Q3 2022 Summit Materials Inc Earnings Call

Good day and welcome to summit materials third quarter 2022 earnings Conference call. Please note today's conference is being recorded all 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'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.

If you would like to withdraw your question Press Star followed by the number one again.

At this time I would like to turn the conference over to Karli Anderson Executive Vice President of ESG and I are.

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

Website.

Andrew's commentary and responses to questions on today's call May include forward looking statements, which by their nature are uncertain and outside of summit Materials' control. Although these forward looking statements are based on management's current expectations and beliefs actual results may differ in a material way, where a discussion of some of the factors that could cause actual results to differ please see the risk factors section.

<unk> of southern materials latest annual report on Form 10-K, which is filed with the SEC you can find reconciliations of the historical non-GAAP financial measures discussed in today's call in our press release.

We'll begin today's presentation with a business update from summit CEO and unit Ryan Harriss. Our CFO will then review our financial performance and I'll conclude our prepared remarks with our view on the path ahead. After that we will open the line for questions. Please limit. Your asked one question 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 Kelly and good morning to everyone joining today's call keeping with our promise to put safety first I'd like to start with an update on our safety trends through September we are tracking ahead of both internal expectations and prior year for virtually all of our key safety performance indicators. Our recordable incident rate for example is 45.

Sent better than 2021 levels.

Critical catalyst for improvements is a greater emphasis on leading indicators that helped to prevent safety incidents before they happen.

Led by our safety leadership teams summit employees around the country have truly embraced our safety first culture as we continue our journey towards being a zero harm organization.

Turning to slide four for a review.

A few of our quarterly performance, you'll see that we delivered solid third quarter results as evidenced by a number of records that included record net revenue and adjusted diluted earnings per share as well as the strongest year on year organic pricing growth for aggregates cement and ready mix in company history.

Our summit teams continue to execute the elevate strategy and a rising to meet the challenges of a very dynamic operating environment. If you were to exclude the impacts of divestitures in percentage terms third quarter net revenue was up mid teens and adjusted EBITDA increased mid single digits versus the comparable prior year quarter.

These results reflect another quarter of successful strategic execution and emblematic of an organization that is transforming to tackle the opportunities that lie ahead.

Particularly in light of the challenging macroeconomic backdrop, it's fair to say that the third quarter was affected by a variety of cross currents on the positive side all lines of business exhibited double digit pricing growth year on year, and perhaps more importantly pricing for aggregates and cement businesses accelerated nicely off run rate levels.

Driven in part by successful July 1st pricing actions pricing accelerated 640, and 450 basis points relative to first half levels for aggregates and cement respectively. In addition to the tremendous price realization, our cement and Green America recycling business is executing on their plan and draw.

<unk> profitable growth for summit, a trend, we anticipate extending into future quarters now in terms of third quarter headwinds, we have not seen supply chain constraints ease in any material way.

As a result, we continue to encounter historic levels of input cost inflation, and while we have whether it's certain cost headwinds, namely energy better than some of our profitability and margin progress has been stunted by higher input costs more specifically, we are still facing challenges sourcing capital equipment and as a result, we are have.

To absorb unexpected repair and maintenance costs as well as higher sub contracting and equipment pulse limited driver availability as well as shortages of cement all book kept aggregates and ready mix volume growth in the quarter those conditions taken together with wet weather, particularly related to the preparation for and.

Impact of Hurricane and explains why our volume growth was slightly softer than expected. Despite these industry challenges I'm very proud of the resiliency of our teams displayed as we navigated through uncertain times.

On slide five we cover segment results where growth was led by our West segment in our cement business.

Net revenues were up 16, 6% driven by robust pricing across all lines of business in all markets, notably after lagging in the first half pricing in Texas inflected significantly in Q3 with double digit pricing gains in all lines of business. Similarly aggregates pricing in Utah accelerated.

In Q3 and was up 10% versus Q3 of 2021.

Volumes for aggregates and ready mix. However were held back as supply chain headwinds I mentioned, a moment ago affected several of our markets. However in Utah, we recognized healthy aggregates growth in Q3, while ready mix volumes were relatively flat year on year West adjusted EBITA grew six 5% fueled by strong <unk>.

Broad pricing growth that more than offset volume and inflationary headwinds.

In the East segment reported results reflected the impact of divestitures, and therefore, let's focus on organic price and volume.

Organic aggregates pricing increased eight 2% led by the strongest growth in Virginia, and the Carolinas, followed by mid single digit growth in Missouri.

Kansas pricing differs by market with Kansas City, commanding stronger pricing than more rural areas. Even so adjusted EBITDA margins in Kansas are typically comparable to the segment average due to advantages cost dynamics in the downstream pricing growth remains robust with 15% and $29.

2% organic pricing growth versus the prior year and ready mix and asphalt respectively.

<unk> segment, adjusted EBITDA declined versus the prior year due primarily to divestitures, excluding those impacts lower adjusted EBITA was due to a combination of higher repair and maintenance costs.

They just subcontractor costs and organic aggregate volume declines due to hurricane impacts that were only partially offset by growth in Kansas City and Virginia.

Finally on cement strong and persistent demand conditions combined with customer preference for material quality and reliability is driving continued momentum in our cement business for the quarter net revenue increased 29, 6% to $119 9 million with strong and balanced growth from price.

<unk> and volume.

Rice and growth of 12, 8% as a high watermark for summit and reflects a combination of inflation justified pricing and sharp execution of commercial excellence principles.

Third quarter cement volumes of 841000 tons is our highest sales volume in five years and represents 12, 4% growth versus Q3 of 2021.

This volume uptick was driven by three factors first P. L. C conversion unlocks additional capacity second we had better asset utilization.

