Q3 2023 Summit Materials Inc Earnings Call
Hello. Good morning, My name is Jeremy and I will be your conference operator today at.
At this time I would like to welcome everyone to the summit materials incorporated 2023 earnings conference call all.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll 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.
To withdraw your question press Star one.
Now I'd like to turn the call over to Andy Larkin.
Vice President of Investor Relations.
Hello, and welcome to the summit materials third quarter 2023 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 our supplemental workbook, highlighting key financial and operating data all of these materials can be found on our Investor Relations website.
Management'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.
For a discussion of some of the factors that could cause actual results to differ please see the risk factors section of semi materials latest annual report on Form 10-K as updated from time to time in our subsequent filings with the SEC.
You can find reconciliations of historical non-GAAP financial measures discussed in today's call in our press release.
Today I am pleased to be joined by Anne Noonan, Summit's, CEO, Scott Anderson, our Chief Financial Officer.
And we'll begin with opening commentary Scott will then review our financial performance and then and we'll conclude our prepared remarks with our view on the path forward.
After that we will open the line for questions.
Our respect for other analysts in the time, we have allotted please limit yourself to one question and then return to the queue. So we can accommodate as many analysts as possible anytime we have available I'll now turn the call over to Ann.
Thanks, Andy and thanks to everyone. Joining today's call. We've certainly been very diligent in progressing multiple work streams since our last call in August alongside all of our undertakings, our summit family hasn't lost sight of our TARP obligation to create and foster a safe working environment for our employees and our communities each of US has a duty and commitment to put safety.
First in service of the common good and although our journey is ongoing we are taking steps each day to build a zero harm culture in a safer summit materials. This.
This quarter before Scott takes you through the financials I'd like to provide some high level commentary on our third quarter financial performance, our 2023 outlook as well as provide a progress report on other relevant topics this quarter.
First we continue to execute our elevate summit strategy, making significant progress against our financial priorities in the third quarter, we generated record levels of net revenue cash gross profit and adjusted EBITDA.
Furthermore, leverage remains near all time lows.
At all time highs and this quarter, we set and elevate summit high watermark for our trailing 12 month EBITDA margin at 24% Chris.
Critical to our overall margin trajectory is the common distribution from our materials lines of business.
As expected aggregates margins stepped up materially this quarter adjusted cash gross profit margins increased 570 basis points year on year in Q3 and is now positive on a year to date basis. Likewise cement EBITDA margins were up 260 basis points in Q3 to 41, 5%.
In both businesses, we are moving towards our North star objectives, with aggregates 170 basis points closer to its cash gross profit margin Northstar objective of 60% and submit 250 basis points closer to its Northstar EBITDA margin objective of 40% in a moment Scott will unpack the drivers for you.
But essentially commercial and operational execution is fueling greater profitability, an important component of our value creation model.
Second regarding our 2023 outlook today, we are increasing the low end of our full year 2023, EBITDA range to $560 million, thereby upgrading the midpoint of our guide to $565 million.
This puts us on track to deliver mid teens EBITDA growth year on year, and EBITDA margins of between 23, 5% and 24% in 2023, our confidence to increase our forecast yet again is underpinned by our year to date performance and the collective execution of our summit teams.
Third we continue to pursue a complete retirement of our TRA liability I collapsed, our up sea structure, which when completed will significantly reduce corporate complicity and streamline our organizational structure.
It may take some time to fully complete but consistent with the Blackstone portion of the agreement we intend to follow a disciplined approach that is value creative for our shareholders Lastly.
Lastly, we remain on track to close the Argos transaction before the end of the first quarter of 2024 from a process standpoint, we have filed our preliminary proxy cleared HSR review and our position to file our definitive proxy later this month at that point, we will announce the date of our shareholder vote.
With bridge financing in place, we have the flexibility to Opportunistically undertake financing when markets are most advantageous for us to do so in the interim we are developing detailed integration plans designed and got talent rich highly effective organization and positioning the enterprise to immediately start to deliver on our synergy commitments upon close.
When complete the combination will accelerate our materials led strategy enhanced our scale and reach in cement and bolster our cash flow generation to fuel further aggregates oriented organic and inorganic growth opportunities now before turning the Florida, Scott I'd like to recognize and thank my summit colleagues across our footprint.
We have remained laser focused on their 2023 commitments. Thanks to them. We are on course to achieve record financial results. This year. They have a lot to be proud of and I applaud them on their efforts and diligence this year with that I'll turn it over to Scott to walk you through the quarter.
Thanks, Anne turning to slide six I'll pick up where it left off by adding specifics to our elevate summit scorecard for leverage we remain at two three times flat versus prior quarter and well below our long standing commitment to be below three times. This is especially impressive considering we used $122 $9 million.
Cash to acquire among others all of Blackstone's rights and interest in the TRA, where approximately 80% of the total TRA liability at a substantial discount to its carrying value.
For ROIC, we again saw progress up 20 basis points sequentially to 10, 3% and moving further ahead of our 10% minimum.
And as Ann mentioned, our last 12 month EBITDA margin is up to 24% driven not only by a notable acceleration in aggregates margin, but by margin growth across all lines of business in Q3, 24% represents and elevate summit record and positions us to deliver on our stated goal of 23, 5% to <unk>.
24% for the full year, adding.
