Yahoo Finance Summit Materials, Inc. (NYSE:SUM) Q1 2024 Earnings Call Transcript
Summit Materials, Inc. (NYSE:SUM) Q1 2024 Earnings Call Transcript May 2, 2024
Summit Materials, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, everyone, and 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, and 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 1 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. Along with safety, I want to turn to Slide 4 to cover, at a high level, 3 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 1 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 an 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 3 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 5 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 2020 portfolio, we have become a much more materials-dominant enterprise with approximately 77% of EBITDA generated from upstream business. That's up roughly 11 percentage points from 4 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 4 years have effectively placed Summit in 9 of the top 10 fastest-growing MSAs, significantly increased our exposure to year-end markets and better distributes our earnings profile from 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 2 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. 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's 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 2 of our EBITDA margin commitments, a commendable accomplishment in year 1 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. And 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 2 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. Before moving on, there are 3 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. And 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 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. And 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. 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 2 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. And 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 time lines for some of these projects could get pushed out this year. Public, by contrast, is the 1 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 3 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. And 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.
On Cement, we are maintaining our outlook that organic pricing should be up mid-single digit in 2024. As always, you should expect us to take a market-by-market approach to pricing as the demand environment and competitive sets will differ by region. For example, and as you will recall, we priced our river market at $15 per ton in January, while the Mid-Atlantic and Southeast markets were more restrained around January 1 pricing. More recently, we issued pricing levers across most Mid-Atlantic and Southeast markets that go into effect April 1. And consistent with our river, we anticipate realization to vary from marginal to 70% in certain markets. Contract timing, mix, and market dynamics will always influence the average sales price that we realize in any 1 quarter.
Furthermore, we have select price increases expected to take place on June 1. This tiered and surgical approach to pricing reflects, in our opinion, the positive yet rational nature of cement markets. As import costs have come down, there have been minor impacts to some of our markets. That said, we are adeptly navigating these dynamics, operating in largely supply-constrained environments and believe that the Cement pricing story will remain positive in both the near and long term. And remember, our market-based pricing decisions will coincide with our ongoing commercial synergy initiatives that include, among other things, working with customers to reset underpriced contracts to more market competitive rates. In both Aggregates and Cement, we will take the opportunity to see how forthcoming price realization plays out prior to incorporating these further pricing actions into our formal 2024 guidance.
Regardless of what traction looks like, we know that pricing will be the most positive lever available to us to offset sticky cost inflation and create sustainable profitable growth for our business. In combination with our commercial efforts, we expect our 2024 margins will benefit from operational improvements already underway across our network. Synergies in ready-mix and cement, as Scott discussed, are flowing through quicker than originally modeled and represent just the tip of the iceberg on our integration plan. Now having been at the wheel for more than 3 months, we are in a position to confidently call up our synergies target to at least $40 million in 2024. This increase reflects 3 factors: first, and knock on wood, we have not uncovered any material negative surprises, a testament to our rigorous diligence process as well as the transparency and strong partnership with the Argos team; second, the increase reflects a quicker implementation and adoption of the synergy playbook; and third, we have greater confidence and visibility to synergies revealed once we took ownership of the business earlier this year, namely greater Aggregates pull-through opportunities and commercial synergies.
Our self-help margin levers extend beyond the Argos combination. In fact, operational excellence within our Aggregates line of business is a key value creation imperative on our path towards our 60% adjusted cash gross profit North Star target. This year, our OpEx team is pursuing aggressive productivity targets, recruiting talent and building towards a best-in-class operations organization and conducting more on-site continuous improvement events than ever before. Together, we expect these actions will lift our 2024 Aggregates margins by percentage points and set us on our course towards greater per unit as well as overall profitability for our Aggregates line of business. In summary, our 2024 outlook has improved versus our February perspective.
Demand, while variable, is coming in as expected. Price remains the primary driver of organic top and bottom line growth, and we are uniquely positioned to deliver margin enhancement this year through meaningful synergy realization and through ongoing operational improvements across the enterprise. These 3 factors fuel our increased adjusted EBITDA guide to $990 million at the midpoint and a reiteration that we anticipate adjusted EBITDA margin between 23% and 24% this year. In closing, the 4 near-term priorities on Slide 15 will chart Summit's course this year: safely integrate and deliver on our synergy commitments; accelerate profitable growth from Aggregates, both organically and inorganically; and effectively manage the balance sheet and cash flow to strengthen the portfolio; and deliver superior returns to our shareholders.
Thus far, we are adhering closely to these priorities and have a very strong first quarter to show for it, with greater success ahead in 2024. With that, I'll ask the operator to provide the required Q&A instructions, and then Scott and I would be happy to take your questions.
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