Finally, we supplemented our production, but some imports in order to satisfy robust customer demand submit adjusted EBITDA was up $6 2 million or 15.5% relative to the prior year fueled by top line growth and greater contribution from Green America recycling.

Before moving on we did want to note two items that will have implications for our cement business first as you may have read drought conditions from the planes for the Mississippi River Basin are resulting in historically low river levels and are impacting barge traffic along the Mississippi River. So far our operations have not incurred significant.

But we are not immune to these conditions, although we are well positioned along the river relative to our competition low river levels are slowing delivery times to date, we've limited stock outs and are working proactively with customers to manage expectations.

However conditions do not improve there is clearly risk to future quarters, and we've incorporated our latest view into our updated guidance all that being said our continental cement team has a tremendous amount of expertise as well as deep and durable relationships that are especially valuable when navigating through these uncertain conditions.

The second cement item worth discussing is around the pricing letter. We recently issued effective for January 1st if you recall, we said in August that we were going to exhaust favorable energy supply contracts on natural gas pet Coke and coal beginning in 2023.

As we have locked in 2023 prices at higher rates, we need to share those higher costs with our value chain partners as such we have announced a $17 per ton price increase when we get into place at the beginning of 2023.

Our pricing actions are commensurate with the higher cost facing the business and we believe they are adequately represent the value we provide the market. Our January 1st move as always is grounded in our pricing principles, which are to maintain a positive net of cost relationships protect margin and price to what the market will bear.

Given the strong supply demand conditions sound value pricing will be a critical lever in achieving our 40% or better adjusted EBITDA margin goal for our cement business.

Let's now turn to slide six for our elevate summit scorecard.

We have achieved already made significant progress on two of the three elevate summit financial targets for net leverage we set another record in Q3 at two three times net debt to adjusted EBITDA and are well below our three times target, thereby preserving maximum optionality to invest in organic growth initiatives.

Further strengthened the summit portfolio via value enhancing M&A and drive superior shareholder returns.

Similarly on ROIC, we sat and elevate somewhat high watermark of 9% up 20 basis points from year end and prior quarter as we annualize our divestitures and rigorously analyze the return on each of our remaining assets, we will move towards and eventually beyond our 10% ROIC target progress on this front is especially.

Critical in light of the higher cost of capital in this rising rate environment.

Adjusted EBITDA margin on an LTM basis decreased 50 basis points sequentially to 21, 9%.

Our efforts on commercial and operational excellence initiatives are helping to stem the impacts of inflation and our focus has been on protecting margin to the best of our ability while growing EBITDA dollars in a sustainable way ultimately closing the gap on our elevate margin target will occur in a material way when inflation headwinds abate.

Materials pricing and jurors in our self help margin initiatives really take hold and our journey to 30% will likely coincide with the progress against the three North Star objectives, We introduced earlier this year.

The first is to have cement EBITDA margins sustainably above 40% on an LTM basis. The operative word is sustainably as we have proven in the past that we can achieve that level of profitability, but not a sustained as we like the second Northstar objective is to reach 60% adjusted cash gross profit margin.

On aggregates, we will get there by pairing commercial excellence and operational excellence initiatives.

Through standardization and best practice sharing a sharp focus on continuous improvement and together with value pricing. We have the self help levers available to us to add considerable points of margin to our aggregates business over time, and finally, our third Northstar objective and bodies shifting the portfolio to being more.

In materials led going from 63% of adjusted EBITDA generated from materials in 2020% to 69% and year to date 2022 reflects the deliberate efforts to shed low margin low growth downstream businesses, while bolstering our aggregates and cement lines by the end of Verizon.

To our portfolio will generate over 75% of its EBITDA from aggregates and cement and we're bullish that our public market valuation should reflect the higher margin business we retain.

All in these three metrics our commitments that we've made in our guideposts you can use to track our progress.

Slide seven contains our elevate summit strategic roadmap with our four priorities layered on top of our foundational and enabling capabilities.

Let me take a moment to review, how we are advancing sustainability and innovation in a meaningful way and then highlight two recent portfolio moves that will make summit, even more materials led.

On slide eight we detailed two noteworthy items that for to buy so much reputation as a leader in social responsibility and a trusted innovation partner first we have partnered with the Minnesota D O T and the National Road Research Alliance project on an innovative research project to develop and test the lowest carbon Smith ops.

For future transportation infrastructure, our continental cement team produced a 20% Portland limestone cement the lowest carbon plc todays as part of a research study to evaluate its performance characteristics to potentially provide a pathway to further reduce cement carbon footprint by Purdue.

<unk> plc of the future and the second item relevant to sustainability surrounds our environmental production declarations for asphalt plants in recent months, we've obtained E. P. DS for six of our plants three in Texas, two in Colorado, and one Arkansas asphalt plant and we plan to have the rest of our permanent asphalt facilities.

And Texas completed by the end of the year with college leadership and exceptional engagement throughout the summit business, we're taking a leading role on social responsibility our commitment we've made to our stakeholders and the communities we serve.

Moving to slide nine where I'm excited to share two recent portfolio moves that further tills the mix towards higher margin materials lines of business. The first is the sale of an asphalt and paving business in the east segment to a strong and capable local market partner.

And consistent with our asset light approach, we have entered into a long term supply agreement with the buyer, thereby permitting our aggregates and ready mix volumes to grow in the south Eastern Kansas market.

By selectively exiting downstream businesses for which there is a better owner.

Lower resulting asset base can favorably and has our ROIC and we retained higher quality businesses that are accretive to margins. This is the 11th no regrets divestiture as part of our elevate summit strategy and with this sale collective proceeds have topped $500 million well in excess of the original target for 200 million.

Selling these assets at over 10 times EBITDA demonstrates the sharp price discipline. Our team has employed while also indicating that the assets. We've retained in our opinion should be valued in excess of those we sold.

