Summit Materials, Inc. (NYSE:SUM) Q3 2023 Earnings Call Transcript

Summit Materials, Inc. (NYSE:SUM) Q3 2023 Earnings Call Transcript November 2, 2023

Operator: Hello, good morning. My name is Jeremy and I will be your conference operator today. At this time, I would like to welcome everyone to the Summit Materials Incorporated 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Andy Larkin, Vice President of Investor Relations.

Andy Larkin: 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 a 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 Summit 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’m pleased to be joined by Anne Noonan, Summit CEO; and Scott Anderson, our Chief Financial Officer. And we’ll begin with opening commentary. Scott will then review our financial performance and then Anne will conclude our prepared remarks with our view on the path forward. After that, we will open the line for questions. Out of respect for other analysts and 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 in the time we have available. I’ll now turn the call over to Anne.

Anne Noonan: 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 top 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 a common good. And although our journey is ongoing, we are taking steps each day to build a zero-harm culture and a safer Summit Materials. 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. ROIC, at all-time highs, and this quarter we set an Elevate Summit high watermark for our trailing 12-month EBITDA margin at 24%. Critical to our overall margin trajectory is the contribution 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 North Star objective of 60% and Cement 250 basis points closer to its North Star 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 and collapse our up-sea structure, which when completed, will significantly reduce corporate complexity and streamline our organizational structure. This 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-created for our shareholders. 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 are positioned to file our definitive proxy later this month.

At that point, we’ll 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, designing a 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, enhance 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 floor to Scott, I’d like to recognize and thank my Summit colleagues across our footprint who 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.

Scott Anderson: Thanks, Anne. Turning to slide six. I’ll pick up where Anne left off by adding specifics to our Elevate Summit scorecard. For leverage, we remain at 2.3 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 of cash to acquire, among others, all of Blackstone’s rights and interest in the TRA or 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 Anne 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 an Elevate Summit record and positions us to deliver on our stated goal of 23.5% to 24% for the full year. Adding color to that margin picture, on slide seven, you will see our Q3 financial highlights. Net revenue increased 8.2% 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 effectively pricing to what our local markets will bear. Pricing growth in combination with sound operational execution drove adjusted cash growth 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 Intermountain West. The third quarter was the first full quarter of our newly entered Phoenix Market and so far the business has been operating better than we originally anticipated. The East segment, which is nearly a pure-play aggregates business, grew EBITDA 13.5% in the quarter and is up 17.8% in 2023 as greater greenfield contributions together with strong pricing and operational improvements, is generating solid sustainable growth.

Cement 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 remained strong as average selling price increased to $155.79, up nearly $6.70 per ton from Q2, reflecting solid price realization and driven by healthy supply demand dynamics along our river markets. Overall, third quarter adjusted EBITDA increased 8.1% and EBITDA margin improved 260 basis points year-on-year. Moving now to pricing on slide nine. And I’d start by simply reiterating our general view that demand conditions and persistent cost inflation have supported a constructed pricing environment in 2023.

And as Anne will talk about, we expect those conditions to carry into 2024. Third quarter average selling price for ags increased 14.4% year-over-year and 4.6% sequentially, primarily reflecting a mid-single-digit mid-year price increases implemented across our footprint. We saw solid traction throughout, with strongest gains in Houston, Missouri, Northern Kansas and Utah. In cement, our $10 per ton price increase effective July 1st saw 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 will achieve at least low-teens pricing growth in ags and mid-teens growth in cement on a full-year basis.

Downstream, high cement 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 residentially 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 non-residential 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 continue to drive positive organic volume growth with especially good performance in the Intermountain West and British Columbia. Adjusted gross profit margin is shown on slide 11, clearly demonstrating improved profitability across the portfolio on both a 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.

If 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 area is for our cement business, where higher cost to fuel our kilns and low river levels along the Mississippi have increased the cost to serve our customers. Thankfully, our experienced continental cement team is proactively working with our customers and was able to fully meet our customer commitments in the third quarter. I’ll 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 120.2 million, which includes 118.9 million Class A shares and 1.3 million LP units. With that I’ll turn it back to Anne for our latest outlook.

Anne Noonan: Thanks, 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 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 restrained 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 of favorable weather could generate a million dollars or more in EBITDA. The second factor affecting Q4 are low river levels along the Mississippi. Our latest view incorporates roughly $2 million of increased operational cost 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 advantaged 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 eased. So we are embedding the assumption that cost headwinds persist as we close the year. For CapEx, we’re 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 a preliminary look at 2024 on slide 15. Our teams are in the late stages of formulating their bottoms-up 2024 budget, and as we fine-tune our expectations, what has emerged is a list of knowns and a list of unknowns. Let’s start first with what we know, and that is 2024 is setting up to be another strong year for pricing.

For cement, we are already out with our January 1st 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 the marketplace. For aggregates, we will implement fresh pricing on January 1st across all markets with exact increases 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 to cost inflation, providing further headroom between price and costs next year. For 2024 end market demand, the picture is still in flux, with strong visibility in the public end markets and more mixed indicators in private construction. For public which comprises 35% to 40% of our revenue, our leading indicators for future activity are flashing green. Fiscal 2024 DOT 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.