Adding color to that margin picture on slide seven Youll see our Q3 financial highlights net revenue increased eight 2% driven by ongoing pricing momentum across each of our lines of business fueled by mid year price increases in aggregates and cement as well as pass through pricing for our downstream businesses. Our commercial teams are in.
Secondly, pricing to what our local markets will bear.
Pricing growth in combination with sound operational execution drove adjusted cash gross profit and adjusted EBITDA growth of 15, 5% and 12, 8% respectively. In the quarter. This came despite volumes that have been negatively impacted by the residential air pocket and unfavorable weather conditions in certain markets.
Segment performance on slide eight shows each business segment grew both EBITDA dollars and EBITDA margin in the quarter, our west segment registered strong pricing growth across all lines of business and continues to benefit from public infrastructure demand in our two largest asphalt markets North, Texas and the inner mountain West.
The third quarter was the first full quarter of our newly entered the Phoenix market and so far the business has been operating better than we originally anticipated.
<unk> segment, which is nearly a pure play aggregates business grew EBITDA 13, 5% in the quarter and is up 17, 8% in 2023 is greater Greenfield contributions together with strong pricing and operational improvements is generating solid sustainable growth.
<unk> achieved positive top line growth in the quarter, despite lower volumes as wet conditions in northern markets, particularly Minnesota, and Iowa combined with reduced import volume led to lower volumes relative to Q3, 2022 that said mid year price execution remains strong as average selling price increased to $1 55.
79 up nearly $6 70 per ton from Q2, reflecting solid price realization and driven by healthy supply demand dynamics, along a river markets overall third quarter adjusted EBITDA increased eight 1% and EBITDA margin improved 260 basis points year on year move.
Moving now to pricing on slide nine and.
And I'd start by simply reiterating our general view that demand conditions and persistent cost inflation has supported a constructive pricing environment in 2023, and as Ann will talk about we expect those conditions to carry into 2024.
Third quarter average selling price for AG increased 14, 4% year over year, and four 6% sequentially, primarily reflecting the mid single digit mid year price increases implemented across our footprint we.
We saw solid traction throughout was strongest gains in Houston, Missouri, Northern Kansas and Utah.
In cement our $10 per ton price increase effective July one so all nearly 70% realization with the strongest reflection in our northern cement markets along the river as expected.
For our upstream businesses given progress so far this year, we are very confident that pricing trends will endure and we will achieve at least low teens pricing growth in eggs and mid teens growth in cement on a full year basis.
Downstream isomer input costs continue to feed higher ready mix pricing and the demand environment for asphalt together with higher liquid asphalt cost has and will continue to drive pricing growth moving forward.
On the volume side Slide 10 bridges from organic to reported by line of business.
Aggregates volumes are tracking towards our full year expectations with year to date growth in Kansas, and Virginia more than offset by lower volumes in our more residential exposed markets, specifically salt Lake City, and Houston as well as British Columbia.
As mentioned cement volumes in the quarter were negatively impacted by a combination of wet weather in our northern markets and reduced import volume in fact, lower imports accounted for roughly half of the overall volume decrease in the quarter.
Ready mix volumes continued to be impacted by challenging residential and light nonresidential conditions, although as comparisons ease in Q4, we would expect volumes to begin to stabilize. Furthermore, as we add the high growth all season Phoenix market to the portfolio reported ready mix volumes should continue to grow as we close the year.
Finally on asphalt we saw public demand continued to drive positive organic volume growth with especially good performance in the Intermountain West in British Columbia.
Adjusted gross profit margin as shown on slide 11, clearly demonstrating improved profitability across the portfolio in both the quarter to date and year to date basis.
Each line of business is extending a positive price cost relationship and effectively countering cost inflation that has not materially relented.
You recall, we had previously discussed cost inflation moderating in the second half and generally fall in that mid single digit range. Thus far through October we have not seen that occur. So we have factored in recalibrated cost expectations into our Q4 outlook.
One, especially notable areas for our cement business were higher cost of fuel our kilns and low river levels, along the Mississippi have increase the cost to serve our customers.
Thankfully our experience continental cement team is proactively working with our customers and was able to fully meet our customer commitments in the third quarter.
Round out my commentary on slide 12 by briefly noting adjusted diluted net income increased 15, 7% in the quarter and is up more than 31% in 2023, primarily reflecting strong execution and overall operating performance during the year that more than offset the higher interest expense.
And finally as of Q3 for the purposes of calculating adjusted diluted earnings per share. Please use a share count of $122 million, which includes $118 9 million class a shares and $1 3 million LP units with that I'll turn it back to Ann for our latest outlook.
Scott the way I'd like to close is to frame up our 2023 expectations then at a high level discuss our preliminary view on 2024 and wrap up by reiterating our view of the Argos transaction slide.
Slide 14 has our 2023 outlook by increasing the low end of our EBITDA range, we are increasing the midpoint to $565 million. This implies solid mid teens growth on a full year basis, but more moderate growth expectations for Q4. The Q4 profile mainly reflects three factors first is our typically risk.
<unk> stance regarding unknown weather conditions to close the year, if weather cooperates and the construction season is extended we could exceed expectations, but as a managerial team. We don't make a habit of predicting Q4 weather conditions to give you a sense of our weather sensitivity in Salt Lake City, one of our highest margin markets. Each extra day are favorable.