The second portfolio moves the acquisition of Sci materials and aggregates based business in the high growth, Florida market that was completed on October 14th with Sci Summit is acquiring an irreplaceable reserve expanding our geographic footprint and advancing our materials first strategy S. C.

Hi materials will integrate with our Georgia stone products business and contribute to our east segment, while relatively small in size. This acquisition can be a blueprint for how we're thinking about M&A. If you recall last quarter, we laid out a three pronged criteria for horizon to M&A that included Richard the portfolio mix.

Pissing on bolt ons and entering or building strong footholds in high growth strategic markets. The Sci acquisition clearly checks all three of these boxes.

We are extremely pleased to add a high value platform asset into the portfolio and it's a clear signal that summit is well positioned to play offense in horizon. Two let me now turn it over to Brian for a detailed review of our financial performance Brian .

Thank you Anne and I'll begin on slide 11, with a look at how pricing has trended by line of business.

As expected and consistent with our second quarter commentary pricing inflected higher across all lines of business in the third quarter.

Broadly this reflect the compounding of earlier pricing actions. The successful implementation of July 1st pricing across all lines and in all geographies and value pricing principles at work.

In aggregates pricing increased 10, 2% and is up six 5% over the first nine months of 2022.

Two Texas operating companies registered the two strongest year on your aggregates price increases in the third quarter.

Given the strong trends in pricing, we remain confident that we will land within our 2022 expectations and exit 2022 with tremendous pricing momentum.

Likewise cement market conditions remain supportive of continued pricing and as I mentioned, we have announced a $17 per ton price increase effective January 1st.

So long as demand stays robust supply remains tight and imports expensive. We believe it creates a favorable backdrop for cement pricing.

In our downstream businesses, which are more pass through in nature. The strong year on year pricing growth, primarily reflects passing elevated input costs through the value chain.

Moving to volumes by line of business on Slide 12.

Here, we are quantifying the impact from acquisitions and divestitures in Q3 and on a year to date basis to provide a cleaner look at organic volume trends.

Take aggregates reported <unk> volume was down 9% backing out the 70 basis point benefit from acquisition and the 620 basis point drag from divestitures and you'd see a organic volume decline for aggregates was three 5% driven by the factors that I mentioned earlier.

But bear repeating specifically unfavorable weather in Texas, and the Carolinas as well as supply chain issues that limited cement and trucking availability in certain markets constrained aggregates volume growth in the quarter.

In our downstream businesses, you can see the dramatic impact of divestitures have on quarterly and year to date volumes as the vast majority of our elevate summit divestitures occurred in these downstream businesses, notably ready makes organic volumes through the first nine months are down driven primarily by lower volumes in Utah.

From cement shortages earlier in the year, while Houston ready mix volumes are up low single digits in 2022 as residential demand there has been relatively resilient although volumes did moderate in Q3 on slide 13, we provide an adjusted cash gross profit margin comparison by line of business.

For the third quarter, despite strong pricing significant inflationary headwinds resulted in contracting gross margin profiles across each line of business.

On aggregates input costs have increased at an accelerating pace through Q3, namely in repair and maintenance labor equipment, and energy costs, which cumulatively have outpaced price increases.

Cement segment adjusted cash gross margins declined to 42, 5%, reflecting unscheduled production outages higher energy and transportation costs as well as a greater proportion of imported cement.

Products and services gross profit margins declined versus the year ago period, as pricing lagged higher labor and energy costs with the most acute pressures primarily on asphalt and north Texas now moving on to slide 14 for a look at additional non-GAAP metrics adjusted EBITDA margin of 27%.

Was down from 28, 7% in <unk> 'twenty, one driven primarily by higher variable cost inflation net of pricing gains EBITDA margins. However were aided by G&A cost controls where expenses were lower year on year in the third quarter by seven 4 million or roughly 100.

40 basis points as a percentage of net revenue.

Third quarter adjusted diluted earnings per share of <unk> 71.

<unk> <unk> ahead of prior year levels, reflecting in part lower DD&A expenses, and a lower interest burden relative to the year ago period.

I'll wrap up with capital structure on slide 15.

As I mentioned Q3 2022 leverage ratio was two three times net debt to adjusted EBITDA down 0.4 times versus the prior year period and.

In the third quarter under provisions related to the divestitures of businesses, we repaid $23 $3 million of our term loan, bringing our total repayment to $95 6 million over the first nine months of 2022. Consequently, these repayments have moderated the interest burden helping too.

Partially offset impacts from a higher rate environment. So that we now expect our interest expense to approximate 85 million to 90 million. This year. Additionally, in Q3, reflecting our view that our shares were undervalued and supported by our strong cash position, we repurchased approximately one nine.

Million shares for roughly $53 $5 million.

<unk> $149 million remain under the three year $250 million share repurchase authorization.

As of October one with available cash on hand, and an undrawn revolver, we maintained nearly $800 million of available liquidity and a fortified balance sheet. You can expect us to use this firepower to pursue attractive capital allocation opportunities that further our strategic objectives, while delivering.

Superior value to summit shareholders.

Before turning the call back to them for the purposes of calculating adjusted diluted earnings per share. Please use a share count of $119 1 million, which includes $117 8 million class a shares and $1 3 million LP units.

Let me now pass back to Ann for a look ahead and her closing remarks.

Thank you Brian on Slide 17, we provide a quick yes important status update on our aggregates Greenfield a key driver of summit's organic growth trajectory. We are proud to report that as of October 10th our Carnival site is fully operational and open for business Carnival is strategically located and complements our footprint of the eye.

85 corridor between Atlanta and Greenfield.

This is a region in market that is benefiting from incredible population growth is underpinned by strong economic fundamentals and we believe has a long runway for growth, especially in nonresidential and public works. This is a prime destination for distribution centers battery plants and ongoing D. O T work to expand I 85, it's just one inch.

