Summit Materials : Q1 2024 Earnings Call Transcript

050224SUM

05 - 02 - 2024

Summit Materials, Inc

1Q24 Earnings

TOTAL PAGES: 29

Q4 Inc.

Fourth Quarter 2022 Earnings

CORPORATE SPEAKERS:

Andy Larkin

Summit Materials, Inc; Vice President, Investor Relations

Anne Noonan

Summit Materials, Inc; Chief Executive Ofcer

Scott Anderson

Summit Materials, Inc; Chief Financial Ofcer

PARTICIPANTS:

Stanley Elliott

Stifel; Analyst

Trey Grooms

Stephens; Analyst

Anthony Pettinari

Citi; Analyst

Garik Shmois

Loop Capital Markets; Analyst

Adam Thalhimer

Thompson; Analyst

Kathryn Thompson

Thompson Research Group; Analyst

Philip Ng

Jeferies; Analyst

Brent Thielman

D.A. Davidson; Analyst

David MacGregor

Longbow Research; Analyst

Jerry Revich

Goldman Sachs; Analyst

PRESENTATION:

Q4 Inc.

Fourth Quarter 2022 Earnings

Operator^ Hello, everyone. Welcome to Summit Materials Inc. first quarter 2024 Earnings Call. Please note that this call is being recorded. I'd now like to hand over to Andy Larkin. Please go ahead.

Andy Larkin^ Hello. Welcome to the Summit Materials first quarter 2024 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 in response 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 and quarterly report on Form 10-Q, as updated from time to time in our subsequent filings with the SEC.

You can find reconciliations of the historical non-GAAP financial measures discussed in today's call in our press release. I am pleased to be joined by Summit Materials' CEO, Anne Noonan; and CFO, Scott Anderson. Anne will begin today's call with a business update.

Scott will then review our financial performance before turning the call back to Anne to conclude our prepared remarks with an updated discussion on our 2024 outlook. Afterwards, we will open the line for questions. (Operator Instructions) With that, let me turn the call over to Anne.

Anne Noonan^ Thank you, Andy, and thanks to everyone joining us on today's call. I'm incredibly proud and pleased to report that our 2024 year is off to a remarkable start with early progress across all dimensions including safety.

Safety is a core value for all Summit employees. From day one of our integration with Argos USA, we have efficiently transitioned towards a common set of metrics and goals enterprise-wide.

We now have a shared language and governance system established so that we can effectively measure ourselves and work together towards our goal of a zero harm culture while consistently delivering industry-leading safety performance.

Q4 Inc.

Fourth Quarter 2022 Earnings

Along with safety, I want to turn to Slide four to cover, at a high level, three areas of strong early progress this year.

First is around solid execution when it comes to controlling what's within our control. Here, I'm specifically talking about pricing, integration execution and ongoing operational improvements. Pricing is performing at or better than our initial forecast.

On the Argos integration, thanks to our day one readiness, a focused integration management office and total organizational buy-in, our integration activities have proceeded exactly as designed with synergy realization ahead of schedule.

In fact, we now have line of sight to at least $40 million in synergies this year, up $10 million from our prior forecast. And lastly, on Aggregates' operational excellence, we are uncovering savings throughout the footprint as we continue to instill and foster and enhanced continuous improvement mindset through our network of quarries. These factors have provided the foundation and confidence to increase the lower end of our 2024 EBITDA guidance range.

We now expect 2024 adjusted EBITDA to be within $970 million on the low end and $1,010,000,000 at the upper end.

From a portfolio perspective, we are organizing and optimizing around being materials-led market leaders in high-growth areas. To that end and thus far in 2024, we have completed three divestitures, shedding subscale and noncore assets that were not additive to our Elevate Summit financial goals, while concurrently engaging in long-term and strategic aggregates supply partnerships via our asset-light operating model. These divestiture proceeds as well as our robust balance sheet position us to pursue an aggregates-rich pipeline of bolt-on opportunities. Together, these portfolio optimization efforts are not new but are extensions of what we've been doing since the launch of Elevate Summit to strengthen our business.

Slide five lays out what we believe is a compelling case that Summit's portfolio is more durable and growth-oriented than ever before.