There could generate $1 million or more in EBITDA.
The second factor affecting Q4, our low river levels, along the Mississippi, our latest views incorporates roughly $2 million of increased operational costs to manage through these river levels. As you heard Scott say earlier, we have an experienced team exploring every possible option to meet our customer commitments and we plan to deliver the quality and service our customers.
Expect that said the reality is that we may have to incur higher costs associated with light loading barges and dredging certain parts of the river right now while we have an advantage position relative to competition. Our primary concern is around our Memphis terminal and we thought it appropriate to incorporate this risk into our year to go forecast and finally variable.
Cost inflation has not materially ease so we're embedding the assumption that cost headwinds persist as we closed the year for.
For Capex, we are maintaining our midpoint expectations at $250 million with roughly $65 million to $70 million of that occurring in Q4. Our modeling items include G&A at approximately $210 million interest expense at roughly $110 million and DD&A at $220 million for 2023.
Now turning to our preliminary look at 2024 on slide 15, our teams are in the late stages of formulating their bottoms up 2020 for budget and as we fine tune our expectations. What has emerged as a list of knowns and list of unknowns.
Let's start first with what we know and that is 2020 for setting up to be another strong year for pricing for cement were already out with our January one price increase of $15 per ton, which we believe adequately reflects a high input cost environment, including significantly higher barge rates as well as the unique value we bring to them.
<unk> place.
For aggregates, we will implement fresh pricing on January one across all markets with exact increase is dependent on demand and competitive conditions in each of our local markets and importantly, we firmly believe that we have shifted to a more dynamic pricing model with customers now expecting at least two price increases a year.
This multiple pricing approach allows for us to more quickly flow through market and cost intelligence via value pricing.
For 2024, and similar to 2023, we expect that our commercial execution will outpace anticipated cost inflation and create that positive price net of variable cost relationship. We're aiming for additionally, and unique to summit, our flexible energy model, along with operational excellence initiatives should provide material offsets cost inflation.
<unk>, providing further headroom between price and cost next year.
For 2020 for end market demand the picture is still in flux with strong visibility in the public end markets in more mixed indicators in private construction.
For public which comprises 35% to 40% of our revenue are leading indicators for future activity are flashing green.
2020 for DLT budgets for our top five public states are up 14% Lettings on a trailing 12 month basis are up nearly 26% more than seven points ahead of the national average and our public backlogs in key markets are nearly double prior year as demand is robust and accelerating for infrastructure projects.
<unk>.
For residential knowing its sensitivity to interest rates, we remain cautiously optimistic that single family construction in 2024 will at a minimum stabilized if not begin to recover next year. What we're contemplating is how the higher for longer fed approach will ripple through residential activity positive lock in impact.
We'll mitigate some of the affordability concerns, but its too early to say to what extent. Nevertheless, we remain bullish on residential in the long run and especially where we over index, namely Salt Lake City, Houston and Phoenix.
Bottom line is that the desire for homeownership is strong and durable while supply remains woefully constrained we are big believers that will be a primary beneficiary as that equation inevitably corrects itself in the long run lastly on nonresidential. We currently see the diverging trends from 2023 carrying into 2024.
Typically we expect light nonresidential to remain relatively dormant as knock on effects from the residential air pockets will impact the non res community buildout that lags residential trends on the other hand, we see sustainable growth in certain heavy nonresidential verticals onshoring of manufacturing is a durable trend underpinned by public funding.
And private companies looking to bolster their domestic supply chain.
Whats, especially encouraging is that these large scale projects have a multiplier effect they create high paying jobs that in turn lead to single family home construction and the commercial developments to support these communities.
That said not all markets will benefit equally for us we have advantaged exposure to the battery belts in the southeast the country's semiconductor hub in Phoenix and Green energy projects in America's Heartland, and along the Mississippi River as we sharpen our pencils for next year, we will add specificity to our nonresidential view, but for now.
Now are working to you is that Directionally, we should witness similar trends from 2023 extend into 2024.
Let me sum up our 2024 perspective by stepping back. We think 2024 is shaping up to be a very positive year for summit materials, we will have to navigate dynamic market conditions, but on balance. We firmly believe we will have several factors working in our favor a stronger more materials led portfolio robust pricing momentum.
A full set of self help margin opportunities and our balance sheet capable of making aggregates oriented portfolio moves.
As is customary with the us with a more granular view in February but as you heard US say last month, we think our business is certainly capable of achieving double digit EBITDA growth next year.
Central to our growth ambitions for next year and the years that follow us our integration with Argos USA together with Argos, our enterprise will be able to utilize our combined platforms and capabilities to capitalize on the tremendous growth opportunities in cement in our high growth markets.
You've heard me say before but it's worth repeating we have the proven experience and expertise to deliver profitable growth through rapid synergy realization. We are confident that are well run and transferable playbook in cement and ready mix will deliver at least $100 million in synergies as part of this combination and critically our growth strategy in cement.
Our more cash generative portfolio perfectly complements and accelerates our ongoing attention for aggregates growth through organic and inorganic avenues.
On slide 16, you'll see our top priorities as we move through the close process consistent with our commitment to transparency in everything we do you can expect us to report against these four priorities as we integrate with Argos USA.
