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spk12: Ladies and gentlemen, my name is Simon, and I will be your conference operator today. At this time, I would like to welcome everyone to the summit materials, third quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star and the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. We ask that you please limit your questions to one question and one brief follow-up. Thank you. Ms. Anderson, you may begin your conference. Ms.
spk01: Welcome to Summit Materials' third quarter 2020 results conference call. We issued a press release yesterday afternoon detailing our financial and operating results. This call is accompanied by our third quarter 2020 investor presentation and an updated supplemental workbook highlighting key financial and operating data, all of which are posted on the investor section of our website. Management commentary and responses to questions on today's call may include forward-looking statements, which by their nature are uncertain and outside of subject 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 supplemented in our quarterly report on Form 10-Q for the first quarter of 2020, each of which is filed with the SEC. You can find reconciliations of the historical non-GAAP financial measures discussed in today's call in our press release. Today's call will begin with a business update from our CEO, Ann Nunes. Then our CFO, Brian Harris, will provide a financial review, and Ann will provide concluding remarks. We will then open the line for questions. Please limit your questions to one question and one follow-up, and then return to the queue so we can accommodate as many analysts as possible in the time we have available. With that, I'll turn the call over to Anna.
spk07: Good morning, everyone, and thank you for joining our third quarter earnings call. Before we begin talking about operating a financial result consistent with our normal practices at Summit, I would like to start by providing an update on safety. Safety is the single most important core value driving the daily actions of all Summit employees. Enhanced safety and distancing protocols are still in place throughout the organization in response to COVID-19. These measures are vital to our operations as Summit is engaged in essential construction activity throughout all of its markets. As we see cases rise nationally, Summit has redoubled its efforts to ensure that we are vigilantly following best practices for the health and safety of our customers, community stakeholders, and our over 6,000 dedicated employees. We thank all of our employees for the commitment to a zero-incident safety culture. This focus is evidenced by our year-to-date safety metrics, which have improved in nearly every performance indicator for the first nine months of 2020. We'll begin on slide three of the presentation with an overview of our third quarter. The headline is that Americans are moving in large numbers to southern and western suburbs and exurbs. Many of the highest growth markets are markets where some have participated, with leading assets and strong operating companies. This migration requires new single-family homes and ultimately will require new roads, schools, distribution centres and medical centres. All of this new construction will create demand for the aggregates and cement that we supply directly to customers. It will also drive demand for the aggregates that will pull through already mixed concrete, asphalt and paving operations, where we capture margin at every stage of the value chain. This migration scenario drove performance in Q3, particularly in our West segment, which posted record net revenue and adjusted EBITDA. Residential construction growth drove higher consumption of aggregates and ready mix. In our high growth markets, such as Houston and Salt Lake City, single family permits increased by double digits year over year in August. We recently closed on two acquisitions that will expand our materials-based positions in important west segment markets. We acquired multi-sources located in Houston, Texas in July, and in August we acquired Valley Gravel, located near Vancouver, British Columbia. Both transactions have good strategic rationale, as they are pure-play aggregates businesses that bolster our presence and scale in attractive markets and increase existing reserves by more than 175 million tons. The East segment delivered mixed results. We reported higher aggregates volume in Kansas and Virginia. Missouri returned to more normalized run rates after last year's levy repair work, and Kentucky completed less road repair work due to the fiscal challenges in that state. Net revenue and adjusted EBITDA were both lower than a year ago, but if you exclude the one-time event of levy work from a 100-year flood in Missouri, each segment aggregates volumes of price were higher year over year. The cement segment is reporting favorable demand trends in residential construction, though several of its southern markets on the Mississippi River have been a bit slower to recover in light of COVID outbreaks and the recent weakness in oil pricing. Lower demand in these markets led to lower net revenue and adjusted EBITDA relative to a year ago, despite achieving a price increase on June 1, 2020. Year-to-date, the cement business continues to deliver strong free cash flow conversion despite challenging conditions. Our profitable Green America recycling facility operated on a limited basis in Q3 due to an explosion earlier in the year, which impacted adjusted EBITDA by $4.3 million. We look forward to Green America resuming normal operations sometime in the fourth quarter. Turning to slide four, we've provided more details on our financial results for Q3 2020 relative to Q3 2019, as well as some ARRI Q4 indicators. Net revenue was down 3.1% as record West segment revenue was offset by lower cement and East segment revenue. Reported net income attributable to Summit Incorporated was up 63% on the reversal of an unrecognized tax benefit and adjusted diluted net income was up 10%. Our adjusted EBITDA of $177.7 million was down 8% on a tough comp relative to the prior year period. However, quarterly cash from operations was up 6% and free cash flow was up 5%. Summit continues to prioritize cash flow and working capital management throughout the organization. That focus on cash helped us keep our leverage ratio steady at 3.5 times in the third quarter, even though Summit