For residential, knowing its sensitivity to interest rates, we remain cautiously optimistic that single-family construction in 2024 will at a minimum stabilize, 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 impacts will mitigate some of the affordability concerns, but it’s 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 now Phoenix. Bottom line is that the desire for homeownership is strong and durable, while supply remains woefully constrained. We are big believers that we’ll be a primary beneficiary as that equation inevitably corrects itself in the long run.

Lastly, on non-residential, we currently see the divergent trends from 2023 carrying into 2024. Specifically, we expect light non-residential to remain relatively dormant, as knock-on effects from the residential air pocket will impact the non-res community buildout that lags residential trends. On the other hand, we see sustainable growth in certain heavy non-residential verticals. Onshoring of manufacturing is a durable trend, underpinned by public funding and private companies looking to bolster their domestic supply chains. What’s 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 belt 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 non-residential view. But for now, our working view 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 a balance sheet capable of making aggregates-oriented portfolio moves.

As is customary, we’ll be out 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 is 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 and 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 our 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 and our more cash-generative portfolio perfectly complements and accelerates our ongoing intentions for aggregates growth through organic and inorganic avenues. On slide 16, you’ll see our top priorities as we move through the closed 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 ags 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 actions, but I’m 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.

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Q&A Session

Operator: Perfect. Thank you so much. [Operator Instructions] All right. Our first question comes from the line of Stanley Elliott from Stifel. Stanley, please go ahead.

Stanley Elliott: Hey, good morning, everyone. Thank you all for the question. Curious if you guys could kind of hash out a little bit more on the pricing outlook. I mean, certainly a lot of momentum here double, you know, finishing strong to the year. How should we think about pricing into next year with some of the other players in the space? Haven’t talked about kind of double digit-ish sort of numbers.

Anne Noonan: 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 out with our January 1st price increases across all of our aggregates markets. And, you know, 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 ags, I believe we’re 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 we’re out in January. So you can expect aggregates that price net of cost to expand further. We’re very positive on that going into 2024. For cement, our pricing, again, we did very strong pricing in ’23. We’ll exit the year there in mid-teens. We’re out for our January 1st price increases at $15 a ton. Our mid-year price increases came in at about 70% realization. So I would expect that same kind of realization along our 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 of both our cement and aggregates businesses doing that.

And then the downstream pricing has been very strong. You saw our margins, even with, you know, some restrained volumes coming into our ready-mix area, you saw us continue to expand margins through our pricing analysis. So really good execution by the team, Stanley.

Stanley Elliott: Great. Thanks so much and best of luck.

Operator: All right. Thank you. And our next question comes from the line of Trey Grooms from Stephens. Trey, please go ahead.

Trey Grooms: Hey, good morning, and thanks for taking my question. First off, congrats on the nice work on the aggregates margins and the acceleration there. Anne, you know, can you talk about some of the drivers there that are, you know, kind of pushing those margins up? And do you think that — or do you expect, I guess this to continue into Q4 and maybe any early thoughts on, you know, the margin trajectory there in aggregates looking into next year? I think you mentioned a favourable price/cost outlook, but any more color you could give us there? Thank you.

Anne Noonan: Yeah. So thanks, Trey. So, you know, 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 importantly, the number that you 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 to that 50%. And that’s purely by execution. And it’s the things we’ve talked about before trade pricing that I just explained, you know, from wen Stanley, we’re very positive on the momentum we have coming out of ’23 and going into ’24.

So that price net of cost expect that to continue to expand. But the second area that I’m extremely encouraged by is our operational excellence that has started to take hold. And this is where we have a unique opportunity and some self-help opportunities at Summit. And we saw year-to-date, our continuous improvement projects in ags 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 across about third of our quarries right now. And that’s about a 25 million EBITDA pipeline. And what you can expect is, in 2024, we’ll 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’d point to is our flexible energy model. You know, diesel, we have a 50 — we’re actually hedged 49% right now. Our pricing is at 275 for that. And on a full-year basis for 2023, we were 317. So those three factors of price, operational excellence, and our flexible fuel model should really allow us to continue to fuel our ags’ profitability into 2024.

Trey Grooms: Wonderful. Thanks for the color, Anne.

Anne Noonan: Thanks, Trey.

Operator: All right. Our next question comes from the line of Garik Shmois. Garik, please go ahead.

Garik Shmois: 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 USA deal. You know, is the opportunity set, you know, consistent with and just your prior comment around some of these, you know, internal initiatives or are there opportunities on the M&A side to accelerate growth in aggregates? And maybe just speak to your ability to make additional acquisitions while integrating Argos once you get to that point?

Anne Noonan: Yes. So, thanks, Garik. So you’re absolutely right on target there, because we are intending to grow both organically and inorganically. And to your point on organic growth, that’s very much heavily driven, first of all, by our operational excellence and growing that bottom line. And also being — having additional price growth. But also, I put greenfields in that category. We continue to have additional greenfields coming online, and they’re very margin accretive also. So that’s kind of our organic growth side. We have a very rich pipeline of inorganic growth potential. And, you know, we’ve talked before about the recent acquisition we did in Phoenix wanting to build out that aggregates platform. Our team’s very active out there right now, trying to build out aggregates around that strong ready-mix position that we have.

And then Florida is the same. Our team are out there scouring every opportunity for greenfields and for M&A. We feel with the higher cash flow generation from a bigger cement profile, we’re going to actually be able to accelerate our number six position in aggregates. So we’re very positive about this and feel that the Argos transaction will only help us accelerate that position.