First off we will continue to invest in aggregates growth focus on operational excellence to expand AG margins and profitably grow that piece of the portfolio. We can do that while safely integrating the companies with agility and a focus on people culture and change management.
After closing, we'll immediately start to deliver on our commitment of greater than $100 million in operational synergies while at the same time swiftly refining and executing on upside commercial synergies and finally, our ongoing priority is to optimize the portfolio while strengthening the balance sheet. These four priorities will inform our decisions guide our app.
Actions that I am confident and optimistic our team can execute on them moving summit forward and creating industry, leading value for our shareholders with that I'll ask the operator to open the line for questions.
Perfect. Thank you so much at this time I would like to remind everyone in order to ask a question Press Star then the number one on the telephone keypad.
Our first question comes from the line of Stanley Elliott from Stifel. Stanley. Please go ahead, hey, good.
Good morning, everyone. Thank you all for the question.
Im curious if you guys could kind of has shed a little bit more on the pricing outlook I mean, certainly a lot of momentum here.
Youll, finishing strong to the year.
How should we think about pricing into next year with some of the other.
Players in the space have talked about kind of double digit ish sort of numbers.
Yeah. Thanks for the question Stanley So, let's kind of deal with aggregates first so we'll exit the year here in 2023 at low teens, if not better.
As we go out and that's really driven by outstanding performance in Texas, Utah and Missouri.
And so we're now at what our January 1st price increases across all of our aggregates markets and basically those will be value priced using all the tools that we've put in place through our commercial excellence efforts to really optimize price in each of those markets and you can expect them to be in the high single digit to double digit and we'll refine that further in February.
The other thing I would say about pricing in AG I believe were now in a standard industry mode of two price increases per year, and so you will expect to see that momentum. So I've got a lot of confidence in pricing both from the carryover, which was very strong in our mid year pricing and then with our pricing that were out in January. So you can expect aggregates that price net of <unk>.
Cost expand further we're very positive on that going into 2024 for cement our pricing again, we did very strong pricing in 'twenty three will exit the year there in mid teens.
For our January one price increases at $15, a ton or mid year price increase has come in at about 70% realization. So I would expect that same kind of realization along a river markets as we go through that so overall you know my commentary had very strong pricing continuing in 2024 and you can see the margin profile.
Both our cement and aggregates business is doing that and then the downstream pricing has been very strong you saw our margins even with.
Some restrained volumes coming into our ready mix area, you saw us continue to expand margins through our pricing.
So really good execution by the team Stanley great. Thanks, so much and best of luck.
Alright, Thank you and our next question comes from the line of Trey Grooms from Stephens. Please go ahead.
Hey, good morning, and thanks for taking my question.
First off congrats on the nice work on the aggregates margin and the acceleration there.
And can you talk about some of the drivers there.
Are kind of pushing those margins up and do you think that.
Or do you expect this to continue into Q4 and maybe any early thoughts on.
The margin trajectory there in aggregates looking into next year I think you mentioned a favorable price cost outlook, but any more color you could give us there. Thank you.
Yes, so thanks Trey.
We were very encouraged by our aggregates profitability this quarter and the progress that the team has made so on a year on year basis expansion of 570 basis points was definitely very significant for us on a unit profitability basis, we were up 27% and sequentially 13, 6% and most.
Fortunately the number that Youll hear me talk about a lot is that best in class target of our north star of getting to 60% cash gross profit margin. This quarter. We started bumping up on a trailing 12 month basis about 50% and that's purely by execution and then it's the things we've talked about before trade pricing that I just explained.
Stanley we're very positive on the momentum we have coming out of 'twenty, three and going into 'twenty four so that price net of cost.
That to continue to expand but the second area that I'm extremely encouraged by is our operational excellence that have started to take hold.
And this is where we have a unique opportunity and some self help opportunities as summit and we saw it year to date, our continuous improvement projects and AG has allowed us to add $9 million to the bottom line and we have a pipeline that we've gone out and done continuous improvement events.
Lars about third of our quarries right now and that's about a $25 million EBITDA pipeline and what you can expect.
As in 2024 will even supercharge that we're adding resources in the form of project management lean six Sigma people and so we're continuing to stay extremely well focused on that as well and then the third point of drivers that I point to is our flexible energy model.
Diesel we have a 50, we're actually hedged 49% right now.
Our pricing is at $2 75 for that and on a full year basis for 2023 were 317. So those three factors are price operational excellence and our flexible fueled model should really allow us to continue to fuel our AG profitability into 2024.
Wonderful thanks for the color.
Thanks, Greg.
Our next question comes from the line Eric Schmidt. Please go ahead.
Hey, Thank you I wanted to follow up just on your comment around growing the aggregates business, even as you move forward with closing.
On the Argos USAA deal.
It is the opportunity set consistent with and just your prior comment around some of these.
Internal initiatives.
Or are there opportunities on the M&A side.
To accelerate.
In aggregate, so maybe just speak to your ability to.
Make additional acquisitions so while.
Integrating Argos so once you get to that point.
Yes, so thanks, Garrick, so you're absolutely right on target there because we are intending to grow both organically and inorganically and to your point on the organic growth. That's very much heavily driven first of all by our operational excellence in growing that bottom line and also having additional price growth, but also I'd put greenfield.