acquired two companies during the period. Looking at the IRB results from the month of October and the possible read-through for the fourth quarter 2020, residential demand is strong, particularly in Texas, Utah, and the central U.S. Non-residential activities being fueled by wind farms and distribution centers. However, airport and retail projects have been delayed or deferred with uncertainty around when those projects will resume. Public activity remains resilient in Texas, Kansas, Utah, and Virginia. However, the fiscal situation in Kentucky, the Carolinas, and British Columbia is still challenging. While the budgetary conditions in those locations unfortunately hasn't changed, there is optimism that we may see improvement in 2021. Our executive summary continues on slide five with year-to-date results. Despite uncertain economic conditions, Summit's year-to-date 2020 performance is in line with 2019. This is an accomplishment that our company can take pride in, as we have maintained business continuity throughout the pandemic and served our customers safely and without interruption. We also believe the year-to-date results provide a more fulsome picture, since our year-ago results included one time very profitable levy work from a 100-year flood. Net revenue is up 2.5% year-to-date 2020 versus prior year. Net income is up substantially. An adjusted cash gross profit margin expanded by 120 basis points as we achieved volume growth in aggregates, ready mix, and asphalt. We also reported price growth in cement, ready mix, and asphalt. Adjusted EBITDA is up 4% relative to the first nine months of 2019. Pricing trends are favorable year to date, resulting in margin expansion in many parts of the business. On a mixed adjusted basis, aggregates pricing is up 2.1%. Ready mix pricing is up 5.2% and asphalt up 1.2%. Adjusted cash gross profit margin for products expanded 240 basis points to 23.8%. And for services, the margin expanded 510 basis points to 29.2%. On slide six, we provided an update of the current market conditions in our top five states by revenue. Summit's end-use markets are roughly 38% public, 31% residential, and 31% non-residential. The good news is that with the exception of Kentucky, which represents only 7% of our revenue, we have not seen major disruptions in tax collections reported from most of the states that we serve. However, each state approaches funding decisions differently, so we've done our best to highlight the latest data points. In Texas, TxDOT is awarding jobs and the backlog has not been interrupted. They expect to receive their full Prop 7 allocation in fiscal year 2021. Our public highway work is booked into 2021, most of which is served by our North Texas operation. Houston is one of the country's most diverse and highest growth residential markets, and single family home permits were up 13.9% in August year over year. Non-residential construction activity has been resilient in many of the suburban and ex-urban markets. In Kansas, July through September tax collections were 5.1% higher than expected, and KDOT has several 2021 projects planned. Non-residential projects such as wind farms, warehouses, and distribution centers are typically left and completed in the same calendar year. Residential activity has been steady. For the third quarter, our Utah operation delivered record results as the state attracts new residents with the second lowest unemployment rate in the country. Single family permits in Salt Lake City were up 10% in August year over year. It is a strong in-migration market and had very low new home inventory levels in September. While Missouri's Department of Transportation initially estimated a decline in tax revenue of up to 30%, its activity has been steady for now, though the longer-term impact is less clear. As with Kansas, most non-residential projects are left uncompleted in the same calendar year. So our visibility into 2021 is limited at this time. Residential activity is steady. Finally, in Kentucky, the smallest of our top five states in terms of revenue, the state legislature continues to struggle with budget shortfalls resulting from fiscal issues that preceded the COVID-19 outbreak. While the Kentucky Transportation Cabinet has acknowledged that budgetary impacts to its road fund are less severe than originally estimated, they are proceeding cautiously and lettings have not rebounded to normal levels yet. On slide seven, we provided an outlook by end market. The residential end market is experiencing accelerated demand. The National Association of Home Builders reports that the supply of single-family homes for sale is the lowest in three decades. Home builder sentiment is at all-time highs, and mortgage rates are near all-time lows. Thus, we believe that conditions are ripe for a period of expansion, particularly for suburban and exurban homes in affordable markets such as those served by Summit. The non-residential market has less near-term visibility, but we are long-term bullish. The architectural buildings index suggests that new project developments have stalled. We've seen several airport expansion projects be delayed or deferred. By contrast, we've still been busy with wind farm and distribution center projects. And given the strength in residential, we believe a corresponding period of growth in non-residential construction shouldn't be far behind. With regards to public infrastructure, we now have more certainty about the FAST Act. A continuing resolution to fund highways through 2021 was passed at 2020 funding levels. Each state is evaluating its own budget needs. The funding sources and revenue impacts vary by state. The outcome of the general election may also influence infrastructure spending. Both the House and Senate infrastructure bills would increase federal funding significantly over current levels. Concluding the business update on slide eight, we continue to pursue our aggregate greenfield investment strategy to drive future sustainable organic growth. Five aggregate greenfield investments have been completed to date, with another five aggregate greenfield investments under development. It is estimated that Summit will generate $45 million of adjusted EBITDA on a nine-year-life basis by 2024 from these projects once they are all in full operation. Expected investment in Greenfields is $50 to $60 million in each of 2020 and 2021. With that, I'll turn the call over to Brian for a discussion of financial results.