Restructure project in the area.

On slide 18, we provide our updated guidance for 2022 as noted in yesterday's press release, we have revised our full year EBITDA expectations to reflect 2022 performance to date. The additional divestiture, we made in the third quarter and the projected fourth quarter impacts from hurricane in and law.

Mississippi River levels as a result, 2022 adjusted EBITDA is now expected to be between $490 million and $510 million in 2022, which at the midpoint represents mid single digit adjusted EBITDA growth on a 2021 base adjusted for divestitures.

In light of inflation supply chain constraints hurricane in the Mississippi River challenges. We feel this is very strong performance in an uncertain macro environment.

Our revised expectations for 2020 to incorporate the following assumptions first forgone EBITDA from all divestitures completed thus far will have a roughly $13 5 million impact on the fourth quarter and approximately $45 million impact for the full year second because of meaningful.

Pricing tailwind, we now expect high single digit pricing growth on a full year basis.

Third we have not seen and are not anticipating inflation to ease in any material way in Q4.

And finally Q4 will be impacted by two discrete items hurricane <unk> impact on our Carolina, and Georgia operations and the impact of Continental cement due to low Mississippi River levels. Together. We estimate these will have roughly a $5 million EBITDA impact in Q4 relative to the prior year period.

Additionally, we have adjusted our expectations for 2022, G&A expenses to be between $185 million and $190 million and.

And finally, we now expect capital expenditures to fall below our previous forecast and instead, we'll spend between $240 million and $260 million for 2022.

Bottom line is that as we close out 2022, our teams remain focused on strategic execution controlling what we can control and building momentum heading into 2023.

Now as we pulled together our 2023 plans and budgets we are doing so at a unique time in U S markets as always our management posture is to reflect the realities of the marketplace. While at the same time setting in place contingencies for the downside scenarios with that in mind, we are conducting cost containment measures where appropriate and primarily in disk.

Aggression every areas that do not jeopardize safety our business growth. We believe this is prudent positioning as overall market conditions are uncertain, but ultimately our 2023 performance will be heavily influenced by the trajectory of each of our end markets. So on slide 19, we provide in broad strokes, our latest view for each of our end markets.

Let's start with the public end market, which makes up roughly 36% to 38% of our annual net revenue to start we don't view public markets are cyclical, yes state budgets can fluctuate, but we find the public infrastructure work as a reliable source of steady growth for heavy building materials for 2020 three public.

<unk> are poised to experience robust and durable growth driven by well funded state budgets and as infrastructure funding begins to flow through we're already seeing solid state D. O T budgets flowed through to contract awards data with highway and paving awards accelerating significantly for summit's top eight states over the last three months.

Awards are up 41%, which is nearly four points better than the national trend and a steep acceleration from the previous three month growth rate.

The point is that our states are outpacing national trends and experiencing tremendous momentum heading into 2023.

Moving next to nonresidential, where our base case scenario is that growth will vary by channels and favorite verticals that are supported by robust economic investment take for example, the move to onshore critical parts and manufacturing. This has resulted in several semiconductor plants back in ground some in our geographic footprint other chat.

<unk> likely to see growth in 2023, our green energy projects that includes electric vehicle and battery plants as well as LNG projects, particularly in the Midwest, Texas and Gulf Coast Technology companies are moving to our high growth markets, such as Utah, where they're building new offices in campuses.

On balance we are bullish on nonresidential in 'twenty 'twenty three with our perspective bolstered by both the Dodge momentum index and the Abi that remain in positive territory.

Turning now to the residential end market, which if you recall from our August call. We are preparing for residential markets to go through a period of deceleration in 2023, and that's a view that we are reiterating today.

Residential markets are clearly moving through a price discovery phase as affordability has deteriorated on higher rates and homebuilders proceed with more caution consequently, and at national level single family permits the best predictor of future starts continue to move lower year on year down nearly 8% in September .

What's important is that we put some context around this trend.

First single family permits have remained north of $1 million and well above 2019 levels when residential markets were considered healthy and growing.

While permits have declined units under construction has ticked up to record levels as construction timelines continued to be elongated by supply chain bottlenecks, which in turn are leading to extensive backlogs for residential construction.

And finally 2022 is very different from 2007 consumer balance sheets are in much better shape and we are not mired in a major global credit event, we don't believe the great financial crisis as a useful template for a coming slowdown and therefore, an air pocket rather than a wholesale collapse is in our estimation the most probable scenario.

For 2023 that said so long as inflation is elevated and the fed's primary lever to tame. It is by raising rates residential construction remains skewed towards risk for next year. Therefore, we will continue to test our embedded assumptions surrounding the depth and duration of the deceleration and have already begun to visit volumes to other <unk>.

End markets, where possible for example, our kilgore business recently secured a large commercial job for a technology company in Utah. Our teams are seasoned at pivoting towards higher growth end markets capitalizing on emerging opportunities and optimizing performance.

Now, although national trends received the headlines what's important to summit is how our local markets perform and for US. We think it's useful to drill down into our two largest residential exposures Houston and Salt Lake City.

First for both Houston, and Salt Lake City have benefited from in migration trends when population growth as well as household formation significantly and consistently outpaced the national trend second bolt metros are advantaged in terms of affordability relative to national average as well as other major msas.

Finally, while more supply has come online both remained below national levels of what we would regard as healthy levels of supply.

When you pull it altogether and notwithstanding the near term air pocket that we are preparing for our long term view on residential growth is unchanged. We think several factors favor strong residential construction trends over time from the aging of the existing housing inventories to well capitalized cohorts entering prime home buying age two.

All changes that are prompting homebuyers to seek out suburban ex urban area. We are firm believers that we are playing in the right residential markets that will benefit from these factors in the long run.

