Q2 2022 Summit Materials Inc Earnings Call

August 4, 2022

Ladies and gentlemen, thank you for standing by.

My name is Brent and I will be your conference operator today.

At this time I would like to welcome everyone to the summit materials second quarter 2022 earnings call.

Your lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question at that time simply press star followed by the number one on your telephone keypad. If he would like to withdraw your question again press Star one. Thank you. It is now my pleasure to turn today's call over to Karli Anderson E V P.

Pete.

Hello, and welcome to summit materials second quarter 2022 results Conference call yesterday afternoon, we issued a press release detailing our financial and operating results. Today's call is accompanied by an investor presentation, and supplemental workbook, highlighting key financial and operating data all of these materials can be found on our investor real.

<unk> web site.

Louis commentary and responses to questions on today's call May include forward looking statements, which by their nature are uncertain and outside of summit Materials' control.

Although these forward looking statements are based on management's current expectations and beliefs actual results may differ in a material way.

A discussion of some of the factors that could cause actual results to differ please see the risk factors section of summit Materials' latest annual report on Form 10-K, which is filed with the SEC you can find reconciliations of the historical non-GAAP financial measures discussed on today's call in our press release.

And you're in and our CEO will begin today's discussion with a business update Bryan Harris, our CFO , who will review our financial performance.

Ill return to discuss the path ahead, and then we will open the line for questions. Please limit your asks to one question and then return to the queue. So we can accommodate as many analysts as possible in the time, we have available with that I'll turn the call over to Ann.

Thank you Carla and good morning, everyone, Let's first start with our progress on safety through June we are tracking ahead on most of our safety kpis on both a year over year basis and versus our internal expectations.

This includes our year to date reportable incident rate, which is down 55% versus the comparable prior year period, and although our journey to zero harm is ongoing I would like to thank our safety leadership and summit employees everywhere, but the collective progress we've made and for their commitment to living our safety first value.

Now, let's turn to slide four for a look at our second quarter performance, where today, we are reporting record quarterly earnings.

Our team overcame challenging operating conditions and divestiture impacts to deliver growth across net revenue adjusted gross profit and adjusted EBITDA. In fact, if you exclude the impact of acquisitions and divestitures second quarter. Adjusted gross profit would have increased more than 7% and adjusted EBITDA would have been.

Crease, nearly 6% versus Q2 2021.

At a high level our quarter was characterized by three overarching factors first continued pricing growth with.

Gains across all lines of business and led by our downstream businesses as we move swiftly to pass through higher input costs.

Second volumes that were held back by divestiture impacts as well as cement shortages in certain markets.

Like this we view underlying near term demand conditions in each of our end markets as relatively healthy, albeit at varying levels and the third factor impacting results as a challenging cost environment, coupled with continued supply chain constraints that continue to face the industry and our business.

In light of these conditions I am pleased that we've been able to navigate these challenges.

So our business, while protecting margins through a continued focus on self help initiatives in both commercial and operational excellence with.

With our solid second quarter under our belts.

Away from the quarters that we are in a position of strength heading into the second half and are well positioned to deliver on our adjusted EBITDA outlook for the year.

Slide five cover segment results, where growth was led by our west segment in our cement business.

<unk> net revenue was up 12, 4% driven by robust pricing across all lines of business and led by high single digit aggregates pricing growth in Utah.

Aggregates volumes in the West segment increased seven 3% fueled by growth in Texas in British Columbia.

Pricing flow through and aggregates volume growth more than offset lower downstream volumes and inflationary conditions to drive adjusted EBITDA up seven 5% in the second quarter.

Staying with the West segment for a second if you recall from our Investor Day, we had flagged issues with cement availability in Salt Lake City, one of our largest residential markets, where a supplier cement operation experience downtime. Our team is quickly to collaborate and for the first time in summit's history, we began railing in some.

<unk> from our Davenport cement plant.

Those actions helped triage the situation and I'm happy to share that the cement situation. Utah has improved we are still receiving about 10 railcars from Davenport per week, but we believe we have successfully navigated through the most difficult supply challenges. In fact June was a record EBITDA mantra Kilgore business in Utah and we are.

We remain encouraged by the momentum we have built out west.

In our East segment net revenue and adjusted EBITDA were lower versus the prior year due mainly to our 2022 divestitures.

Those impacts aside we saw lower aggregates volumes in Kansas due to wet weather that was mostly offset by aggregates volume growth in Georgia.

Aggregates pricing in the East segment was up six 6% in Q2 and is up six 7% year to date.

Unpacking. This further pricing differs by geographic market within the segment for example, in Virginia, Georgia, The Carolinas and the Kansas City Metro area. We can expect high single to low double digit pricing growth on a consistent basis.

In contrast, the more rural areas in Kansas, and Missouri Command low to maybe mid single digit pricing growth, which is why we are actively working to tilt our central region sales exposure towards the higher growth, Kansas City Metro area.

That being said demand conditions and cost pressures continue to warrants a more aggressive pricing posture. We therefore have more back half pricing plans and beliefs east should ultimately be firmly within that high single digit to low double digit territory in this demand environment.

Each segment adjusted EBITDA was adversely impacted by higher repair and maintenance costs as well as higher subcontractor costs as sourcing capital equipment in certain markets has been difficult resulted in higher, albeit necessary operating cost to extend the life of our assets.