That category, we continue to have additional greenfields coming online and Theyre very margin accretive. It also so that's kind of our organic growth side, we have a very rich pipeline of inorganic growth potential as you know we've talked before about the recent acquisition. We did in Phoenix wanting to build out that aggregates platform. Our teams very active out there right now.
And to build out aggregates around that strong ready mix position that we have and then Florida. It's the same our team are out there scouring every opportunity for Greenfield and for M&A, we feel with the higher cash flow generation from our bigger cement profile will then actually be able to accelerate our number six position in aggregate. So we are very positive.
About this and feel that the Argos transaction will only help us accelerate that position.
Yeah.
Alright. Thank you. Our next question comes from the line fill energy Bill. Please go ahead.
Hey, good morning, this is actually calling on for Phil.
I appreciate the high level commentary on the different end markets, but can you put some number ranges around your preliminary review for volumes in 2024 with your peers talking about aggregates volumes being flat to down low single digits next year. I guess is this something that also achievable by summit or do you anticipate some variance either to the upside or the downside.
Yeah. So Colin Thanks for the question, let me start by saying we are refining our numbers. So we'll come out with a much more clear guide to you in February as we always do but I'll kind of share with you where our mind is right now around volume. So let's start with the one we have the most visibility which is in the public side.
This year, we saw mid single digit growth solid mid single digit growth that pipeline is only increasing so public we see the iia dollars flowing through we see that in our major Texas and Kansas State and we're actually seeing that happened. So definite proof that that has started and will accelerate only into 2024.
The other thing we look at is our contract highway paving awards in public, but you're up 27% year on year of which seven percentage points above the national average. So that's all starting to play through and then if we look at our space.
<unk> budgets for 2024, they were up 14% for our top five states are $4 5 billion like Texas alone is up 24% to $18 5 billion.
Utah is up $2 nine Kansas is up to three Missouri around $4 1 million billion and then Virginia's at eight one so very strong pipeline and the whole point of giving you that data has to approve that and then our backlogs, which is really what we have in hand, and I always use Texas is our bellwether stage on how we're doing on backlogs, they're nearly double.
What we had last year and they are building so bottom line up for all those that data I gave you was public is very strong we continue to see that into 2024, let's switch a little bit to residential so residential we believe we're cautiously optimistic it'll stabilize if not recover but it's a little different by our end markets. So in.
And we're seeing that recovery come back faster you can see that in the form of single family permits are improving that trend decline is improving and actually see if you look at our forecast, though single family permits them turning positive in 2024.
We actually see that in our business and the Texas market is held up by a very strong economy. Both from an energy perspective household formation and population growth. So we expect the Houston markets continue to recover faster Salt Lake City, a little bit slower.
They are the larger builders are faring better than the regional builders, but again single family permits the trend is improving there. So you could potentially see some recovery, but are planning stance as kind of longer trough. There and then finally, our Phoenix market in residential.
Actually we're not as over index on residential there were heavier commercial which is doing extremely well, but even the residential there the single family permit trend is improving as well so.
Line on residential stabilize if not recovery, but the point I'd give you on residential which I think is very important as we were down 20% this year.
And the reason we've kept our margins up and done very well on our pricing is we're in the right markets with advantaged assets and leading positions and we're overall very bullish on residential in the long term. So we can see that being a swing factor in 'twenty four and then let me move to nonresidential, which I think has some real positives to it just to remind you we've had.
Flat stance on that and it's played out pretty much as expected with the heavy for men onshoring of manufacturing and energy offsetting the light nonresidential and we've seen that play out we feel we have very good advantaged positions for nonresidential. If you look at our southeast markets and Florida and Carolinas.
In Atlanta, Theyre growing heavily but the EV battery factory and then if you think about along a river markets in the Gulf driven by allowed the energy verticals and then Phoenix as the epicentre for semiconductor manufacturing and actually if you look at the funding that's come from the I R. A chips act so far over 60% of.
That has gone into our top states. So we're very encouraged by that the other thing we love about the nonresidential is theyre very eggs and cement intensive and so we're getting that materials portfolio strength compound itself over the years and then you have the multiplier effect as we look out over time of building out single family homes and further light nonresidential.
So all that's to say is we can see a path to maybe flat growth next year.
It'll be really the drivers will be we're very positive on public residential we could get that recovery that would be a driver upwards and then nonresidential I would say starts from a flat perspective, Colin and then we'll update our pipeline to you which is quite rich right now on the nonresidential side, we'll give you more specificity on that when we come into.
February.
Great. Thank you.
Alright. Our next question comes from the mind of Anthony Pettinari from Citi. Anthony. Please go ahead.
Hi, good morning.
Good morning.
Hey, you got good.
Pricing in AG, and <unk>, and I think organic volumes were down seven 5%.
You talked about dynamic pricing and value pricing I'm. Just wondering are you walking away from any business and if so would that be any component of that seven 5% decline.
And then maybe just an add on question I guess your expectation is for cement pricing to outpace aggregates pricing in 'twenty three.
Not sure if there's too much to read into that if those markets are just a little bit stronger or maybe you just have more of an opportunity there from a commercial excellence perspective, or if theres any color you can give there.
Yeah, So Anthony let me address eggs volumes and pricing in Q3 first of all so obviously they were done because residential has been down. So that's a big driver of your AG being down the other point I'd point to really answer your question around pricing is having a British Columbia market. There we are leaders in pricing.