Non residential growth to be positive and largely be project dependent and that residential will slow although the depth and duration of the slowdown is still to be determined of course as is customary we will provide a more granular outlook on February one we'll have more visibility into how 2023 will play out as.

That's an important point I want to underline is that with our clean strong balance sheet, we are well positioned to pursue attractive inorganic opportunities through the cycle something we couldn't do previously the takeaway is that embedded in the elevate summit strategy is an agility and resiliency to manage through uncertain times and capitalize on the opera.

<unk> that emerge in the year ahead.

Before taking your questions I'd be remiss, if I didn't acknowledge the CFO transition that we announced in September after nearly 10 years of service to summit materials, and a long and accomplished career, Brian announced he would step down as CFO . Once a successor is named and then continued to serve summit in an advisory capacity thereafter.

Personally Brian in depth industry knowledge and intimate understanding of our organization has proven invaluable as I stepped in as CEO . In 2020. He has built a world class finance team over the last several years and because of his finance leadership and foresight. He has truly set up somewhat for continued success with our elevate.

Strategy I know, you're not going anywhere anytime soon but thank you Brian for your commitment to this great organization and congratulations on a career filled with countless achievements and accolades.

Now, Brian and I will turn attention to answering your questions.

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.

Okay.

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

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

Brian Thanks for all the help over the years.

Best wishes in your retirement, maybe you can even.

They got in play a little golf.

[laughter] can you just talk about kind of the pricing tailwind right I mean, you're exiting at a very strong rate what sort of pricing carryover should we expect into next year. You know you mentioned.

The January $117 per ton increase just ballpark, how we think about pricing accelerating into next year.

Yeah.

Thanks Stanley.

Let me address where we are on AG first so eggs, we as we said in our prepared comments.

We are confident that we will end the year at high single digit growth because as you saw we had a big step change here due to the strength of our July price increase as we go into 2023, we see a very strong demand dynamic and ability to continue have inflation adjusted pricing and we'll go with it.

<unk> based January price increase across our enterprise cement is already a double digit acceleration coming out of 2022, and we did to your point talk about the $17 per ton increase which will be necessary given that we're lapping these very significant energy escalation costs in our cement business.

We believe bottomline that in 2023, it'll be very constructive to pricing across all of our business.

Downstream markets as you know we've been pricing very robustly to pass along at a minimum and in materials costs, but we always hope to expand margins in that way as well.

Alright, thank you.

Okay.

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

Good morning, everyone. Thanks for taking my question I also wanted to congratulate Brian on your retirement as well, but nice working with you.

Best of luck on your next chapter.

Mike My first question.

So and you mentioned not expecting inflation to ease in the for Q.

And I know you guys pre buy some of your diesel.

Mentioned, the energy side of your cement business.

Well, we'll probably remain elevated but how are you thinking about the overall cost trends as we look into next year and given the pricing outlook.

From where we stand today, how are you thinking about.

Margins across your business lines given that backdrop.

Yeah, I mean, I'll give you a kind of the high level as we're thinking about from a cost perspective, we do not believe installation will materially change we're going in with an assumption that is going to stay high and so our pricing on January 1st will reflect that.

And basically our supply chain continues to be a drag with respect to having just higher costs and cement increases are out there at a pretty high rate as well so from an energy perspective, while we might see some moderation on diesel.

We are not expecting this inflation is going to go away in any way shape or form so we're pricing.

With respect to keeping net head of costs and we're also as you know trade working very hard on our centers of excellence to work on our operational side, where we have a number of activities underway to mitigate cost escalation and that's in the form of our continuous improvement events, which we've really been gaining momentum on our procure.

And setting up the standardization of our procurement practices. So basically the track that we've been on value pricing and operational excellence is where we're planning to expand our margins over time as we go through Q4, the price momentum will be there we expect another price increase in October one.

And one in Texas as an example, so we will continue with that pricing momentum.

However, we will we expect will have a good opportunity to expand margins in Q4, because we have a nice basically lapping onetime costs from Q4 2021 also our mix because of our portfolio.

Portfolio optimization, the businesses that we have actually divested have basically lower contribution to Q4, so that richness of the portfolio mix should come out in Q4 and extend into 2023.

Got it.

Thank you for all that color that was helpful. If I could just sneak one more in on the cement volume in the quarter, especially impressive.

Can you talk about some of the drivers there was there anything unique going on to drive such strong volume in the quarter and is that level sustainable.

Persist at that level next year kind of just thinking about your ability to continue to purchase material and also how the increased.

Plc could play into it.

Yeah. So we are working very hard to meet our cement customers demand.

It is extremely tight and nearly every plant in our high fixed cost plants are running flat out right. Now so you lose a day it doesn't come back trade. That's the reality our plants have run very well our team has done a great job of really working on keeping our downtime at a minimum we've also been as you point out buying imports and.

Just to give you a context traditionally we'd have about 5% of our volume in imports in Q3. It was 15% of our volume now that came with a little bit of a hit to margin obviously, because we don't make the same margin on imports as we do on our domestically produced.

Right decision for the business and for our customers to grow our dollars of EBITDA from a plc perspective, we've talked about a 5% to 10% ability to supply the market and we are fully converted on plc conversion and then the other factor I would talk about our Davenport dome is now in place and that's going to allow us to give more security of supply to our north.

Customers plus reduce our demurrage costs. So it's a combination of imports and really strengthening our operational excellence and our value pricing on cement will continue that strong performance.

Thank you and I appreciate the color I'll turn it over thank you.

Thanks Ray.

Your next question comes from the line of Phil English Jefferies.

Hi, Good morning, this is calling on for Phil.

I guess just touching on the the import level here.

I guess is there.

This new mix towards that 15% of shipments.