Turning lastly to our cement results, where we are seeing significant momentum in June we realized a record monthly EBITDA in a very strong revenue month as well for the quarter net revenue increased nine 1% to $93 7 million.

Driven by pricing growth of seven 5%.

As expected pricing growth moderated versus first quarter 2022 levels as we lapped April 2021 price increases that said the pricing environment remains very constructive and we have moved forward with an $8 per ton price increase as of July one.

And so far we are witnessing higher than normal price realizations as our sales team continues to implement and execute our customer segmentation and value pricing principles.

Cement volumes were slightly lower year on year in the second quarter. Despite this demand conditions in cement remains very strong as our customers continue to express concerns over cement supply and the ability to meet high seasonal demand.

EBITDA margins for cement in Q2 were 46, 2% as pricing gains combined with favorable to merge costs relative to the prior year period drove margins roughly 25 basis points higher versus the prior year period.

In the long run through a combination of commercial and operational excellence initiatives successful completion of the Davenport cement storage dome investment as well as the full recovery and expansion of the Green America recycling facility, we have accretable and figure paths to drive cement margins sustainably above 40 <unk>.

<unk>, which is our northstar objective for that business.

Now, let's turn to slide six for our elevate summit scorecard.

There Youll see that we reached two summit records first on net leverage we once again set a new low at two four times net debt to adjusted EBITDA were down <unk> four times from Q1, 2022 and remains firmly below our three times elevate summit targets.

Armed with much enhanced financial flexibility summit is in a strong position to pursue a broad array of value creative capital allocation priorities, including investments to drive organic growth aggressive pursuit of high return M&A opportunities and Opportunistically repurchasing shares when they represent compelling value and.

Second record was ROIC of eight 8%, which matches our previous high watermark for summit.

<unk> increased 40 basis points sequentially 30 basis points year on year and as our divestitures flow through results. We expect that <unk> should continue this upward trajectory.

Adjusted EBITDA margin on an LTM basis decreased 10 basis points sequentially and reflects the challenges in this operating environment as the realization of our price increases lagged cost inflation, particularly in early 2022, having said that our centers of excellence are relentlessly focused on.

On improving operations and commercial excellence in each of our lines of business.

We have efficiency projects underway to optimize our cement mixers reduce washout times in ready mix and improved tons per hour in aggregates.

Each of these initiatives is designed to drive out costs and improve margins.

Together with our commercial excellence initiatives are self help margin opportunities unique to Soma as we drive best in class practices enterprise wide and are critical to reaching our greater than 30% EBITDA margin target.

As we move each of these forward I'd like to highlight two recent areas of progress.

The benefits of this conversion are worth reiterating first plc reduces concrete embodied carbon by approximately 10% without compromising resiliency or quality.

By replacing flavor with plc, it unlocks additional capacity and finally plc carries a lower cost and therefore has positive margin implications for our cement business.

These benefits are more quickly realized thanks to the rapid adoption of plc by our customers, including state Dot's. The bars on the right show our 2022 planned sales volume for plc and the gold line indicates that we are tracking well ahead of our internal forecast a plc sales for 2022.

Put a finer point on market acceptance and 2022, we expect to sell approximately 125 million tons of plc, which will be up from 25000 tons in 2021, a tremendous accomplishment for our continental teams are proof that some of us taking aggressive steps to.

What's been the most socially responsible construction materials provider in the industry.

The second item I'd like to highlight is on slide nine that centers on portfolio optimization in horizon. One we move through no regret portfolio moves divesting 10, mostly downstream businesses generating $470 million in proceeds and delivering considerable value for our shareholders at more.

10 times EBITDA across all divestitures.

Now in horizon, two our goal is to invest to grow priority markets. What does that mean exactly it means three things.

First it's about richness the mix to be more materials led we are targeting high quality assets in aggregates and cement and we'll be very selective about anything in the downstream.

Portfolio optimization is about sourcing bolt ons, both large and small that will deliver higher margin higher return and less earnings volatility to our portfolio everything we do is through the lens of bringing increased value to our shareholders and finally, it's about entering our building our leadership position in high growth strategic.

Markets, we want to expand our market presence in both geographic adjacencies as well as targeted rural and ex urban markets, where we see an achievable path to being the number one or number two player.

Summit is pursuing opportunities to lead in key markets from a position of strength. We are in the best financial shape in the company's history with ample liquidity and the lowest net leverage ever.

While there is a universe of about 5000 targets in aggregates cement and related businesses. We have prioritized about 60 opportunities in our current M&A pipeline and within those priority targets. We are in active discussions with several of them and have many LOI in place.

While we are eager to grow we are also disciplined and structured in our approach and our team is intensely focused on our horizon II portfolio optimization principles in other words, we will pursue opportunities that we believe will help us grow and that will move the needle towards our elevate stomach goals, while transforming the portfolio to be more material sled.

Which leads me to slide 10, where we want to emphasize just how much changed the portfolio has undergone year to date approximately 72% of our 2022 adjusted EBITDA has been generated by aggregates and cement.

This is a major step up from 2020 levels are roughly four percentage point increase from 2021 and significant progress towards our horizon two goal of at least 75% of EBITDA source for materials.