And we tend to lead and we'll lose a little bit of volume and then it'll come back that's just the way it works every year we.
We saw the trends from Q2 to Q3 improve on our volumes. There. So we're positively encouraged that that'll turn around that being said price the value of our pricing way outweighed that volume decline in Q3 on aggregates.
Cement I think he just read into that more that we started from such a high point in January and cement pricing. If you recall, we had to go very high on our pricing was like $17 a ton increase in January followed by a mid year $10 a ton and that was really because as we were in cement pricing in plenty of 'twenty three we those really high energy costs.
The beginning of the year with very strong supply demand dynamics, but generally cost inflation was quite high. So we had very strong realizations of our midyear price increase of 70% and frankly as we go into 2024, we're going to go up but that's $15 a ton and I'd expect that same realization so cement the supply demand dynamic stays strong our COO.
Costs are going to be higher again, maybe have Scott talk a little bit about our cement costs as we go into we believe this will keep pricing frankly in 2024.
Because we have some significant increases in costs that are a little different in 24, then twenty-three. So Scott maybe you want to talk a little about that yeah. Yeah. Let me let me just.
Lay out the cost picture as you heard in my prepared remarks, they have not relented. So.
I actually I'll start with the buckets or the categories that have eased off a bit.
Really and that's around our hauling costs and our sub contracting costs those have eased off a bit.
But when you start looking at the rest of the cost they have really stuck around I think if you remember early in the year, we thought they would moderate by this time and come back down to that mid single digit range and they haven't we're still pushing up against that high single digit even to a double digit.
And when you look at labor, we're right up against that double digit it's high single digit across all of our labor cost and then.
Materials that go into our downstream those are actually in your mid teens.
Increases year over year, and then the one that's really sticking with US is repair and maintenance we have a lot of equipment a lot of equipment intensity and the repair costs are still.
12% to 15% up so when you look at all of that we're not seeing the easing of cost yet so we've factored that into our Q4.
Expectations, but I do think next year, they will they will start moderating.
That will help that price cost relationship next.
Next year.
Hopefully that answers your question Anthony.
No.
Super helpful I'll turn it over.
Thank you.
Alright. Our next question comes from the line of Kathryn Thompson from Thompson Research Group Catherine. Please go ahead.
Hi, Thank you for taking my question today.
Just hoping that they can take share as you contemplate the integration central integration of Rguest.
It will be a higher capex spend just with a greater concentration of cement in the next.
How how are you planning to balance.
Maintenance and potential catch up maintenance.
Or rguest assets, along with some of the growth initiatives that you talked about earlier in this call.
And he.
<unk> been in a journey of winnowing down.
As I said, perhaps don't don't say it.
That's been the strategy of summit.
Is that process, mostly wrapped up and are there any other assets that you can see turning to.
To help with cash flows for anticipated increase in Capex. Thank you.
Yeah. Thanks for the question Catherine I'll kind of answer the latter part of your question at a high level here and then turn to Scott for more specificity around the Capex and catch up so overall.
I think the one of the things that's important to understand that.
The cement assets are actually less capital intense than then aggregates assets. So we see that in our base business. So that's something to understand as we think about free cash flow conversion.
From the point of view of our growth initiatives, we feel that we'll be in a really good position because of that higher cement portfolio better free cash flow conversion to further accelerate aggregates, but to your point Catherine we are definitely continued to be focused on portfolio optimization every quarter, we meet as a team and we have what we call our tier one divestiture list and that list gets.
We had diamond every single asset and business in the portfolio and if theyre not going to meet our ROIC and margin profiles. They get put on the list and there is more opportunity there and we are very confident in our ability to delever the balance sheet, Scott, maybe I'll turn to give on the Capex, yes. So Catherine when you look at the pro forma combined basis on the Capex you will see that we still.
We'll maintain that historical about 10%.
On the 10% of net revenue on the Capex and then really that.
That goes along for about three to four years, and then you'll see it start coming back towards the traditional age where wed like to be but that 10% does give us the bandwidth.
When you think about the cement the cement business actually is less capital intensive than our AG business and so it does give us the bandwidth bandwidth to sit in those growth projects and those debottlenecking projects that we have on on the Argos as well as our green initiatives with the alternative fuels that youll see kind of ramp up is.
In the in the year, two and three so we do have that.
And then we will still continue to do our Greenfield a matter of fact this year, we've got $10 million to $15 million into Greenfields, we will still have that and that's modeled in as well that will be continuing that.
On the AG side.
So overall, maintaining that 10% profile is very doable.
The other thing I'd add Catherine is that we're very confident in our ability to deliver on our synergies. So we've said in our prepared comments before that over 50% of our synergies within the first 18 to 24 months, we feel are very doable and that's only on the operational synergies I'm actually really looking forward to when we close and get our commercial teams together and really.
Supercharged those commercial opportunities, which aren't even in the 100 million start will help a lot with cash flow as well.
Thank you. Thank you.
Thanks Catherine.
Alright. Our next question comes from the line of David Macgregor from Longbow Research David. Please go ahead.
Yes. Good morning, everyone I wanted to ask you about in your deck slide number nine and in aggregates you guide to low teens aggregate pricing.
Just based on the year to date numbers it seems to imply a mid single digit increase in <unk> or am I reading that right and if so.