spk06: Thank you, Anne. Turning to slide 10, I'll start with a summary of Summit's capital structure. In July, we strengthened our balance sheet by redeeming all of the outstanding 650 million 618 notes due 2023, which was our nearest term maturity, with proceeds from 700 million of 5.25 notes due 2029. We ended Q3 with $289 million in cash, an increase of over $100 million from the year-ago quarter. Combined with our undrawn revolver, Summit had over $617 million of available liquidity at the end of the third quarter. Our leverage ratio is now 3.5 times net debt to adjusted EBITDA, which is a good improvement from 4.2 times a year ago. By completing two strategic acquisitions totaling $123 million in the quarter, we demonstrated our ability to balance M&A with efforts to improve our liquidity ratio. We reported $124.3 million of free cash flow for the third quarter 2020, an increase of 5% from the year-ago quarter as we continue to improve our working capital management. On slide 11, we provided a bridge showing our updated 2020 capital expenditure guidance. We increased the projected range to $175 to $185 million from $145 to $160 million. The projection for 50 to 60 million spend on greenfields in 2020 remains unchanged. Increased CapEx has been deployed to invest in reserves and to add additional equipment in some of our highest growth markets. On slide 12, you'll see the net revenue bridge comparing Q3 2020 to Q3 2019. Net revenue decreased 3.1% to $645.2 million. Performance was led by our West segment, which contributed an incremental 10.6 million organic net revenue on higher aggregates and ready mix volumes, particularly in Utah, while we also benefited from an incremental 9.4 million in revenue associated with recent acquisitions. Our east segment's net revenue declined by $27 million, which reflected a very difficult comparison relative to a year ago when flood repair work in Missouri contributed an outsized proportion of volume and price relative to the normal product mix in that region. Kentucky is also part of our east segment, where letting activity is still far below typical levels. flood repair work and Kentucky aside, the east segment nonetheless posted strong performance from Kansas, where non-residential wind farm and distribution center projects contributed to higher aggregates volume and price. Our cement segment's net revenue was down 14.1 million in Q3 2020 relative to the prior year quarter on lower demand, particularly in the market south of Memphis. Turning to slide 13, we've provided a Q3 adjusted EBITDA bridge. We ended the quarter at $177.7 million, a decrease of 8% from a year ago. The decrease lower east segment and cement segment performance relative to a year ago, partially offset by record performance from our west segment. Turning to slide 14, you'll see key gap financial metrics. Net revenue decreased 3.1% in the third quarter due to lower cement and asphalt volume, partially offset by higher aggregate volume and higher cement and ready mix price. On a year-to-date basis, net revenue has increased 2.5% due to strong performance in our west segment in aggregates, ready mix and asphalt volume and price. Q3 operating income of $100.6 million decreased $30.3 million as compared to the third quarter of 2019 due to lower revenue and higher general and administrative costs in the third quarter associated with approximately $10.6 million of CEO transition and related stock compensation adjustments, along with other quarter-end accrual true-ups for healthcare and workers' compensation. Excluding these one-offs, our year-to-date G&A costs are running roughly in line with the prior year. On a year-to-date basis, operating income is up 4% on higher revenue. Reported Q3 net income attributable to Summit, Inc. of $90.7 million included a reversal of an unrecognized tax benefit totaling $32.9 million and is the primary source of the increase relative to $55.8 million reported net income in the prior year period. Turning to slide 15. we've presented several non-GAAP financial metrics where we compare Q3 2020 to the prior year as well as year-to-date. Adjusted gross profit margin contracted by 10 basis points in the third quarter, yet expanded by 120 basis points year-to-date, and a combination of volume and mix-adjusted price improvements from aggregates and ready mix. Adjusted EBITDA margins contracted 150 basis points to 27.5% for the quarter on tough comps relative to a year ago. But on a year-to-date basis, we are at 22.7%, which is 40 basis points ahead of the first nine months of 2019. Adjusted diluted net income is up 10% over the prior year quarter and up significantly year-to-date 2020 versus the first nine months of 2019 due to non-cash adjustments impacting our effective tax rate. Turning to slide 16, we have provided a comparison of price and volume year-to-date. Organic average selling prices increased 0.6% for aggregates, 1.1% for cement, 5.2% in ready mix, and 1.2% in asphalt. Organic volumes increased 1.3% for aggregates, 4.5% for ready mix concrete, and remained consistent for asphalt. Cement volume contracted by 7.4%. Turning to slide 17, we provided adjusted cash gross margin in the quarter and year-to-date in all lines of business. Aggregates margins contracted by 440 basis points in the third quarter on tough comp relative to Q3 2019, which featured flood repair work at a higher volume and price than our normal mix of business. However, year-to-date 2020, our aggregates margins are unchanged from the first nine months of 2019. Our products business expanded by 100 basis points per third quarter and 240 basis points year-to-date as we experienced both volume and pricing growth in residential markets for our downstream businesses, particularly in Utah and Texas. Margins in our services business expanded by an impressive 480 basis points in Q3 and 510 basis points year-to-date on pricing gains, lower fuel and trucking costs in Texas and Kansas, as well as volume in North Texas, Kansas, and Virginia. Cement margins contracted only slightly in the third quarter, reflecting well-managed production and cost control methods. Year-to-date cement margins have contracted by 200 basis points, which reflects winter storage costs early in the year, together with the impact of the explosion at the Green America recycling facility. Materials and products comprise 86% of our Q3 adjusted cash growth profit, and we continue to expect that the contribution from materials will be an increasing proportion of our EBITDA as we pursue our greenfield strategy, experience organic growth in our markets, and engage in M&A. For quarterly modeling purposes for the fourth quarter 2020, we estimate that interest expense should be in the range of $25 to $26 million. We anticipate paying minimal state and local cash taxes and no U.S. federal income taxes. In addition to minimal cash taxes, we do not expect to have any significant TRA payments until 2025. For the purposes of calculating adjusted diluted earnings per share, please use a share count of 117.2 million, being 114.1 Class A shares and 3.1 million LP units. And with that, I'll turn the call back to Anne for her closing remarks.