This is proof that we are no longer yesterday summit, we are transforming into a higher margin materials led business.

We believe we should be valued commensurately.

Now before passing to Brian Let me wrap up on slide 11, where we lay out the three horizons of our elevate summit strategy alongside our financial targets as we said at our Investor Day, we are fully in horizon, two with respect to our portfolio transformation and our sustainability agenda. Meanwhile, we are still in the early innings of.

Our innovation priorities and we will update you as we make progress against that strategic initiative.

Overall, we are making progress improving leverage and ROIC, while maintaining adjusted EBITDA margins. Despite stiff cost headwinds we are confident in our strategy states focused on controlling what we can control and driving continuous improvement throughout the enterprise <unk>.

This approach will ultimately set the stage for margin expansion assisted by self help commercial and operational excellence and the compounding effects of additional July price increases as we move into our biggest volume quarter of the year I'll now pass it to Brian for a financial review before coming back to discuss our second half outlook.

Alright.

Thank you Anne and I'll begin on slide 13, with our second quarter volume and price performance by line of business.

Second quarter aggregate volumes decreased one 6% as solid organic volume growth in Texas and other markets was offset by volume decreases in the east segment due to the impact of divestitures excluding.

Excluding acquisitions and divestitures aggregate volumes would have increased by approximately one 6% versus Q2 of the prior year.

Q2 aggregates pricing was up four 7% led by the strongest gains in our east segment and more specifically double digit pricing growth in Virginia, and Georgia, followed by high single digit growth in the Carolinas Northern Kansas.

<unk> segment aggregates pricing was up high single digits in Utah and low to mid single digits in Texas in British Columbia.

In cement continued favorable supply demand conditions in our key markets drove Q2 pricing up seven 5%, culminating in June was the best monthly EBITDA performance in Continental cement history.

However, we continue to operate within a very tight supply environment and when you couple that with ongoing cost inflation, including high energy costs, we will need to work with our customers to pass price along the value chain.

Second quarter cement volumes were essentially flat to the prior year as our plants are sold out for the year as was the case last year as well.

In our downstream businesses the higher cement price has been incorporated in our ready mix prices, which increased nine 7% in the second quarter on strong residential demand, particularly in Texas.

Year on year volumes for ready mix were down nine 1% due to divestitures as well as production constraints, resulting from limited cement availability.

Excluding the impact of divestitures ready mix volumes would have been virtually unchanged versus the prior year period.

And in asphalt average selling price increased 18, 9% in Q2, as we pass through much higher liquid asphalt costs relative to a year ago.

Asphalt volumes were down 15, 2%, reflecting the impact of divestitures.

On slide 14, we provide an adjusted cash gross profit margin comparison by line of business for the second quarter.

In the face of significant inflationary pressure, we experienced moderate impacts to our aggregates products and services margins, while expanding cement margins on aggregates cost inflation, including higher fuel repair and maintenance and subcontractor cost run slightly ahead of aggregate price increases.

Some of which went into effect in April and June however, the preventative maintenance that we undertook in Q1 helped us to prepare for a strong upcoming construction season. So the impact was limited to a reduction of 220 basis points of aggregate margin for the quarter.

Cement segment adjusted cash gross margins were 48, 6% up 140 basis points from the year ago as pricing gains outpaced increases in our variable costs.

Our products and services gross profit margins declined versus the year ago period, as pricing slightly lagged higher labor and energy costs, primarily on asphalt.

<unk> ready mix gross margins were up year on year to reflect strong and swift price realization in Salt Lake City and Houston.

As we told you on our last earnings call in May our teams are focused on executing cost mitigation initiatives across the organization. We continue to implement our flexible energy model by hedging diesel and coal locking in prices for natural gas and swiftly implementing fuel surcharges across.

The business.

Our focus on preventative maintenance to extend the life of our assets as well as sharing equipment across our markets has helped summit blunt the impact of inflation and only experienced minor degradation in margins during a period of exceptional volatility.

We believe these proactive measures position us for future margin expansion potential as we fast tracked operational excellence initiatives all in an effort to improve performance offset inflation and upgrade the consistency of our operations.

Now moving on to slide 15 for a look at additional non-GAAP metrics.

Adjusted EBITDA margin of 26% was down from 26, 5% in <unk> 'twenty, one driven primarily by higher cost inflation net of pricing gains.

Second quarter adjusted diluted earnings per share of <unk> 60.

Was <unk> 11 ahead of prior year levels, reflecting in part lower DD&A, resulting from divestitures.

I'll close with capital structure on slide 16.

As Ian mentioned, our Q2 2022 leverage ratio of two four times net debt to adjusted EBITDA is the lowest in summit's history, and as Dan 0.6 times versus Q2 2021.

And then the second quarter, we repaid $72 $4 million of our term loan under provisions related to the divestitures of businesses.

As a result, we have further reduced our interest burden, helping to offset impacts from a higher rate environment.

And as we said in May based on the midpoint of our 2022 guidance, our current debt levels and cash flow generation. We are on a glide path to get to two times or below by the end of the year.

This provides for significant optionality, including further repurchase activity as.

As a reminder, in March our board approved a three year $250 million share repurchase authorization.

To date, we have repurchased approximately one 5 million shares and we have approximately $200 million remaining under the program, which we'll use opportunistically to return capital to shareholders.