The good run rate to go forward or how should we think about that mix between domestically produced in imports going forward and I guess that what tonnage levels do you need to to ramp up these enforce it.

For demand.

Well, what we're hoping over a 15% was required this year because we are not on a full European see conversion as we enter into 2023, we're going to want to optimize our domestically produced products, so that 5% to 10% bump we get from the plc full conversion of both our plants that will be the first Smith will sell in.

The markets. We will then augment with imports as they are available, but they will continue to be high priced and so we're very selective when we use them call them. When we used imports we've got to make sure. We can pass and have price protection on the higher cost imports coming into our portfolio. So it's really a very much an opportunistic plan to me.

Our customers' needs, but will always go for the domestically produced first and we shouldn't be in really good shape to do that in 2023.

Thank you.

Thanks Collyn.

Your next question comes from the line of Brent Thielman with D. A Davidson.

Hey, great, Thanks, and Brian best wishes as well.

And can you just talk about your expectations or even what you're seeing on the ground.

Already occur for pricing and maybe more your housing centric market.

Thinking Houston and Salt Lake City, just wondering if the game there.

Match, the broader portfolio or is there is there are more pushback.

Yeah, no pricing has been very robust across all of our markets.

As you know aggregates is always a very strong pricing opportunity. We have had as you saw in our Q3 results, we really accelerated pricing from the first half and aggregates up to 11, 2% in Q3 cement was up 12 point as ready mix 18.8, and 17.8 in asphalt.

To your question, specifically to Houston, and Salt Lake City. The increases in Q3 in Houston were 20% in excess of 20% and Salt Lake City was in the high teens. So one of the things as we went through the portfolio change bread, we divested all the underperforming and weaker businesses in our downstream that served.

Housing so when you think about the summit today, it's our downstream markets are much more robust and that's by design because we have leadership positions in them. So we are able to command the pricing and the team's done a great job of passing through pricing on ready mix. In fact in Q2, we actually expanded margins a little bit. This this quarter was a little more difficult because we <unk>.

Some cement shortages, we had some weather in Texas to the point, where we were only running four days in a week at times. So I remain very confident on our ability in both ready mix and both Houston and Salt Lake City too because they are strong markets and the strength of our portfolio. There we should be able to continue with our strong pricing posture.

Okay, great. Thank you.

Thanks for your next question. Your next question comes from the line of Kathryn Thompson with Thompson Research group.

Hi, Thank you for taking my question today, when you look into 'twenty, three you've given us a bit of a sneak peek in terms of budgets that probably from a pricing standpoint.

But.

What gives you confidence in terms of your view for 'twenty three based on the preponderance of patches, particularly when you look at our backlogs.

Or larger jobs that are in the books.

Along with that given my.

Some of the logistic issues on the Mississippi River.

This obviously very important for your northern submit operations.

What gives you confidence that we'll be able to work through that in order to meet spring late spring demand next year. Thank you.

Thanks, Catherine and appreciate the question. So obviously, we're not giving guidance on 'twenty three but.

We will talk to some trends here and what gives us confidence so from let me start with the demand perspective, as we've talked we see public strengthening and accelerating and that's a very non cyclical part of our business. So you know our contract and highway paving awards for our top eight states were up 24% year on year, which is three points above.

The national average and if I take Utah out of that were actually up 32% and which is 10 points above the national average. So we remain very robust on the public side, so that should be a very good strengths for us moving forward.

Non residential to your point on projects, we last quarter I talked about three major projects that have come in in our Kansas City area and Logistics Park, an industrial Park and Panasonic 4 billion dollar investment in electric vehicle batteries Theres, even been three more projects that have come in and this is what we look out for strength. So we've got.

Soybean plant in southeast, Kansas, Our rail expansion project in Wichita, and mixed use warehouse facility in Kansas City. So you see our central region, becoming really very heavy project laden in Utah, We talked about the Tech campus project that we secured in our prepared remarks, but we also have eggs in ready mix Intel.

Ziv warehouse projects, we have manufacturing facilities in multi use construction jobs that have also been put out there and we've talked in the past about our LNG investment with our cement business and then our southeast region continues to have warehousing and Charleston around our Jefferson quarry, So really robustness.

Around the nonresidential as well and all of the indices that we talked about in our prepared remarks around the Dodge momentum in a b I am I would say also the thing we've looked at is that private nonresidential spending is up 10, 4% in September and 44% of that is in manufacturing. So we see confidence there in U S spending.

Which really supports that continued investment in manufacturing and in energy projects.

Specific to your question about the river and cement. So our team are really looking at this and it's a very dynamic situation as you might imagine.

Today, we're working heavily with our customers and what we're seeing we're managing through it we're seeing a little bit of delayed shipments as well I would say, but we have a number of mitigation activities underway. The first thing that the team is working on is really getting product inventories into Louisiana, St. Louis in Memphis as a priority.

We're also looking at securing more truck availability to basically augment our light loading on barges. We're also working with our customers who were getting very creative about pick up pick up options at our plants and then we're working with industry partnerships to try and basically.

Get more flexibility into our supply chain. So overall, we feel that these actions are in place to not only mitigate Q4, Catherine but also as you know we've got to mitigate back Q3, I'm locked closure side with dependable. So we've got to have these actions in place. So yes to your point it is a.

It's something we're very.

Very intent on right this minute, but I feel the team has got a good handle on mitigating it into 'twenty 'twenty three when we get to February we'll have a much better view on this for you.

Alright, Thank you very much and Brian that's not been a pleasure working with you over the years.

Thank you Catherine.

Your next question comes from the line of Anthony Pettinari with Citigroup.

Hi, This is Asher stone and offer Anthony Thanks for taking my question just on the challenges, forcing equipment that you mentioned about sort of as part of your prepared remarks are they sort of unique to you or should we think of them as being supportive of pricing power across the industry in the same way that maybe energy cost inflation permitted some healthy pricing.