Relative to our first quarter two020 portfolio, we have become a much more materials-dominant enterprise with approximately 77% of EBITDA generated from upstream business. That's up roughly 11percentage points from four years ago.

The second element I'd highlight is our reduced seasonality. Today we maintain a large position in Texas, a much stronger presence in the southeast and a growing foothold in Phoenix.

As a result, 63% of Q1 revenue is now derived from all seasoned markets versus just 35% prior to launching Elevate Summit. Critically, our efforts to reshape the portfolio over the prior four years have effectively placed Summit in nine of the top 10 fastest-growing MSAs, significantly increased our exposure to year-end markets and better distributes our earnings profile from

Q4 Inc.

Fourth Quarter 2022 Earnings

quarter-to-quarter. Despite these objectives and foundational improvements to Summit's business, our solid execution has not been rewarded with a sustained increase to our trading multiple.

Nonetheless, we remain confident in continued strong execution on our strategic and financial commitments to our stakeholders, recognizing that markets will, over time, come to appreciate the value of high-quality and consistent financial performance.

Turning to Slide 6, where we present first quarter financials and line of business performance. I'll let Scott provide the details but we'll cover a couple of notable takeaways.

First, with Q1 adjusted EBITDA of $121.2 million, we now anticipate that roughly 12% of our annual EBITDA is achieved in 2024. That 12% figure is based on the midpoint of our updated guidance range and is more than double the historical baseline for Summit.

If you recall in February, we had thought first quarter adjusted EBITDA would approximate $98 million or approximately 10% of full year EBITDA.

The better-than-anticipated results were driven predominantly by Cement outperformance relative to prior expectations. The combination of faster pull-through of anticipated synergies, strong price realization, and demand holding up better than forecast drove the first quarter above our expectations. The other takeaway from this page is that while organic aggregate shipments did decrease, our demonstrated commitment to commercial excellence and value pricing is evident in the 10.4% year-on-year organic pricing growth.

It is also an acknowledgment that pricing remains a prominent and primary lever to deliver earnings growth for our Aggregates business, a trend we expect to persist as we move towards our midyear pricing actions.

Stepping back and grading ourselves against our Elevate Summit scorecard on Slide 7.

We are clearly ahead of pace in 2024. Net leverage is well below our Elevate Summit target at 2.5x. This provides the capacity to take accretive portfolio actions to enhance our business and shareholder returns.

As expected, ROIC at 9.3% moved below our long-run minimum, but we are confident that within two years, we can restore ROIC above our 10% target.

This will happen through achieving organic growth and employing our disciplined and focused portfolio optimization approach to the entirety of the asset base. And finally, with LTM EBITDA margin at 23.4%, we are benefiting from a step change in the Q1 margin profile.

Q4 Inc.

Fourth Quarter 2022 Earnings

first quarter adjusted EBITDA margins increased 560 basis points year-on-year, catalyzed by margin expansion from both materials lines of business. Pricing and operational improvement helped drive Aggregates' cash gross margin expansion of 550 basis points, and cement segment adjusted EBITDA margins went from breakeven a year ago to over 25% as Cement constitutes a larger portion of our Q1 business today than when compared with the legacy Summit profile.

Overall, this strong momentum to start the year puts us firmly ahead of pace to comfortably achieve our full year 2024 EBITDA margin range of between 23% and 24%. When achieved, that would put us on the brink of entering into horizon two of our EBITDA margin commitments, a commendable accomplishment in year one of our integration.

I want to conclude my opening remarks by thanking our Summit teams, especially those undergoing large-scale changes and integration activities. You have dedicated yourselves to our common vision.

While there is plenty of work ahead of us, we are stronger today thanks in large part to your tireless work and sacrifice to bring our two great organizations together safely. Thank you. And congratulations on a very strong start to our combination. With that, let me pass it to Scott to walk you through our detailed financial performance.

Scott Anderson^ Thanks, Anne. I'll pick up on Slide 9, covering off our total company performance in the first quarter. In Q1, net revenue increased to $773.2 million including the partial quarter impact of the Argos USA assets.