We closed Q2 with roughly $465 million of cash on hand, and together with an undrawn revolver, we have nearly $800 million of available liquidity at our disposal. This together with our low leverage position means summit has the firepower and flexibility to pursue the highest return capital allocation.

Cities with the intention of growing our existing business pursuing attractive M&A opportunities and ultimately delivering superior value creation for summit shareholders.

And lastly for the purposes of calculating adjusted diluted earnings per share. Please use a share count of $119 4 million, which includes $118 1 million class a shares and $1 3 million LP units and with that I'll pass back to <unk> for a look ahead.

Thanks, Brian .

Slide 18 is a key component of the organic growth strategy, our organic greenfield for our Greenfield, we use a proprietary playbook developed by our east region to identify promising greenfield opportunities.

Our playbook Triangulates geological market and economic data to determine site feasibility and probability of successful Greenfield development.

So far we have completed eight greenfield with three more currently under development in our East segment collectively we expect these 11 sites to produce roughly $6 4 million tons of aggregates in 2022 up more than 7% from 2021 production levels.

By 2025, we forecast nearly 8 million tons of aggregates annually from these sites.

We view consistent and significant investment in Greenfield as critical to sustaining the purest form of organic growth with that in mind, we will use a disciplined approach and a deep understanding of returns to prospect or develop new greenfield and high growth attractive markets.

These greenfields will play a key role in driving margin growth and advancing our market leadership strategic priority.

On slide 19, our perspective for our end markets is that supply demand fundamentals to support healthy demand conditions in both public and private markets.

Residential demand may level off near term, but the long term growth trajectory remains solid the truth is that the U S has been under building since the great recession.

Since 2009 housing starts lagged household formation by roughly 100000 per year. This chronically under built environment necessitate further single family supply and community development together.

Together with record rent inflation and resilient affordability in some top markets. We are bullish on residential markets in the long run even if near term demand enters a temporary air pocket.

At nonresidential, both the Abi and Dodge momentum index remained in positive territory and largely reflect what we're seeing on the ground in our cement business. We are seeing multiple LNG projects, particularly in Louisiana.

In Kansas Panasonic is planning the largest private investment in the state's history with the 4 billion Mega Battery factory near our quarry in Eudora and.

And pending federal legislation could further fueled nonresidential investments the.

The bipartisan chips Bill passed by the Senate last week and the tentative agreement on climate change initiatives has potential to catalyze investments in aggregates and cement intensive onshore manufacturing and green energy projects with direct and indirect benefits to our business for years to come.

With respect to public spend we viewed this end market as the most steady reliable and the least influenced by economic cycles today with state Dot's being very well funded we are seeing year to date, Lettings and our top eight states accelerate faster than the national trend and we believe that when infrastructure spending gets fully underway.

We will be in for a multiyear period of strong public infrastructure growth.

Overall, our end market outlook has been altered but not materially changed since we released our 2022 outlook in February we are steadfast in our view that we are in attractive markets and an industry poised for long term profitable growth, bringing it all together on slide 20, where we are reiterating the full year adjusted EBITDA guidance.

Issued at our May Investor day for.

For 2022, we continue to expect adjusted EBITDA between $500 million and.

$530 million, which implies high single digit EBITDA growth on 2021 pro forma levels and while the environment, particularly on the cost side remains dynamic we believe that we have levers available to both offset cost inflation and be in a position to hold our growth second half adjusted EBITDA margins, Let me.

Quickly walk through the assumptions that underpin our outlook first we still forecast mid to high single digit pricing growth on a full year basis and within that is the expectation that aggregates pricing will accelerate off run rate levels. As further pricing is implemented notably this outlook does not incorporate a late summer early fall.

Pricing actions in aggregates, our cement, which we have not taken off the table second we are confident that excluding the impact of divestitures volumes will be supportive to our outlook. This view is supported by strong backdrop for public spending new opportunities. We are seeing in the nonresidential end market and backlogs.

Residential that showed sustained 2022 volumes.

Finally, we still forecast high single digit cost inflation in 2022 as energy costs remain elevated and we take on higher repair and maintenance costs as well as higher labor and subcontracting costs that said, we had taken a prudent approach to our cost outlook. When we last updated markets in may and that proved to.

The appropriate decision on a year ago basis, we assumed the cost pressures will continue so we will rely on pricing and self help productivity initiatives to offset cost and hold our growth EBITDA margins in the back half in terms of second half pacing I will highlight that nearly half of the full year forgone adjusted.

<unk> contribution from the ankle or approximately $14 million will hit in the third quarter.

Our full year forecast for G&A has not changed as we expect between $200 million and $210 million in G&A spend on a full year and approximately $200 million and DD&A in 2022.

Finally, our Capex forecast is also unchanged at between $270 million and $290 million and I'm happy to report that Summit's largest 2022 capital project. The Davenport cement storage dome is on track for completion in Q4 and will drive immediate savings for our cement business.

Before opening the lines for questions I'd like to close my prepared remarks with a few takeaways.

First and foremost I want to acknowledge and thank all summit employees.

Our greatest assets your commitment to our vision and strategy is inspiring and taxed your tireless focus on execution, we delivered record safety performance and earnings in Q2 and have a lot to be proud of secondly, I'd like to thank summit shareholders for their continued support of the elevate summit strategy we have.