spk07: Thanks, Brian. I'll conclude my prepared remarks with a management outlook on slide 19. In a world where more people can work remotely, They desire single family homes in locations offering a more affordable cost of living. Americans are migrating towards many of the markets where Summit has an established presence. And we are well positioned to benefit from the homes being built today and the roads, wind farms, distribution centers, and data centers they will need in the future. Summit is vertically integrated in both high growth markets and uniquely positioned to capture value across aggregates, ready mix, asphalt, and paving. I recently joined Summit and I feel humbled and honored to lead the company through its next phase of growth and value creation. Immediately after being appointed CEO on September 1st, I embarked upon a listening tour of employees, customers, current and former investors, sell-side analysts, and other important stakeholders to get an outside-in view of the business. Feedback is important. To those of you who provided your valuable time and insight or participated in our perception study, we thank you. I'm sure many of you on this call are eager to hear about our vision and strategy for future growth and value creation at Summit Materials. The answer is that it is still early days. What I can tell you from our initial analysis is that Summit's markets are growing, our financial position is strengthening, and we are focused on free cash flow conversion. we are aligning our business to maximize returns on invested capital. ROIC is now part of our compensation plan, and we will use that framework as a key component to evaluate our performance. We are conducting an in-depth strategic review of the financial and operating performance of our portfolio and its future growth potential, leveraging the feedback that you've generously provided to date. And finally, We are focused on consistent organic growth with investment in greenfields and summit end markets that are underpinned by strong growth fundamentals. Sustainable organic growth serves as a foundation to support strategic acquisitions while continuing to de-lever the balance sheet with increased focus on cash and returns generated across the entire summit portfolio. With that, I'd like to turn it over to the operator for questions. Operator?
spk12: Thank you. At this time, I would like to remind everyone that in order to ask a question, please press star then the number 1 on your telephone keypad. Again, we ask that you please limit your questions to one question and one brief follow up. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Catherine Thompson with Thompson Research. Your line is open.
spk00: Hi, thank you for taking my questions today. First, focusing on the cement segment, I acknowledge that you were expecting some tough comps going through the quarter, but still the volumes are off a little bit more than expected. Could you give color on the delta and then also, just as a follow-up on the cement segment, put some takes on the cement margins, including any impact from higher plant costs in the quarter? Thank you.
spk07: Okay, well, let me just address cement volume. So as we said in our prepared remarks, most of our volume declined within our southern markets, and that had an impact overall on the overall volume of 7% negative growth. The puts and takes on cement moving forward. If we look at, I'll let Brian refer to the margins on cement, which were pretty close. If you look at year over year, most of our reduction was from fixed cost coverage, just by the volume defined. But also the one we pointed out also was the Green America recycling, which has been down and had an impact of 4.3 million in the quarter.
spk06: yeah i don't really have much more to add to that on the cost side catherine um the big impact obviously was the with the gar uh explosion impact that the plant is still not up and running we expect that to happen during the fourth quarter uh based on uh current timing estimates so we're likely to have an impact in q4 as well albeit uh probably lower than it's been in q2 and q3 um otherwise the plants were running well um we did lose a little bit of ground because of you know under absorption of overhead from those lower volumes but otherwise the plants ran well and costs were well controlled okay and just to clarify on that the increase in capex is this all related to greenfield expansion or there are other initiatives that may have overlooked No, it's actually not related to the greenfields. The spend on the greenfields we've kept in the range of 50 to 60, that's unchanged. So the increase that we've identified has come from a couple of sources. The first is that we opportunistically purchased some aggregate reserves in the Utah market where aggregates are scarce. And so the opportunity to purchase those came came along and we took advantage of that. And then the second part of it was really that in many of the very high growth markets, we added some additional equipment, so yellow iron and trucks to take advantage of the growth that was going on in those markets.
spk12: Your next question comes from the line of Phil Ng with Jefferies. Your line is open.
spk03: Hey, guys. It would be helpful if you could provide a little more color on how volumes track inter-quarter and certainly appreciate some of the color you guys provided on October trends. But anything more specific on volumes in some of your core businesses? It seems like trends stop in inter-quarter pretty generally.
spk06: Yeah, Phil, thanks for the question. Yeah, they did weaken a little bit just towards the very end of Q3. We had Hurricane Laura came through. That lost us a few days with weather in Houston market, and then it swept right up through the center of the country and over into the coast. So we lost some volume in our high-margin, high-price markets in the Carolinas and Virginia. So that was a little bit disappointing towards the end of Q3 and kind of just took a bit of the luster off. But other than that, you know, the cadence of the volumes was pretty much as we expected through July, August, and September.