Can you talk a little bit about what might be coming to bear on the on the pricing growth and then on the ready mix chart, I guess pricing gains in the third quarter decelerated, rather sharply can you talk about how youre seeing market conditions may be evolving in your.
Salt Lake City, and Houston, and how is the addition of Phoenix, maybe contributing to the change.
Change in ESP growth. Thanks.
I'll, let Scott will talk a little bit about the AG growth's here and in the Q4 impact.
Hey, David just on the <unk>.
Pricing when you think about Q4, the comp does get harder if you remember last year, our price increase in Q4 was about 13, 9% so that does get harder.
So you won't see quite the margin or the price increase in Q4, but we still think the.
The the mid.
Mid teens or low teens is attainable on a full year.
Yeah, Let me, let me talk about the ready mix side. So all of our markets have held up really well honestly with 20% down volume.
David I've been extremely impressed by our ready mix team they've managed to keeping that 'twenty, which we've done and I've said before the summit is very good in the downstream and we're even better today, because we're in the right markets with leading assets in leading positions and we've added added our centers of excellence, where we've been able to expand those margins as well so I wouldn't focus too much on.
The pricing in those ready mixed markets, because we're really just pass through and then we've always had a little bit of margin. It's much more important to be in the right markets to be able to add to our centre of excellence value proposition onto our margins to expand but the pricing is going to go a little bit with where cement goes in those various markets and or <unk>.
Short load fees et cetera that we're very focused on.
I might add one more thing David just on the AG pricing too when you think of the seasonality as.
As we get into the colder months, that's where you start shifting away from your claims stone your higher ASP clean stone and more to your base materials. So that the mix will actually bring that down just inherently a bit too in that Q4.
Okay. Thanks very much.
Thanks, David.
Alright, our next question comes from the line.
Adam Adam.
Adam Please go ahead.
Hey, good morning nice quarter.
And can you talk about seasonality in the cement segment I wasn't modeling margins down that much sequentially. So I'm just wondering if that was a maintenance timing issue and what's your outlook for cement margins is.
Yeah. So you know.
I would talk if you're talking about seasonality in cement I would say if you're looking at Q3 volumes. The impacts there we always got to watch the amount of imports. We did one year versus the next so if you look our volumes were down in Q3 and cement and the major reason for that was about 50% of that decline was because we had more imports last year with more of those LNG projects, which have.
Course is dilutive to margin good for dollars EBITDA.
On the other side, we had a little bit of weather in Minnesota, and Iowa. So that's why you see kind of volumes down in Q3, but.
They were just kind of one time events I would say our ability to continue to expand margins in cement is very strong on a year on year basis. We were up 260 basis points. This team has done a phenomenal job of increasing towards that trailing 12 months, you know Northstar objective of 40% EBITDA margins.
This quarter, we were at 37, 6% on a trailing 12 month basis and that's from the value pricing that we talked about a lot earlier in the call, but it's also about the investments we have done around improving what you call our operational equipment effectiveness, which for Davenport, where best in class Annabelle has a ways to go to get to that 85%. Our team is very focused on.
We also invested in the Davenport storage dome, which has helped our operational costs. We continue to drive plc across all of our network and then as you go into 'twenty four think about Green America recycling, we're expanding that and Davenport with our flex fuel technology investment, which will allow us again to continue to expand margins. So all.
Those four key elements of pricing operational excellence screen America, and plc will allow us to continue to have that strong pricing capability and supply to underpinned by strong supply demand dynamic in cement Adam.
Thanks, Dan.
Thanks.
Yes.
Alright. Our next question comes from the line of Brent Thielman from Davidson, Brian. Please go ahead.
Okay. Great. Thanks, just had a question on aggregates and maybe just the different cost buckets I think you indicated.
The costs are hanging around higher for longer maybe where are you seeing some abatement in where are you seeing some influence.
The higher costs in that business going forward.
Okay.
Brent This is Scott I'll answer that one when.
When you think of the AD costs. Your two biggest two biggest cost drivers there as your labor and your equipment cost and frankly, Brent we're not seeing those abate those are still driving up there and.
I commented earlier, the labors up theyre, pushing double digit and on your equipment cost.
The fuel earlier this year, we thought we were going to get some tailwind on fuels.
And unfortunately, that's kind of went away since fuel cost of uptick.
And as you know our AG business is very dependent on diesel fuel, so where we thought we were going to get maybe an $8 million $6 million to $8 million tailwind on that is actually probably more like a $2 million and most of that has already been realized so don't anticipate any tailwind on the fuel costs going into the Q4 either so.
Not a lot of abatement going into Q4.
We are hopeful for next year that labor will start coming off and we're hearing the signs are that we're just waiting for to see wait and see it pass through now.
Okay.
Great. Thank you.
Thanks Brent.
Our next question comes from the line of Mike Dahl from RBC, Mike. Please go ahead.
Hi, Thanks for taking my question.
Just to stick with the cost side I know, there's a lot of moving pieces here, but based on what Youre seeing.
Today.
Now embedding into your fourth quarter Guide you talked about it moderating or do you think it will moderate in 2004 can you give us any sort of finer point.
Your current planning assumption would suggest for cost increases in both acts in cement for 'twenty four.
Okay.
Yeah, Mike.
First of all we are hopeful in 'twenty for.