Accomplished a lot today and today's summit as a higher performing materials led organization, but we arent done.

As we pursue our four strategic priorities, we will continue to move the needle and Bolton on our elevate summit targets. We aim to drive superior shareholder returns through further materials led portfolio transformation and sharper execution on commercial and operational excellence as always we appreciate the candid feedback of our investors and we are.

Relentlessly working to improve our business and deliver superior returns.

And finally, it bears repeating what you've heard from US before we continue to believe it's a tremendous time to be in this industry and a better time to be at summit pricing and volume trends are favorable and as we make progress against each of our elevate some of the initiatives we plan to emerge as a better stronger more highly valued public company.

Filter tackled tomorrows challenges and opportunities. Thank you for your continued support of summit materials, and we will now take your questions.

At this time I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad.

Your first question comes from the line of Stanley Elliott with Stifel. Your line is open.

Hey, good morning, everyone. Thank you all for taking the question and congratulations on a tough environment.

And I guess, starting off can you talk a little bit more about the M&A opportunity, it's nice to see the leverage coming down you've got it sounds like you've got a lot on the table. How quickly can you put something together I mean this is something we should think about maybe this year or is it into next year.

Just curious given the it sounds like Theres a lot of activity out there right now.

Yes, certainly and thanks for the question, we are very focused and in horizon, two and very happy to be in a position to be there.

Following all the hard work the team has done in horizon, one on the divestitures, which gives us great Optionality and Thats why we have said all along we've had an active M&A pipeline.

You can see that we've got 60 priority ones in there that we're focusing on we have some very active LOI is it's hard to give exact timing on when we might actually close an acquisition, but I will tell you. There's two or three that we're pretty far along right now that will blend probably into 'twenty three but expect much more on the M&A side from us have much left on the divest.

Sure so as we move forward.

And.

The pricing environment has been very good the inflation environment has been has been tough as well how do you all think about the hedging part of the business that you guys have typically been a very good job with.

Especially given it looks like some of the input costs, maybe maybe trending down here in the back half of the year.

Yeah, I'll, let Brian address that yes, thanks Stanley Yeah, we can.

<unk> to pursue a hedging strategy for diesel, albeit that we've been a little bit more cautious and the pace at which we've put those hedges in place this year.

Right now we're about 21%.

Hedged for our estimated diesel consumption for 2023, the prices higher and were watching that on a daily weekly basis. So that we can opportunistically step in and layer in a little bit more for 2023 as those prices come down. So the policy is still in place very much intact, but it's been a little bit.

More of a cautious approach given oil was up in the $120 range. It's now come back to 90 ish low nineties.

It may drop further yet so watching it very closely as we are with all of our other energy input costs.

Great. Thanks for the time.

And best of luck.

Thanks Ben.

Your next question comes from the line of Trey Grooms with Stephens. Your line is open.

Thanks, and good morning, everyone.

So with the.

The aggregate increases that you have have announced for July are put in place for July .

Can you give us some idea of how youre thinking about pricing gains in the back half and I think you mentioned something about the <unk>, sorry, if I missed it but.

On the details there, but more kind of looking for just the overall aggregate.

And you also mentioned that these increases are coming at a seasonally strong period for aggregates shipments so.

Can you give us some more color on how we should be thinking about the aggregates profit per ton as we move through the back half.

Yeah. So as you correctly pointed out year to date, our total combined aggregates pricing is four 7% and in the quarter is the same we have called for on an overall basis high single digit pricing in <unk>.

The prepared remarks, I talked to some of the variations we see amongst our regions. So if you'd look at Georgia and Virginia. They have produced already 13, 4% aggregates pricing.

Utah nine seven Carolinas nine to Kansas City is up in that high single digit, but the one area that we did point out was the Texas. For example did not go as fast on pricing. So in April they had their first price increase in April and have another one now in July so that's really a key.

Factor that we're watching and it's a swing factor for us as we go into the second half to get Texas caught back up and have compounding effects of those two price increases in our highest volume quarter of the year and also the other regions are also still continuing to do price increases in July . So we've had it across all lines of business and.

Particularly aggregates strong execution I think you can expect those margins to expand as we go throughout the year.

The team is controlling costs as they can but the pricing environment is very strong and candidly three while it's not in our 2022.

Guidance, we wouldn't rule out a fourth quarter price increase and aggregates either.

And that's.

That's all very helpful with that fourth quarter, just to touch on that is that.

Market specific is it widespread or any any any details there.

Generally we price market specific but widespread inflation will drive widespread pricing in my prepared comments I, even talked about the differential we have in our central region, where we have some more rural areas, but even they have accelerated on pricing because inflation is not.

It is not isolated to one region or the other unfortunately, so we will continue with that aggressive pricing stance.

Thank you for the color I'll pass it on good luck.

Thanks Ray.

Your next question is from the line of Philip <unk> with Jefferies. Your line is open.

And congrats on a great quarter and a choppy backdrop.

Certainly a lot of questions around how <unk> could look like next year curious kind of order trends are you seeing heading into August between your different end markets and then any color on how to think about backlogs as of today across the board.

Yes, So let me kind of go through each one starting with resi as you correctly pointed out there's a lot of we're watching that very carefully.