spk03: Got it. And I think you touched on this, you know, early days in terms of . Reassess your portfolio, what does it take? And I guess when you think longer term, from a philosophy standpoint, how important is vertical integration? And I guess, you know, what's your ability to unintegrate any markets if you do non-core on the downstream side of things?
spk07: Bill, I found it very hard to hear the front end of your question there. If you wouldn't mind repeating it, that would be very helpful.
spk03: Yeah, sure. I know early days of your process in terms of your strategic review, but I think you did a great takeaway in terms of how important and critical it is for you to be able to do this before it.
spk01: Hey, Phil, I'm really sorry. We couldn't quite make that out. Maybe we can catch up with you later offline. No problem. You broke up on that one.
spk07: I heard part of your question, and that was round. You were very alert on it, Phil. I think the last end of your question came through about vertical integration, and I think I would point you to the strength of our Houston and Salt Lake City markets. if there's ever an example of where vertical integration is an asset for some of this record performance that we've had this quarter and year to date, really does demonstrate that for our model.
spk12: Your next question comes from the line of Jerry Revich with Goldman Sachs. Your line is open.
spk13: Yes, good morning, everyone, and welcome. Thank you. I'm wondering if you talk about how your approach to returns on capital is a pivot from Tom and the prior teams. So obviously the team's done a good job of acquiring assets, attractive multiples. So what's the tweak as you think about your strategy and the way you look at returns on capital versus the way you
spk07: the team had looked at it in the past what are the key differences to the approach yeah i think one of the key differences we've now added it to our incentive plan right to really increase emphasis on that and you know we've referred to the fact that we're doing a normal course uh portfolio review as part of our strategic review and in that we're really going to look at all the elements of our business and all the sub segments to look at the returns the growth potential, and the cash over time and cash needs as we will define and optimize our portfolio moving forward. So I would sum it up with saying increased emphasis on a normal basis running the company. And then when we look at our portfolio, having very active portfolio management and optimization moving forward.
spk13: And then can I trouble you to expand on the last point in terms of increased focus on running the company? Obviously, the company has a lot of acquisitions historically. Can you talk about how the structure is changing? I know it's early days, but any broad strokes would be helpful if you could expand on that point.
spk07: Yeah, it is really early days. You know, we've been going through a very clear process here. And again, thank you for all your input on the outside in view of the company. That was kind of stage one in our process. Secondarily, we've been, you know, near-term focus has been resiliency of our business in any COVID scenario, making sure we're ready. And then the third part is our in-depth strategic review. which is really ongoing and the team's working very hard to get to some answers there, but we really don't have any conclusions. We hope to share that, at least an update on that in our next earnings call.
spk12: Your next question comes from the line of Stanley Elliott with Stiefel. Your line is open.
spk04: Good morning, everyone, and welcome to the call. If we talk about kind of the portfolio optimization, you know, you've just done two acquisitions here. Do we think that the M&A environment gets put on hold as you continue to work through, you know, the mechanics of the portfolio? Or we'd love to hear that in context of leverage at three and a half times.
spk07: Sure. When we talk about our capital allocation priorities, obviously focusing on delevering And we've succeeded in that year to date, but we continue to focus on cash and organic growth of our company and putting capital in to invest in the organic growth portion of the company. Yes, we did do two strategic acquisitions, so I would not say acquisitions are on hold. I would say we're being very selective and working on returns in doing that. And the two acquisitions that we did are really pure play aggregates that have been ongoing for six to seven years, as my understanding is. And these are strategic acquisitions that we feel will really strengthen our West segment moving forward, which is our high growth segment. So I would not say on hold. I would say just selective acquisitions. But while we continue to delever, and we heard you all loud and clear on that, that you would prefer lower leverage on the company.
spk04: And then, switching gears a little bit, thinking about how strong the residential markets have been, really nationally, but especially in the two key markets you all highlighted, how long before the non-residential market typically would pick up in those markets as one-off, whether it's retail or light commercial, things of that nature would end up following what looks to be a pretty nice growth trajectory on that residential market side?
spk07: Well, we look at the residential typically, and this does vary a little bit, and I guess the rate of in-migration to these market segments will determine that. But generally, we would quote 12 to 24 months on that, on the light commercial. So it is a bit bumpy when we look at other non-res, but on the light retail, I would say on the low rise, typically a 12 to 24-month lag, which is why we are really strong on residential markets. non-RES following that as we continue to grow in the West segment.
spk12: Your next question comes from the line of Adam Follimer with Thompson and Davis. Your line is open.
spk09: Hey, good morning, all. I wanted to see what's your outlook specifically for Utah and Texas, just because they're such important markets for you?
spk07: Well, if we look at Utah and Texas, um, I'll start with Texas, you know, very strong on tech stuff. So our public spending continues to be strong. We have backlogged into 2021, um, you know, residential, very strong. Uh, so I would say, you know, in both our Houston and North Texas, we continue to see that in migration and considerable growth. Um, if we talk about Utah, low unemployment, you know, residential, very strong. And again, you know, the public spending there has been pretty steady. So, you know, all indicators are pretty strong in those two areas.