But we will see that moderation and we're actually going through our budgets right now.
And we are seeing some cost actually barging costs.
One that's actually surprised us to see the increases were we're hearing in the barging side, along the Mississippi River. So we're going to accommodate that in our in our budget for next year.
But overall on the specific assumptions were in that mid single digits right now, but as Ann mentioned, we'll have a finer point on that when we come back to you in February.
On the broader yeah, I think just to give you order of magnitude Mike one of the reasons why we're going out with a very strong price increase in cement with $15. A ton is because our barge costs are up about 9% to 10% even with mitigation by our team. So we're working hard on that we continue to outside to see cost inflation, but we.
Do you think it'll moderate somewhat next year, but we're going to continue with a strong pricing stance and control what we can control on our costs with a focus on operational excellence on both eggs and cement and really drive our costs down and that's what we can control in 2024.
Okay. Thanks, Dan.
Thanks, Mike.
Alright. Our next question comes from the line of Jerry Revich from Goldman Sachs. Jerry. Please go ahead.
Yes, hi, good morning, everyone.
Good morning.
I'm wondering if I'm.
I'm wondering if we just talk about the margin potential of the products business as it stands today.
And what the opportunity is.
For margin expansion.
From here, assuming flattish volumes historically this business at some point has gotten into the high twenty's or the cash gross profit margin basis, but obviously the portfolio has evolved so just wondering for that part of the portfolio specifically how.
How do you feel about the opportunity to push price ahead of cost.
Over the medium term.
Yeah. So you know one of the things we do like so this is our downstream business is essentially and.
If you look at both but let's take them separately. So our ready mixed business. We've clearly shown our ability in the past to do Twenty's and we're good at ready mix. We're just very good at the downstream and with the portfolio work that we've done I wouldn't have said this two years ago with the portfolio work. We've done we're in the right markets with advantaged assets and we have leading positions and the other thing our teams.
Done a lot of work on them ready mix as we very much leading innovation. The team has done a lot of work around AI around the admixtures. So the value proposition that they bring and the ability to expand margins. In these strong markets is where we see that ability to pop that 20%, but very importantly, all of these downstream business of high ROIC and that's why we're in.
In these markets and that's a key part the other point I point you to is on our asphalt and construction there very much upheld by very strong public demand right now liquid asphalt is moderated off a little bit so that price net of cost and asphalt you can see that pop in the margins. So I'm very confident that our team will at least be able to continue to add points of margin.
And both of our downstream business because of where we play and because of our focus on our improvement of our operational capability and value proposition to the customer.
Super Thanks.
Sure.
Alright. Our next question comes from the line of Keith Hughes from Truth. Keith. Please go ahead.
Thank you on the the aggregate pricing in the fourth quarter Guide assume historically you were talking about you have some seasonal declines.
From third to fourth.
These numbers this looks particularly.
Large or was there something unusual going on this year that you're going to see more of a seasonal impact.
Last years.
No I mean, I'll, let Scott go to specifics.
If you want but honestly, it's not any different we always see this seasonality in Q4 around pricing. So it can get a little bumpy around that but our pricing is still very strong. If you think about our aggregates pricing from the mid the mid year price increases.
At the top end of that or carryover AG pricing will be in that mid single digits, but it was very strong execution. So I wouldn't read anything into that Q4 other than our typical seasonality Scott would you like that and I don't think so and I think I think we're on track for them that low teens.
Mid teens.
On the on the full year yeah.
Yeah, we take a more of a conservative approach on that.
With the mix, but I don't anticipate it to be a drop here, we're going to continue the pricing yeah robot and it will drop to the margins will continue as we've said we're targeting overall EBITDA margins.
A record of $23 five.
<unk> percent to 24%.
Yeah, Okay, because we've seen the compounding effect of the strong pricing over the last couple of years. So that's why you're starting to see a lot of these margins pop. So I wouldn't over index on Q4 at all that's just kind of a seasonality thing we lagged at low teens or better and continue to have strong pricing in our January one price increase as the teams are out there with very strong price increases.
Of mid single digit to high.
Okay. One other one on some that you talked about why the volume was down a third are we going to see some of that in the fourth as well.
The volumes are.
Q4 in cement will see the same seasonality that we've always seen.
There'll be down a little bit just because of the river levels et cetera, we're doing everything to meet our customers' demands bus.
The barges well the yummy localism.
I would comment just on the import volume will be a change.
From the prior year, we did have a heavier and heavier import volume last year, which we won't have which you know.
As we've talked about in the past, we use that as kind of a flex for those projects and talked about earlier, the LNG projects that we target.
Down on the Gulf Coast.
Thank you.
Thank you. Thank you.
Alright, there are no further questions at this time, so I'd like to turn the call back over to Anne Noonan for closing remarks.
Thank you Jeremy once again I'd like to thank our summit team for putting us on course for a record setting year financially and for moving US forward strategically our strong third quarter results underpin our belief that our portfolio is stronger more resilient and we are executing across the business. At this point, we remain laser focused on meeting or beating our 2000.
Twenty-three commitments setting ourselves up for continued success in 2024, while at the same time progressing the value accretive oracles combination I want to thank you for joining our call today, we look forward to our continued dialogue and appreciate your ongoing support of summit materials, Thanks and have a great day.
This concludes today's conference you may disconnect.
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