Long term, we believe that <unk> is still going to be very strong purely because we're so under built in a rural ex urban areas in single family homes.

We have since 2009 starts have basically lagged home homeownership by 100000 per year. We've got these millennials coming out very high population that are in prime buying home buying format and then you've got on top of that a number of migration factors that are.

Driven to the affordable states that we have so we're bullish on residential in the long term. If we look at 2022 as we're finishing out the year. Our backlogs are still very strong and we believe that will continue through the end of the year or are we seeing single family permits slow in some of the regions absolutely, yes, but honestly looking at.

We look at residential we think it will decelerate going into 2023, we're not thinking theres going to be an abrupt stop just because the rents are so high mortgage interest rates. When you compare to historical highs are at like about 5% many of us used to pay double digit mortgage interest rates. So home buying is still an option. So bottom line as we go into 'twenty.

Think about it as a deceleration and we believe that if it could settle around an equilibrium of about 1 million starts per year, that's going to be a healthy amount that the supply chain can handle so residential.

Some deceleration, but not a complete stop non res we are seeing considerable acceleration right now and we have seen that in the indices. So you see private construction non res construction up 9% year to date Youre Dodge is set a 14 year high in June Abi has been over 50 for the <unk>.

Last 17 months.

Seeing this in a lot of.

Post pandemic verticals such as energy.

Onshore warehousing and data center, so a lot of pent up demand and we're actually seeing it in our projects.

If we talk about our Kansas area alone.

If we look at the soda, Kansas I said in my prepared remarks, there's a panasonic $4 billion.

Investment in batteries in North Kansas City, There is an investment in the KC I 29 Logistics Park, that's $1 3 billion.

In North Eastern Kansas, Theres, a north point Industrial Park, that's a $1 billion investment than our cement business has opportunities in LNG and we're still seeing some warehouses go up in the brand the Charleston area, that's particularly advantaged to our Jefferson quarry, So very bullish on nonresidential public very strong very <unk>.

Steady.

If you just look at our state funding alone.

Into 'twenty three our top eight states are in really good shape, Texas is at $11 billion, Utah, $2 7 billion, Kansas, One, Missouri, three five with another $500 million in tax revenue per year, Virginia is up to $7 9 billion, which is a $400 million increase.

So we're really seeing that state funding stayed very robust going into 'twenty three and also this is playing out in the Lettings, which is what we watch on a regular basis and when you ask about backlogs I would refer you to that so lettings are up year over year, our top eight states are at 16.

Sent up on our pavement and highway contract awards.

And that's four points above the national average and just to give you some color around that Texas is running at about 24, 6%.

We have a number of others like miseries at 50% increase Colorado at 20%. So very strong increase in all of our markets across the public side and then we haven't really impacted anything on the infrastructure built into our estimates at this point in time as we said before.

We don't believe 2022 will be an impact we do believe 2023 will have impact now. The one thing. We are watching is how fast that volume will come in based on inflation and so we're watching that very closely we don't think it's a matter of if we will have extra volume in 2023, it's the magnitude of the volume as inflation impacts now I will.

Say when you look at summit footprint, we do a lot of repair and rebuild and we do a lot of smaller jobs. So that impact of inflation may not be as big on summit's type of business from the infrastructure Bill as you might compare to others.

Okay Super Thanks, a lot appreciate the color.

Thank you Phil.

Your next question comes from David Macgregor with Longbow Research. Your line is open.

Yes, good morning, everyone.

I wonder on cost inflation, if you could just walk us through Brian maybe the.

The individual buckets within your cost structure, what kind of inflation, you're seeing in any of those you talked about fuel and maintenance repair and contracted increases but.

Break out those individual buckets and help us understand what youre seeing in each would be a big help and then just secondly is there any way to talk about cement capacity for 2023.

What incremental volume opportunity you might have with plc and the dome and everything else that's coming into play there. Thank you, yes sure David Thanks for question.

So.

Buckets.

Energy is about 6% year to date of our total that's all energy inclusive of diesel coal electricity.

Fuel oil and everything and it really goes into energy is about 6% of our tool.

Total cost of goods sold.

Materials is by far and away our biggest input cost that's primarily going to be cement that we buy for our ready mix business. That's a.

How much larger.

A portion of that is by far the biggest input cost labor of course is another fairly large one we're seeing.

Cost inflation there in the mid single digit level, obviously again.

Have to be mindful of specific market circumstances and labor shortages. So.

It varies a little bit depending on.

Exactly where we are but realities.

The reality is you know.

Wages and salaries have increased across the board and we are doing what we tend to stay competitive as we compete to retain and retain our talent.

Other.

Yes, Brian Yes, I was hoping you could quantify each of these buckets for us.

All possible or even give us a range or the kind of magnitude.

No we're not going to go into details on every single cost bucket David that would.

Take up a lot of time on this call. So those are the bigger percentages that we have at this point and we can follow up with you on a later call.

Sure.

As for the cement capacity, we're basically sold out the plc will give us approximately 5% to 10% increase in our capacity capability as we go into the end of this year and into 2023.

The only thing I'd add to cement capacity as Brian said is very very tight right. Now we continue to see very strong demand dynamics from our customers.

We are very focused as Brian said the plc the team's done a great job that frees us up a little bit we are very judicious with our imports to add to our capacity usually about 5% level.