spk09: Okay. And how about the southern Mississippi River markets? They've been kind of a thorn in the side of cement. What are you seeing there?
spk07: Well, you know, we can't predict because a lot of that was driven by COVID and lower oil pricing. We're not seeing that return to any significant level in the near term. We're estimating that we don't. And so that drives behavior on our behalf, which is control what we can control in our operations. As Brian referred to earlier, the GAR expansion will come back into play. So we'll recover into 2021 on this loss that we've had in Q2 of 4 million, Q3 4.3, and Q4 is likely to be a hit depending on how quickly we ramp up. So we have that plan in place, so that'll be an uptick to spend. But then when we look at the demand, which we can't control, We do have a number of initiatives really focused around commercial excellence, supply chain excellence, and operational excellence. In the case of commercial excellence, it's around price execution, staying close to our customers as we continue to do in this business. On the supply chain, we've brought in some new talent to really look at our logistics and distribution costs and make sure we continue to optimize. And this team is very strong on operational excellence, but we're never done, and we will continue to focus on our cost containment moving forward.
spk12: Your next question comes from the line of Trey Grooms with Stevens. Your line is open.
spk10: Hey, good morning. So I'm... I'm going to try maybe a bigger picture one here. So, you know, we're going into the election here just a few days out. And, you know, if we were to get a blue sweep, which, you know, some folks are saying that there's a pretty good chance of that, how and when do you think that starts to impact your business?
spk07: Well, we can't really predict the future on that. I will say that, you know, In 2016, Trump talked a lot about an infrastructure bill, which even though he owned the Senate, never came to pass. However, we do believe it will be an uptick to the business. The timing is very hard to predict, Ray.
spk10: Got it. Yeah, understood. And then I guess kind of circling back on the cement margins just briefly so I can understand sequentially the change. that you saw there. I understand there were some benefits in the 2Q period that maybe didn't repeat, but both periods did incur that cost that, you know, from the explosion, but had very different EBITDA margin. So can you dive in a little bit, maybe not look at it year over year, but sequentially, maybe some of the cost differences there and how we should think about those. Is there anything, you know, ongoing there outside of what we've already talked about.
spk06: uh yeah trey uh thanks for the question um i think really it was it was down to some of that overhead absorption recovery uh that we we mentioned there uh from catherine's question that with the volumes being uh much lower and as you know cement has quite a high fixed uh cost base we just didn't get the recovery on the overhead uh due to that that would be the primary difference between Q2 and Q3. Also in Q3, we did have the shutdown, the origin shutdown of one of the plants. The second one will happen in Q4. So we have some lost days because of that, which we don't have in Q2.
spk12: Your next question comes from the line of Garrick Schmoy with Leap Capital. Your line is open.
spk02: Oh, hi, thanks. Just wanted to ask about pricing, just given some of the negative price mix in the quarter. Can you provide a little bit more visibility on how we should think about pricing moving forward? And just given the volume backdrop, are you seeing any change in the competitive landscape? Is it getting a little bit more intense, just given some of the volume challenges in a couple of your markets?
spk07: I'll have Brian address the specifics on the pricing. But on the competitive landscape, We're not really seeing any significant changes. I will tell you, Garrick, that one of the things that was a surprise to me in coming into this business is how different the competitive dynamics are between regions that drives our pricing. But we're not seeing a fundamental change in any of our markets.
spk06: Yeah, Garrick, on the aggregates pricing, organic pricing was actually positive in the quarter. And the main reason for the reported decline was due to the comparison with the prior year where we had that very high highly priced levy repair job in Missouri. And then on the multi-sources acquisition, the average selling prices on that product line are lower than the averages that we have elsewhere in the business. So that was a little bit of a drag on the average selling price. But what I'd ask you to do is not just look at the aggregates pricing in a vacuum, but keep in mind the margins because they do go hand in hand. You can have product lines which have lower selling prices, but actually have very good margins on them. And if you look sequentially, you'll see that our aggregate margins actually increased quarter on quarter. The LTM margins are up by 1.6%. And even with a difficult comp, our year-to-date margins are the same as they were in the prior year. So a few moving parts there, but you really have to look at price and margin together. Okay. Ready Mix prices were strong, up 4.5% and up 5.2% year-to-date. And even on a year-to-date pricing on aggregates, Mix adjusted. That's positive by about a little bit over 2%.
spk02: Great. Thanks for all the detail. And just want to ask on logistics as well, if you're seeing any bottlenecks or anticipating any bottlenecks moving into next year, just given some reported capacity constraints on the trucking side.
spk07: Not at this time. I think actually in Texas with oil pricing being down, we've actually had a better availability of trucking and driver's capacity. So no impacts on the business that we're seeing here in the near or medium term.
spk12: Your next question comes from the line of Rohit Seth with Truist Securities. Your line is open.
