput, which makes a big difference to our margins.
So sequentially they will increase in Q2 Q3 as we've seen historically, we don't expect that trend of.
Margin.
Sequential increase to change.
And ultimately the.
Realization of the selling prices will offset.
The cost inflation that we're that we're experiencing.
Okay. That's helpful and maybe just to put a finer point on that if pricing accelerated to call. It.
The 8% to 10% range over the next couple of quarters for you folks who've that's offsetting inflation.
So I think inflation.
Accelerates to the mid teens range, given the fixed cost nature of the business and I just wanted to ensure that that ties to the inflation that you're seeing and obviously diesel is clear, but maybe you could comment on wage inflation other purchase components.
Is that the level of inflation that you're seeing on those.
Inputs.
If you could comment Brian thanks.
Yes wage inflation, Jerry I think is around about 6%, probably a little a little bit.
Above that in certain very strong markets, but averaging at around about that.
6% range.
<unk> as we've talked about is our biggest single material input cost and that is going to probably see two price increases this year in an $8 to $12 range, depending on the market.
And other inflationary items that probably at least in the.
Mid to high single digit range. So it does vary the percentage varies on depending on that input cost.
Their parts availability and pricing there is another factor.
That goes into our repair maintenance and I'd say that was running.
In the high single digit range as well in certain parts, which can be in short supply, but essential can be even more than that.
Okay. Thanks.
Thanks Jerry.
Your next question is from the line of Adam.
Ill Hymer with Thompson Davis your line is open.
Hey, good morning, and can you break out the timing and magnitude of the aggregates price increases.
Yes, they do vary by different regions.
I will tell you if we look at just Q1 is as we said in our prepared comments the east region led pricing on aggregates.
And even within the East region, we had double digit increases in our northern Kansas markets and in Virginia, and high single digit in Kentucky, and Georgia, and then in our West region, We had British Columbia, leading with 10% and we had more muted and the rest of the west region, but still in that mid to.
High single digit aggregates, and we're calling for that as we go throughout the year.
We did in some regions, we did a January price increase others. Some of our west region areas have done may increases and to a fault every one of them will probably be mid year price increases. So the order of magnitude does vary between our west and east segments, but that's kind of the plan and then as Brian said.
Cement, where both the buyer and seller cement and you can expect that to be in that 8% to $12 with mid year price increases again.
Okay, and then the disposition in the quarter, which.
Segment line should I take that out of that as a model going forward.
Take it out of the pricing. So I think if you look at that.
Of the six to 8 million of EBITDA, like which segment did that pull from in terms of the <unk>.
It did.
Our east, yes, I know, but which like our ready mix paving.
It's primarily the divestiture was primarily downstream businesses.
Which if you look at the headline number is 48 million, we got an eight times multiple which is a very strong multiples in.
In the market and that business went to a strong strategic partner with long term supply agreement on aggregate. So good for everyone around.
Great. Thanks, Sam.
Thank you.
Your next question is from the line of Kathryn Thompson from Thompson Research Group. Your line is open.
Okay.
Hi, Thanks for taking my questions.
Just on <unk>.
The cement tight supply.
How much of this is.
Our function.
High demand, which we're obviously seeing but also we're hearing.
More extended plant outages and then also.
Less supply from certain international players, who create Turkey, providing product.
Which of these factors.
Our greater impact now and do you see this.
Beating the situation abating as the year.
Progressive.
Okay.
Yeah Katherine Thanks for your question I would say overall, it's high demand dynamics is driving this more than anything and the industry. As we said before we are supplier and a buyer of spent so we see both sides of this.
And it is tight across the board. It does vary by region summary, we had some downtime we were able to augment that with some import materials being careful how we price that in the market, obviously and we did that in Q1 and we'll do that as is our typical model moving forward.
But it is definitely overall driven by a higher demand driving tightness across every single market that we have and we see that continuing which is why I called it out as a very significant watch out as we go through the year, keeping an eye on and making sure. We're very agile in our cement purchases as well as making sure that we give out.
Customers the highest quality service, we can overtime.
Yes.
Okay and have you seen any improvement from the input situations.
We have our imports established I would say.
The price is higher and so it's requiring us to be very pass along certain high pricing and any cost escalation. We see we have several as you know there are several big LNG jobs coming through and we've been bidding on those but we've made sure we bid in a way that if we're using import material cost is priced right into.
Our model over time.
So we have not had a problem getting the material I would say it's more of the price.
Okay great.
And then your prepared commentary.
<unk> weaker pricing and Houston.
Which seems counterintuitive given the stronger market.
Wanted to see Houston also does have a greater residential next pick on on the west side.
Hum, maybe at a little bit more of a clarification on that pricing weakness in Houston and does it have anything to do with.
Softer housing.
Yes, Catherine I can see why you asked the question it actually wasn't anything to do with weaker demand our price competitive situation. It was more around timing. So cement price increases for example did not go in place until April and so that's why the ready mix lagged some of our other regions like our west region and in our AG.
We've continued to put stronger pricing in in January and we'll continue to do that as we move through mid year. So it is not a market dynamic it's more timing dynamic is how I would describe it.
Okay Perfect and then just final question for me is just on residential and you have given some some helpful color on.
On today's call, but I, just guess more pointedly.
Have you seen any type of.
The change in demand.
Or.
In EMEA markets with the residential end market simply due to inflation or any other factor.
Yes, we have not seen it in our markets.
As we said we're watching mortgage rates, obviously, there they're a factor they are higher but when you look at historical mortgage rates. There are a lot higher than that we're balancing that around where we play. So we play in markets that have a better affordability index and then against that as you well know Katherine theirs.
The whole migration trends go into our footprint is particularly served by suburban ex urban markets and a lot of people are moving there. So if we look at just summit's actual states like Salt Lake City, we're seeing double digit increases in permits in 2022 with less less than a half a month of inventory.
Houston, Austin, and Texas also double digit single family permits go up.
Kansas, We had 10% growth and in Missouri, 2%.
<unk> continued to grow in 2021 was 15% single family growth, 4%, even year to date and as I said I look at the overall, there's this gap between supply with between permits and starts that's going to continue to drive that and long term, we just see residential continuing to be strong clearly we're watching us.
Every day, but we do think that theres going to be a gap that has to be filled where there is some backlogs and then we'll continue to watch that as we go into 2023.
Okay perfect. Thank you.
Thank you.
We have reached our allotted time for the Q&A session I will turn the call over to Ed Noonan for closing remarks.
Thanks to everyone. Let me leave you with the following comments first while energy costs and supply chain constraints have become more challenging we are taking the right steps to achieve our 2022 outlook.
Early year price increases will be more fully realized in the second quarter of 2022 and current market conditions are favorable for mid year price increases in all lines of business.
We know what works and the plan is to double down on our proven elevate summit playbook in 2020 to.
That means a sharp focus on value pricing investing in capabilities optimizing the portfolio and executing on our operational excellence initiatives.
Finally.
We think it's a great time to be in our industry and a better time to be with summit.
We're in position to benefit from the rare concurrence of continued strong demand fundamentals and public and private end markets plus we have unique self help margin levers that will continue to leverage in 2022. Thank you for your time today.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
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Yes.