But the other thing we're very focused on is getting investment economics through our pricing because to add any additional capacity into this market, we really need to get to that Northstar objective and a minimum of 40% EBITDA. So very focused on richness the quality of our earnings. So we can reinvest back into this business on an ongoing basis.

Thanks, Dan.

Your next question is from the line of Garik <unk> with loop capital. Your line is open.

Oh, hi, Thanks for taking my question.

Wanted to follow up on the point around Texas aggregates pricing is there anything structural impacting the level of price growth in your Texas markets or was it really just timing related given the April increase versus perhaps earlier increases in other markets and then I wanted to follow up on your comments.

Salt Lake with improvement of cement supply downs specific to your shipping.

Our cement from Gavin.

The supplier from external.

Suppliers.

Salt Lake as well.

Okay. Thanks for the question, Eric So, Texas. It was just a matter of timing based on the market, we do price to market. So it was just an April price increase versus January but then quickly followed by July . So we continue to see strong pricing support in our Texas markets is one of our highest growth markets. So I wouldn't call it struck.

Shall I call it more timing.

Because we have the strongest leadership position in Houston in AG. So we will continue to take that leadership position and value price over time.

Salt Lake City, the cement supply, we did have that temporary where we were based.

Basically triaging with our own cement, but thats not ideal, but it is improved with our suppliers and salt Lake City, which the team did a great job managing through this but it was pretty hectic through the quarter, but I'm very pleased to say that thats starting to ease up for our for our Salt Lake City team.

Got it thanks a lot.

Thanks, Eric.

Your next question is from the line of Mike Dahl with RBC capital markets. Your line is open.

It's actually Chris Kalata on for Brian Thanks for taking our questions.

Just shifting over to aggregates volumes, you said this quarter organic growth was up 1%.

I heard correctly.

Wanted to get your sense on what organic volumes, which are expected to look like for the full year and then if you can total volumes, including divestitures.

Yes, I'll give you the AG volumes within the quarter. If you exclude the impact of divestitures was one 6% growth.

As we go through the remainder of the year, we see continued support for AG volumes because of all of our private and public end markets.

So I would expect us to meet the overall AG volumes that we've given in our guide.

Over time, which will be that low to mid single digit growth and we're pretty confident that that based on support from the end markets that we serve at this point in time.

Understood that's helpful and just for my follow up.

Looking at cost trends on a consolidated basis I was hoping you could help us understand the cadence of.

Price cost towards the back half of the year and.

To extent possible I know you guys mentioned some price variability by region. So if there's any notable.

<unk> and price cost.

<unk> you want to call out would be helpful.

Yeah I'll answer the latter part first I wouldn't say, there's any notable variations by region. It's just more what the market will bear I will tell you as we go through the remainder of the year. We continue to be we're assuming continued high inflation and costs right through the second half of the year, which means we've got to continue to drive our pricing in that regard.

<unk>, which is why I said, we wouldn't.

Rule out of Q4 price increase either.

As you go through Q3, we will continue to try and push that price ahead of cost I would expect margin sequentially to improve now Q4, we might see some margin expansion because we had some onetime costs in Q4 2008. Once you might see that that would be the one area, where we're looking to see if we can expand that.

Margins through pricing.

Understood appreciate the color and good luck.

Thank you.

Your next question comes from the line of Jerry Revich with Goldman Sachs. Your line is open.

Yes, hi, good morning, everyone.

I'm wondering if you could.

Alright.

I'm wondering if you could talk about.

Think about the new summit portfolio as it stands today.

What level of operating leverage do you think the business would see.

Cool downturn, given the meaningful improvement in the mix.

The market share that you folks are outlined earlier in the presentation.

I believe our portfolio today, where we feel that we're very close to getting to that 75% of materials, which gives us a stronger quality of earnings a stronger portfolio with less volatility and it gives us more operational leverage as we move forward.

We're obviously in a much better position with those portfolio changes to weather any storms that are ahead of us sitting at 800 million in liquidity. So.

So we feel that the portfolio movements Jerry have really are a key part to why we were able to successfully navigate through this Q2 with only a difference of 40 and 50 basis points on our margins. So between the materials the price in the call and operational excellence, we will continue that through the second half, but this stronger portfolio is going to lead.

Into 2023 in a better position, Brian anything you'd add to that no I don't think so obviously, there's a number of levers that you can pull in the event of a downturn one of which would be too.

Reduce the pace of your Capex and that would obviously help throw off a little bit more.

Cash so I wouldn't see a meaningful.

Fluctuation in the leverage ratio.

A downturn.

Yeah.

The cadence of pricing actions over the course of this year compared to diesel inflation earlier in the year, what sort of carryover margin benefit should we be thinking about 2023, I know youre not providing guidance yet, but it seems like from an exit rate standpoint, we're going to be.

Coming out of the year with pricing about a point maybe two points ahead of course as we enter the early part of 'twenty three current diesel prices hold.

Im wondering if youre willing to comment on that.

Well, it's a very dynamic situation on diesel pricing. So we will continue to the one thing I can say Gerry is will be very agile in our pricing. What we have planned in July was a very strong price increase and I think with respect to our energy we have been doing a pretty good job of covering that between our flexible energy program and our pricing I will tell you the one thing.