spk15: Hey, thanks for taking my question. The first question is building on the infrastructure question that came earlier. If there was an infrastructure bill that's passed, I think the shovel-ready projects would probably be repair and maintenance type work. I'm just curious on, you know, given your focus has been on the less, you know, on the smaller jobs, is it fair to say that, you know, you guys might be an earlier beneficiary of, you know, any pickup and spending, you know, coming from the feds?
spk07: Yeah, I think that would be a correct assumption because a lot of our work is repair and rebuild. So we would expect to see some uptake from that relief.
spk15: Okay. And then second question, Brian, on the TRA, again, from the elections taxes, corporate taxes go up. I do recall when taxes came down, there was a revision to the TRA liability. Now if they move the other way, does that unwind or what would the impact be on that TRA liability?
spk06: Yeah, so hypothetically what would happen is the TRA liability would go up. in the same way as it came down when the corporate tax rate was reduced. But it would not change the timing on when any payments are likely. As we mentioned in the prepared remarks there, the earliest we expect to have any payments under the TRA is 2025, and that date is constantly shifting as a result of any other tax attributes that are generated along the way, whether they be from accelerated depreciation or step-ups in basis that we get from acquisition. So hypothetically, yes, an increase in the tax rate would increase the TRA liability.
spk12: Your next question comes from the line of Anthony Pedinari with Citi. Your line is open.
spk16: Good morning. And you talked about ROIC being added to compensation, which I think is great. Is it possible to talk about expected returns for the incremental CapEx investments, and then just generally what returns you'd expect from aggregate greenfields versus acquisitions like MultiSources and Valley Gravel?
spk07: I think we've said before on returns from the actual ongoing acquisitions we target in the mid-teens. With greenfields, are you more specific on that?
spk06: Yeah, the greenfields, you know, they've yet to play out as to precisely what the returns would be. Certainly the entry multiple is significantly lower than you would pay if you were, you know, EBITDA through acquisition. We know that the aggregates, multiples paid can be in the mid-teens and sometimes even higher. So the entry point is much lower, but obviously it takes a little longer to actually realize the EBITDA from those investments. We'll know more as each of the projects unfolds, but based on the $45 million of EBITDA in 2024, we'd expect those returns to be, you know, in the mid-teens IRR.
spk07: Then the other thing I'd ask, you know, Anthony, when we look at our strategic review, we're not complete through that, so we haven't really set a target on ROIC at this point in time, so that'll be something coming out of our in-depth review.
spk16: Okay. Okay. That's helpful. And then, Brian, you gave us an update on the impact of weather in the quarter. Can you talk about what kind of weather comp 4Q is set up for, you know, for modeling purposes? Is there anything we should keep in mind or that you've seen so far in October?
spk06: Yeah, I think most of the weather patterns that we've seen in the different parts of the country have held up pretty well in October or have followed a similar trend. So we're going to see some wet weather continuing, and we've lost a lot of days in the southeast, so in Myrtle Beach, Wilmington, Columbia, Roanoke. Lexington, they've all had significantly more rain days this year, but elsewhere it's been dry. So Kansas, Wichita, Columbia, Missouri, Salt Lake, kind of the Intermountain West has been particularly dry. You've probably seen all the fires that we've had, but it's been dry. So at the moment we kind of have seen that similar pattern of weather unfold in October.
spk12: Your next question comes from the line of Sheldon Clark with Deutsche Bank. Your line is open.
spk11: Hey, thanks for the question. I apologize if this has been asked. service issues as well earlier um could you just provide a little bit more context um on the impact from recent m a on profitability and pricing um it looks like there's just a bit of a negative drag on aggregates mix in the quarter i know you said margins held up um decently well but can you just maybe talk about how pricing differs in these markets versus your existing markets and maybe just help us bring up what the potential opportunity is there uh to either improve pricing or margins in those markets.
spk07: I have a comment on our, you know, multi-sources acquisition, which was done as a pure play aggregate. You know, we've just done that acquisition and we're in the process of starting the integration. So as Brian correctly pointed out earlier, there was some lower pricing, but the margins were strong. As we look to integrate, we always look to have one to one and a half turns of improvement. And also, you know, the back office, our sourcing, integration, and also as we look to apply our commercial and operational excellence, we expect to be able to get to the pricing targets that we do for the entire portfolio.
spk06: And Sheldon, I'd just add to that. We delivered, you saw on the bridge there, the Ibiza bridge, the contribution was about 2.3 million of Ibiza in the quarter. There really wasn't anything from Valley Sand and Gravel up in Vancouver. It was late in the quarter, but multi-sourcers contributed about 2.3 million in Q3.
spk11: Okay, that's helpful. Thanks. And then just kind of a broader question. I don't know if you have a timeline around it, but when you do complete your strategic review, should we expect any sort of investor day or analyst day type presentation, or is this sort of something that, you know, you'll just string into earnings calls over time?
spk07: Well, we are in early days, and we don't have a specific timeline. I will tell you the team is working very hard, and we're doing a very comprehensive review to make sure that when we do come out, With a revised strategic roadmap, it's something that is very well thought through. You know, we have our normal course discussions with buy-side, sell-side, and our ongoing earnings interactions. If we feel that we're not getting the full coverage for our strategic roadmap when it's ready, we obviously would consider an investor day at that time. But we haven't made that decision up to now, Sheldon.