In 2022, and then is there any way to sort of size the cost headwind from equipment sourcing and sometimes it's the contract cost for contractor costs that you are saying.

I'll just give you a high level, but maybe Brian can give some specifics on it there it's not unique to us for me, yes, I've heard it's basically our we have our capital equipment that we've put our orders and further coming in late and what happens is within the quarter ash or we will get have to spend more on repair and maintenance because we get a call and say that piece of equipment.

It's not coming in so we have to spend more on repair and maintenance to extend the life of our equipment, maybe Brian you can talk a little bit more about that yeah. So im sure Youll see it in the fact that we've taken down our Capex guide for the year, we brought that down just because we're not going to be able to spend everything that we had originally anticipated due to those delays in mostly in <unk>.

The area of yellow iron and another over the road trucks have been delayed.

And obviously that just puts more pressure on the equipment that we do have and we got to keep it running and so those are and there is inflation in the input cost of the repair and maintenance items as well. So it's a it's been quite a challenging year from that perspective.

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

Thanks Ashwin.

Next question comes from the line of Jerry Revich with Goldman Sachs.

Yes, hi, good morning, everyone and Brian Congratulations on all the all of the growth in the business under your watch and congratulations on not having to.

Work with us going forward.

[laughter].

Jerry.

Uh huh.

Can I ask so the.

Cost pressures, obviously came a quick and fierce this year pricing actions are permanent and now we're talking about a margin expansion perpetually exiting the fourth quarter and.

If we think about the carryover effect.

But price cost tailwind from the beginning of the year it feels like you're set up for.

4.5 point year over year margin tailwind.

Starting off 23, I'm wondering if you can comment on that and.

And maybe touch on.

Expected performance of your downstream businesses.

Slower environment, you folks have obviously consolidated the market and a lot of areas can you just comment on how you expect the downstream portfolio to perform.

Because the aggregates product line performance.

Obviously, a very good track record for.

Yeah. So Jerry Thanks for the question, we are not in the point of giving guidance. Our teams really working very hard on multiple scenarios for the budget for next year. So we won't be ready to give much granularity about margin expansion until we get into.

February time frame, we did say in Q4, it's our best chance of expanding margins for the reasons I outlined earlier on.

We've got nice price momentum, we believe demand will be strong to your point. So you know if inflation in any way eases off you know the strength of our aggregates pricing will hold and that's when we would expect to see some of that margin expansion, but we don't have a crystal ball today. So we're going to assume and plan around heavy inflation as we enter into 2023 and our pricing.

Our cost and operational excellence actions will be in accordance with that assumption now downstream environment slowing we are planning a couple of things and I mentioned this in my.

Prepared remarks, so if residential does slow we are already we're not waiting for that our team have already started pivoting some work into the more commercial side nonresidential and public and it really started with having some momentum in that direction now we never say, we can convert everything but then I would also say our residential markets we don't see.

<unk> scaled collapsed, we see more of a deceleration and in fact some of our homebuilders are talking about basically taken the opportunity during deceleration to build up their land inventories, which we actually see as a positive response. So I think our business is because as I said earlier the strength of the portfolio in the markets. We now play in in the downstream.

Very deliberately versus what we had maybe even a year and a half ago is so much stronger we should fare quite well.

Alright. Thanks.

Thanks Jerry.

Your next question comes from the line of Adam Thalheimer with Thompson Davis.

Thanks for taking the question on.

On the M&A side can you give us a sense of kind of how many transactions you are evaluating right now I'm curious both on the on the sales side from this point going forward and the acquisition side.

Well from a sales perspective, if you think about our three horizons horizon, one was much more about it being a project with respect to divestitures I'm really tidying up the portfolio as we've now moved into a horizon. Two you should really think about divestitures being more of a process not a project and just being much more focused on.

And value, creating M&A and we gave you. An example of a small one we did in this particular quarter, we have a very rich pipeline I can't give you. The exact number sitting here I would say, they're all at various stages of development, but the good news is that we have the strong balance sheet, a much stronger portfolio to add on and a company that's much more.

The jail because of our focus on centers of excellence. So we are very positive about being able to acquire even in a down cycle and so we will continue to have our teams focused we've reorganized our business development team a little bit to be very much focused within our regions and really build on our core bolt on opportunities that summit's D.

N E and so you should expect to see more of that from us and see more of us like the one we did this quarter going into a strategic growth market.

Okay. Thanks, Dan.

Thank you.

Your next question comes from the line of David Macgregor with Longbow Research.

Yes, good morning, everyone.

And congratulations to you and your team on all the progress.

Shaping up very nicely.

Wanted to just go back and ask you about a couple of things that you had indicated in your prepared remarks, one of which was with respect to the cement business I'm talking to you about the effort to build a more sustainable.

Margin performance above 40%.

Guess, what does that take from where you are now is that all pricing or I'm guessing, it's maybe a little more than that but if you could talk about that and then just secondly on the Sci acquisition and I fully appreciate that this is a small.

But you did reference it.

What form asset and so I guess whats changing in terms of your view of Florida, and what's kind of a long term vision for summit, Florida. Thank you.

Okay. Thank you David appreciate the question. So let me address the cement Northstar objective that we have a 40% sustainable EBITDA margin. So the team's really been doing a very nice job over the last two years focusing heavily first of all on supply chain optimization.

Secondly, they have really worked on commercial excellence and not just in the motive value pricing, but also in optimizing our customer mix such that we're really have a better mix of low to medium sized customers are not so dependent on heavy power buyer. So that has momentum that part of the business is working extremely well there.