In the quarter, $378.5 million of revenue was recognized from the recent acquisitions. Pricing, as Anne mentioned, across all lines of business also contributed to our net revenue growth in Q1.

Adjusted cash gross profit margin increased 340 basis points year-on-year, reflecting positive pricing as well as product and geographic mix benefits and came despite lower organic volumes in most businesses and cost inflation that remains elevated in several cost categories.

Similarly, adjusted EBITDA margins inflected higher, up 560 basis points in Q1, driven in large part by gross margin flow-through and enhanced by better G&A leverage in the quarter.

As a percentage of net revenue, G&A decreased 240 basis points this quarter relative to the comparable year ago period. Adjusted diluted loss per share improved $0.14 relative to Q1 '23 despite higher interest expense driven by better operating performance.

Q4 Inc.

Fourth Quarter 2022 Earnings

Before moving on, there are three items I would like to note. First, transaction costs associated with the Argos combination amounted to $61.3 million in the period, and as is customary, are not included in the adjusted results.

Second, having completed the opening balance sheets for our combination, we have adjusted our full year expectations for DD&A.

We now expect DD&A to approximate $385 million in 2024.

Third, a share count of 175 million is an appropriate figure to use moving forward. And prior to the close of the quarter, 100% of previously outstanding LP units that were not held by Summit Inc. were exchanged, effectively eliminating our Up-C structure and helping to streamline our corporate structure.

Turning next to line of business performance. Aggregates volumes in the quarter were negatively impacted by adverse weather conditions across much of the country, especially in January and early into February. This, alongside generally subdued residential activity, pushed aggregate volumes 8.3% lower on an organic basis.

Organic aggregates pricing, on the other hand, remains persistently strong, increasing 10.4% year-on-year, powered in part by wraparound 2023 pricing as well as fresh price increases broadly implemented on January 1. Notably, the 7.4% sequential acceleration in average selling price from Q4 of '23 is an important indicator that our value pricing approach is working and yielding solid end market traction.

By market, pricing growth was strongest in Kansas and Missouri, followed closely by double-digit growth in British Columbia, Houston, and the Carolinas. This pricing dynamic, combined with moderating cost headwinds, mix favorability and operational improvements to drive adjusted cash gross profit margins up 550 basis points. Per unit profitability for our Aggregates business increased $1.06 year-on-year, continuing a positive trend from 2023. This growth came despite a cost environment for Aggregates that remains challenging.

But remember, we were expecting a gradual reduction in cost headwinds over time, and that's still our expectation for 2024.

Margin-wise, this is a fast start to the year and reinforces our perspective that we are looking to put percentage points on the board this year as we aim to reach 60% adjusted cash gross profit margin for Aggregates over the long run.

Turning to Cement performance on Slide 11.

Organic volumes held up rather well despite weather disruptions with strong volume

Q4 Inc.

Fourth Quarter 2022 Earnings

performance, most notably out of our Mid-Atlantic platform. For pricing, you are seeing play out what we discussed on our February call.

Specifically, river market pricing effective January 1, especially inland geographies, is powering organic pricing gains. Reported growth, while up low single digit, does reflect a different pricing cadence in the legacy Argos markets that Anne will cover off in a moment.

The material gains in our business is best seen at the margin line, with Cement segment adjusted EBITDA margins registering 25.7% in the period. Historically, our business would be very pleased with any non-negative Cement segment EBITDA margins in the first quarter. This meaningful step-up reflects not only the pricing gains but our new footprint and operational improvements.

Foundationally, with our expanded footprint into the southeast, we extend our season. Once winter kicks in and locks closes on the Mississippi River, that effectively shuts down the season in those markets.

Without those constraints in Texas, the Mid-Atlantic, and Southeast, it frankly makes for a more profitable Q1.

The other factor influencing profitability were the operational improvements across our network. Yes.

We are still early in our integration journey, but plant performance has already exceeded our expectations due in large part to effective winter turnarounds.

I'm proud to report that all plants that have come out of their annual turnaround have done so on time or faster than scheduled and are operating at higher rates since emerging from their planned downtime.

Importantly, all turnarounds were done without a single safety incident.

On the investment front, our CapEx spend is already paying dividends.