That's more of a price more of a cost impact to us that hits us within the quarter. We do catch up is the sub contractor cost that Brian talked about because we've got to keep our plants running and our highest volume quarters and it's their repair and maintenance.

It's because we have delayed capital equipment coming in and we've got extend the lifetime of our equipment. So they are the two that we probably feel as more variable than our actual diesel because of our strong hedging position as we've moved through now I do think we are going I know, we're going to end with strong pricing momentum in exit momentum into 2023 with what's in the guide today.

Our July price increases because that price will compound now in our highest volume quarter and as Q4 continues to grow we will continue to have strong pricing entering 2023, and as you know aggregates pricing evenness as inflation abates, we will hold our aggregates pricing and that's when we will look forward to further margin expansion and really continuing.

Towards our 30% EBITDA goal.

Okay I appreciate the discussion thanks.

Sure.

Your next question is from Brent Thielman with D. A Davidson your line is open.

Great. Thank you good morning, Hey.

And you've got a pretty large Houston condition, just curious sort of any indirect implications and the suspension of vulcan's assets in Mexico, and sort of ability to serve that market. What are you seeing is that.

Causing any disruptions to project flower or any impacts to your business.

Yeah, we've looked at that and our team has looked at it pretty closely we play in different parts of Houston them, where that has impacted so we would not see a significant uptick news around some of our geographies. There may be some additional opportunity for volume, but honestly I don't see it being an impact.

On Summit's business, our Houston position is very clear, where we play from a rural and ex urban area and in our locations that don't impact where Vulcan has played.

Okay. Okay.

And then I was interested in your comments just around.

Dale ability your ability to to address in Utah by Continental as you said that that wasn't ideal but.

Some might say.

These availability issues are transitory others might argue it's going to be a growing issue just given how tight the market is I mean, how are you.

How are you exploring initiatives to kind of combat that.

Our relationships with the cement suppliers and just curious in the instance that musicians continue how do you address it.

Yes, we're very active looking at that and it's very timely you asking that question.

I mean, our team has taken a complete step back and look at constantly optimizing our terminal positions in all our tight geographies clearly we do not choose on a regular basis to move demand from Iowa into Salt Lake City, and our team did a great job of passing that along but it's not what you would optimize your supply chain and so we are undergoing a complete cement supply chain.

Look right now.

Our support and because we have leading positions in our markets, we tend to be able to weather.

Cement shortages I'll give you an example, Houston, where such a leading position there and ready mix, we tend to get preferential cement supply. So we are in a good position, but you can always optimize it to your point moving forward and also as we talked about looking at imports and how we will optimize those in the future.

Other thing around supply that we Didnt mentioned, Brian alluded to is our Davenport cement storage dome that will help us to better security of supply to our northern customers by having that in place as we go into 2023.

And I assume that thought process been keeping these leading positions quite isn't kind of the M&A trial that youre looking at to hear it.

It absolutely is all part of the M&A trail in each geography is a little different as you might imagine.

Okay, great. Thank you.

Thanks, Brian .

Your next question is from Anthony Pettinari with Citigroup. Your line is open.

Hi, This is Ashley <unk> on for Anthony Thanks for taking my question you mentioned that you wouldn't rule out of Q4 price increase and I guess I'm just wondering what would we need to see happen for that to materialize. It just cost inflation accelerates further from what you currently expect maybe demand gets a little bit stronger.

Yeah, I think it's both of the above I think cost inflation is the thing we're watching because the swing factor for us as we go through the second half as price over cost and so costs. We're constantly trying to stay ahead of that and as I mentioned in some prior Q&A. There. The thing that is probably surprises us within a month or within a quarter is there.

This sub contractor.

And R&M costs, because the more our capital equipment continues to get delayed through supply chain constraints. The more we have to extend the life of our equipment and we're going to keep running our quarries. So that's a good business decision no matter what to spend more there within a month or quarter, but then we have to go for increased pricing when demand gets stronger. We're also stripping more of our plant.

So a lot of factors go into that but we do eventually get ahead on the pricing.

So Q4, it would take more inflation, we have strong demand across all of our markets already so I don't see that changing a lot.

Great.

Switching gears you took a pause on buybacks this quarter sort of after establishing your first.

Purchase authorization, how should we think about your cap allocation not locking on the current macro environment should we expecting a repurchase maybe resume in the second half, possibly more opportunistically or maybe share repurchases positive horizon two starts off.

Reengagement M&A more earnestly.

Yeah, Anthony I think.

Got it.

Kind of balance that out.

Really a little bit more opportunistic on the share buybacks, but obviously balanced with that M&A activity.

And it.

Will we.

We will look to buyback.

Buy back where we think it represents a compelling opportunity, but probably fairly opportunistic based on other priorities.

Alright, Thanks, that's very helpful I'll turn it over.

Thank you. Your next question is from the line of Adam Thalheimer with Thompson Davis Your line is open.

Oh, Hey, good morning.

What's the outlook for aggregates margins in the back half.

Well as we go into the back half of the year, we will have additional pricing.

In July here in Q3, and we should have volume so that compounding effect of price, we would expect to see some improvement in our aggregates margin as we said overall for the business as we go into Q4. There is some onetime costs that I would expect more margin expansion in Q4.

Q2 2022 Summit Materials Inc Earnings Call

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