Other factor I would point you to that's been is a very much a factor in getting to that sustainable 40% is just plain old operational excellence, reducing downtime and really being very very good at lean six Sigma OE E. All of those things operating very well and then the third one which we talked about a lot of dark Green America resize.

Link and Green America, we have it contributed in 'twenty, one, but $4 million, we've been expanding it and in 2022 it should contribute about eight to 9 million to our EBITDA and then as we go out over the next year, you should think about adding another four to 5 million and that which is the EBITDA mix because that has a stronger margin business.

The portfolio and then the fourth point I would talk to is the Davenport dome, which has reduced our demurrage costs provide security of supply to our northern customers and so overall, it's additive to that additional margin expansion. So I believe we've got a very credible path to our cement, 40% EBITA margin. So the team's been exit.

<unk> extremely well.

With respect to your Sci question, Yes. It is small and we do see it as a platform. So one of the things to remember it to point out about this it's one of our strategic markets, where we do see a path to number one or number two position, which was one of the things. We've always held out there. It's aggregates led it isn't a fragmented markets. So just like we did when you.

Think about when summit first went to Utah and grew bolt on bolt on after bolt ons to become what it is today, we see the opportunity at SDI to do that obviously, we won't go into much more detailed than that for competitive reasons, but this is some its DNA and with the fragmented market and the difficulty of logistics and that particular mark.

Because we believe theres an opportunity to have a very strong position over time.

Hopefully that answers my question.

It does thanks, very much and good luck Brian .

Thanks, David.

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

Oh, hi, Thanks for taking my question.

You called out a mixed benefit in the fourth quarter from the best of crude falling off and some of the seasonality.

Those assets that you had I'm wondering if there's any way to quantify it.

And then.

Just on the non runs pivot that you called out several projects and winds out west.

Could we knew.

<unk> June approach kind of.

Moving more towards non res and just kind of curious what goes into two winning some of these larger projects like or no hardwood.

Well no I you broke up on the front end of your question on the mix benefit. So it might have to ask you to repeat that back Eric Let me address the non res pivot and Hello, Bryan to maybe you can repeat the first part of your question. So.

What goes into that it's not as big a pivot as you might think because we have the products. The team is very seasoned at doing it and we don't take a margin hit by doing that they are heavy aggregates intensive projects. So it's really the one thing I would point out about non res, we try and keep a nice balance between non res and residential I'll use salt Lake City as an example.

You have your positive residential customers on development over time, non res can be a little more bumpy.

And if you talked when I first joined the company in 2020, we had very few non res projects. So you're seeing that acceleration of non res following up residential growth, but you're also seeing this energy focus and onshoring of manufacturing, which I would say is where most of our projects are coming from and we see them as large volume projects in that.

What would force us to move over to those projects with the aggregates intensity, but we'll always keep a good balance because that's one of the nice things about summit portfolio is that we do have that nice balance of end markets and ability to pivot Brian you want to ask could you repeat the first part Derik I think it was about a portfolio mix.

Yes, sorry, I broke up there hopefully you can hear me better now.

He was asking about the divestitures that are rolling off in the fourth quarter. You cited there was going to be some comparability and mix benefits in the fourth quarter of this year. Just wondering if there's any way to quantify how much of the margin benefit you're going to see in the fourth quarter from the absence of the assets that you had last year.

Yes.

No I mean, we've got a we cited about $13 5 million of EBITDA rolling off and we've got the impact of the.

Of the Mississippi River in.

In the fourth quarter, which we quantified at approximately $5 million.

I think it's.

The improvement year on year is going to come from that pricing momentum primarily that we've already baked into the into the numbers you saw it in Q3, we expect that pricing momentum to rollover into Q4 and as I mentioned, we actually have a price increase in the first of October in Texas. So.

That's what will make the difference quarter on quarter.

Got it thank you.

Thank you.

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

Hi, This is actually Chris kalata on for Mike. Thanks for taking my questions I was hoping we could maybe dial in on the <unk>.

Margin outlook, specifically it looks like there's a pretty wide range of outcomes potentially given the range you gave for the full year. So I'm just hoping maybe you could flush out you know what what what gets you to the high end of your margin.

Next quarter low end, what are the big kind of moving pieces that we should be focused on.

Yeah, Chris typically in the fourth quarter is one in which it's a little bit weather dependent you get a good run of mild weather through into the fourth quarter that will really help with the margin.

It will pull through a lot of extra volume.

The pricing, obviously is going to be a make a difference for us this year significant pricing momentum going into Q4.

But then offset by those are you know the uncertainty around the river markets would be the one maybe a little bit of a wildcard right now as we as we go into Q4, but pricing and more days we can have.

The balance of the year the better the outcome.

Yeah.

I appreciate the color.

Thank you.

There are no further questions at this time I will turn the call over to Ann Newman CEO for any closing remarks.

Okay. Thank you again, congratulations Brian on your pending retirement I'll leave you with three key takeaways first we are making strategic progress along each of our priorities.

She had a record net leverage ratio taken significant strides towards our 10% ROIC target and made several value enhancing moves the strengthen enrich in the portfolio.

We are acting with agility in the face of uncertain economic conditions that means continuing to execute on pricing to what local markets will bear pivoting volumes towards higher growth and looking to advance our self help margin initiatives aimed at stemming inflationary headwinds with execution overtime, we are confident that our margin progress.

We'll show through.

Finally, we have the strongest balance sheet in company history, and we are better positioned to pursue attractive organic and inorganic opportunities than ever before as you've seen today, we will continually optimize our portfolio, while investing and growing prioritize markets as we continue to make strategic progress focus on what we can control and invest in high.

Return opportunities will emerge as a more consistent and a more profitable summit materials as always we thank you for your continued support for summit materials and we hope you have a nice day.

Thank you for participating that concludes today's conference you may disconnect at this time.

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