For example, investments in the raw mill at the Newbury facility in Florida are enhancing reliability, increasing throughput, and helping to drive higher operational equipment effectiveness, or OEE, a primary value driver of our synergies. Moreover, we are seeing exceptionally strong cohesion between our plants, our people, and the technical experts within our Cement teams. This seamless integration of talent is critical to knowledge sharing, troubleshooting, and facilitating performance improvements throughout our Cement network.

Q4 Inc.

Fourth Quarter 2022 Earnings

Moving forward, all the core ingredients for continued margin expansion are in place, positive pricing momentum and energy cost basket that remains favorable, and the operational and commercial synergies that we believe are firmly within our control.

Closing with our downstream businesses on Slide 12. Ready-mix volumes remain negatively impacted by residential and like nonresidential trends that show signs of improving but are still down overall. Reported growth primarily reflects acquisitions in Phoenix and the integration of Argos ready-mix in our East and West segments.

On the back of infrastructure growth, organic asphalt volumes grew 9.4%, with strong performance in our two heaviest asphalt markets, North Texas and the Intermountain West. Ready-mix and asphalt pricing grew 12.5% and 7%, respectively, in the period.

And collectively, adjusted cash gross profit margins were stable year-on-year despite dilutive impacts from the acquired portfolio and softness in private end markets.

As ready-mix integration activity is well underway in key markets like Houston and Florida, we expect to have momentum to sustainably grow downstream margins over time. Unlike others, we are unapologetic yet selective about where we participate in downstream businesses.

When we can have leading positions in growth markets, we have proven we can deliver top-tier downstream profitability. With that, let me turn it back to Anne to close our prepared remarks.

Anne Noonan^ Thanks, Scott. Slide 14 succinctly summarizes how we see things today and you'll notice our view is largely consistent with how we saw things in February.

Specifically, we still see demand conditions accommodating margin growth.

What I mean by that is our 2024 margin outlook is not overly reliant on volumes. Why that's especially prudent this year is because private end markets remain quite variable.

Take residential, for example. Already this year, we've witnessed healthy seasonally adjusted trends in January and February, followed by plateauing and retrenching in March.

Similarly, since nonresidential is highly project and timing dependent, we will be appropriately measured regarding the trajectory of nonresidential at this point in the year.

We're finding that commercial work seems to be sensitive to the higher-for-longer interest rate environment.

As a result, the commercial project pipeline and backlogs remain promising, but the start timelines for some of these projects could get pushed out this year.

Q4 Inc.

Fourth Quarter 2022 Earnings

Public, by contrast, is the one end market where we have considerable conviction on both the direction and magnitude of that end market's volume outlook.

We are encouraged by trends in our markets including the recent win of the multi-year $2.8 billion I-70 project that expands the interstate from St. Louis to Kansas City. This project will be accretive to pricing and benefit both our Aggregates and Cement businesses in 2024 and beyond. The primary point is strong backlogs are underpinning mid-single-digit or better public market volume growth in 2024.

In total and on balance, our vantage point on demand is consistent with where it was three months ago. Public tailwinds mostly are more than offset by variability in private end markets. The swing factor on volumes will be on private demand recovery. And at this point, we are cautiously optimistic that interest rate relief in the back half will spur greater activity, but for now we are prepared to lean into that scenario.

Switching gears to pricing.

As we approach the midyear pricing window, we do so with a strong track record of commercial execution and reflecting the value our construction materials bring to their respective marketplaces.

On Aggregates, while our plans vary by locality and by product type, midyear price increases will be across our markets and can be expected to range between low single digit to 7% at the high end.

As we effectively shift towards a dynamic, more frequent pricing model on Aggregates, our sales teams are able to better leverage tools and processes to incorporate real-time cost information, demand conditions and more adequately reflect the increased value that our reserves have in our markets.

And while we simplified the external discussions surrounding pricing, the reality is we are constantly looking for instances to value price.

In fact, we recently recognized conditions in certain East Coast markets that were suitable for an April price increase.

We swiftly moved on that intelligence and we're realizing relatively strong market receptivity. These anecdotal trends give us increased confidence that the pricing environment remains healthy, and we look forward to solid traction for our midyear pricing actions.