spk12: Your next question comes from the line of David McGregor with Longbow Research. Your line is open.
spk05: Good morning, everyone. I have a question on cement and just looking at the pricing up 50 basis points. And you talked about south of Memphis, so I appreciate that color. Maybe think about the rest of the river system going north from there. And I think it's common knowledge. It's always been a tough market on pricing. But just trying to get a sense of, was the most recent price increase just you weren't able to get much traction north of Memphis? Or is the traction just maybe a little bit slow in coming through? And we see that more evident in the fourth quarter numbers. But any kind of color you can provide on just market conditions across that segment of the market would be helpful.
spk07: Yeah, the northern portion demand has been pretty steady. And really our demand challenges were in the southern part. which when you put the two together, it really boils down to customer mix that resulted in the 0.5% increase. So it's not a lack of execution on where we said we would get the price increase. It's just customer mix, I would say, would explain it out.
spk05: And so how does that play into 4Q? What should we be looking for there? Does that mix correct?
spk07: I think more is the same because I don't see our southern markets particularly rebounding. So I think you could probably just, you know, carry that across from where we are today.
spk05: And so there isn't any incremental benefit from further traction in 4Q? Just across the entire mix?
spk07: Okay. No, the mix should not change.
spk05: Okay. Thanks for that. And then the second question is just you were addressing earlier questions about the balance sheet and leverage and you know, the importance of striking a balance between, you know, investing in the business and, you know, repurchasing stock and buying and paying down debt. I guess I'd just be interested in your plans and sort of looking a little further forward than just the next quarter, but, you know, through the next 12, 15, 18 months, where do you see leverage getting to from three and a half times? And do you get there by using cash or is it just EBITDA growth or is it a combination of both? But any color there would be helpful.
spk07: Yeah, I think, you know, we are undergoing our strategic reviews, so we do not have concrete numbers that we've rolled out as a result of any change in strategy. I will say we have ongoing focus to delever, and the team has been working diligently upon that, working on working capital, really doubling down on our organic growth, making sure our operational excellence is strong. So we will continue to delever. Now, any significant step changes will come out of our strategic review, and we will review that at the time.
spk12: Your next question comes from the line of Mike Dahl with RBC Capital Markets. Your line is open.
spk14: Hi, thanks for taking my questions. I just wanted to ask the first question on the ax margins. I understand from a year-on-year standpoint, a tough comp with the levy repair work, but anything you can give us on unit costs in the quarter? Because presumably, you know, diesel would have still been a
spk06: a tailwind for you guys and just so any color around unit costs and in three Q and how to think, think about that in four Q. Yeah, the diesel costs were a tailwind far as they have been all year where we obviously hedge by forward as a portion of our diesel and then we pick up the balance spot. The diesel has been a tailwind for us throughout the year, not just on the ags business, but throughout the entire organization, particularly actually on Readymates, where we do a lot of a lot of mileage. So that has been a tailwind. There isn't really anything specific on the underlying cost side of the equation in aggregates that would have affected the margins. It's really more to do with that mix of pricing. And say it's a mixed adjusted basis in Q3, we would have been up by about 2%, a little bit over 2%. And sequentially, we're at 64% in Q3, 64.2. And actually, LTM is now back above 60%. So it's really just the pricing mix that was the biggest factor in Q3. And obviously, Q3 of 2019 was a very tough comp where we had margins of over 68%, which is you know, abnormally high for the normal run rate of this business. Great.
spk14: Okay. Thanks, Brian. And my second question, and I know it's early to have perfect crystal ball here, but, you know, there's obviously a debate around public and non-res as we head into 21. I think what you've outlined is certainly helpful going through kind of the state-by-state breakdowns in terms of current state of play you know, I think if we look at your comments across your markets that make up the majority of your business, yes, there are some puts and takes in places with headwinds on the public side, but overall, it seems like your view is potentially that public side remains more resilient in the markets that matter to you, and same with the combination of kind of private res versus non-res. I guess where I'm trying to get to is when you're thinking about next year, do you think you're positioned to actually have a year of volume growth in 21 based on what you're seeing early signs?
spk07: Well, I think we haven't rolled up overall. I would say that, you know, obviously any further impact from COVID is uncertain at this time, like any other business. I would say, though, that there's one factor on the residential side, and, you know, we've talked about public, but all inventories are low across all our major markets. So we would expect that to continue to grow if it's consistent with this year and interest rates stay low. On the public side, we've pointed out each area and, you know, it's on our strong markets, clearly in the west segment. We expect that to continue. Kansas, very strong. Virginia, strong. And where we have, I don't believe Kentucky will particularly rebound, but that will be each state makes their decisions differently. So we'll just have to wait and see on that.
spk12: Ladies and gentlemen, we have reached our allotted time for Q&A. I will turn the call back over to Anne for any closing remarks.
spk07: Thank you, Operator, and thank you all for joining us today. That concludes our call. Good day.
spk12: Ladies and gentlemen, this concludes today's conference call. You may now disconnect.
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