Summit Materials, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Summit Materials Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. After this speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Carly Anderson. Thank you. Please go ahead. Welcome to Summit Materials' fourth quarter and full year 2020 results conference call. We issued a press release yesterday afternoon detailing our financial and operating results. This call is accompanied by our investor presentation and updated supplemental workbook highlighting key financial and operating data, all of which are posted on the investor section of our website. Management's commentary and responses to questions on today's call may include forward-looking statements, which by their nature are uncertain and outside of summit materials control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results may differ in a material way. For a discussion of some of the factors that could cause actual results to differ, please see the risk factors section of some of the 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 Newman. Then our CFO, Brian Herron, will provide a financial review, and Ann will provide concluding remarks. We will then open the line for questions. Please limit your asks to one question, 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 Ann.

Good morning, everyone, and thank you for joining our fourth quarter and full year 2020 earnings call. Before we begin talking about our operating and financial results, 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 activities of all Summit employees. Enhanced safety and distancing protocols are still in place throughout the organization in response to COVID-19. Ours is an essential business and we take that responsibility seriously. We continue to work towards a zero incident safety culture. Our over 6,000 dedicated employees deserve recognition for their success in 2020 as we improve performance in lost time and recordable incident rates relative to 2019. We'll begin on slide three of the presentation with an overview of our fourth quarter performance. Summit delivered a strong finish to the year as in-migration trends continue to favor rural and ex-urban residential construction. In many of our key states, public spending activity was resilient, resulting in more working days. We delivered record Q4 results for net revenue, operating income, and adjusted EBITDA. Volume growth was robust throughout the quarter, with aggregate volumes of 24.7%, cement volumes of 4.5%, ready mix volumes of 6.4%, and asphalt of 20.3%. Our West segment was the largest contributor to Q4 results, delivering record adjusted EBITDA as residential activity drove higher aggregates and ready mix demand in Utah and Texas. West segment results also included a full quarter of contribution from the strategic acquisitions of multi-sources in Houston and Valley in British Columbia that occurred mid-year. In our east segment, performance included double-digit organic growth in Kansas aggregates, driven by robust public spending and the completion of several wind farm projects. In Kentucky, we made the decision to focus on cash optimization in a volume-challenged market. Lettings have resumed after several months of deferrals, albeit at a lesser pace than normal run rates. Our cement segment reported higher adjusted EBITDA relative to Q4 2019, driven by demand recovery in markets that had struggled earlier in the year and the impact of price increases that went into effect on June 1, 2020. Higher volume and price, combined with our focused continuous improvement efforts in operations and supply chain, yielded a 210 basis point gross margin expansion for cement in the fourth quarter. Our Green America recycling facility operated on a limited basis in Q4 as we await final permission to resume full operations. This downtime impacted our cement segments adjusted EBITDA by $4.2 million in the fourth quarter. We look forward to Green America resuming normal operations sometime in early 2021. as there is significant pent-up customer demand for its services. We also plan to undertake a modest expansion of the Green America facility in 2021 to position that business for future growth. Turning to slide four, we summarized full year 2020 results, where we set records for net revenue, net income, and adjusted EBITDA. We reported record net revenue in 2020 of 5%, primarily resulting from 3.6% organic volume growth in aggregates and 5% growth in ready mix, as well as pricing growth in our ready mix asphalt and cement lines of business. Aggregates pricing declined slightly relative to the prior year due to three primary factors. First, we made a strategic acquisition of multi-sources to bolster our market position in the fast-growing Houston market. Since making that acquisition in July, the Houston team successfully implemented two price increases, and we have now fully integrated the business at prevailing market prices. Second, flood repair work was completed in 2019 in our Missouri operation and did not repeat in 2020. Third, we had a change in product mix as we sold through some lower-priced inventory, which impacted our average selling price. For example, in Kentucky, where the state temporarily deferred all public spending activity, we made the strategic decision to engage in operational improvements to optimize cash generation in a volume-challenged market. On a mix-adjusted basis, aggregates pricing increased 1.7% in 2020 over 2019. Our end market fundamentals were good at year end, establishing a solid foundation for successful price execution in 2021. Fully reported net income attributable to Summit Inc. was up 134% on higher revenue, resulting in higher operating income and the reversal of an unrecognized tax benefit. Our adjusted cash gross profit margin expanded by 80 basis points on higher operating income. Our record adjusted EBITDA of $485 million was up 5% on higher revenue in aggregates, ready mix, and asphalt. We continue to prioritize cash flow and working capital management, resulting in a year-end leverage ratio of 3.2 times, which is the lowest in the company's history and one full-turn improvement over five quarters ago. If we achieve the growth estimated in our outlook, we see a path to realizing a leverage ratio below three times by year end 2021. We plan to discuss our capital allocation strategy in a more holistic fashion during our upcoming virtual investor event on March 16th. We're looking at the early results from the month of January and the possible read through for 2021. Residential demand in our markets is still robust, particularly in Texas, Utah, and the central US. obviously last week we were not operating at normal activity levels in many of our markets due to exceptionally cold weather conditions but that does not change our view that the overall demand picture is healthy we've seen some lettings come through for wind farms and distribution centers in early 2021 but it's still too early to tell whether we on pace with 2020 when wind farms in our kansas market contributed approximately 5 million of adjusted ebitda Most airport and retail projects are in a holding pattern, as they were in 2020, with little visibility when these projects will resume. Public activity remains resilient in Texas, Utah, Kansas, and Virginia. Missouri and Kentucky have begun letting projects and are catching up on 2020 deferrals, but it is early days and too soon to quantify the impact. British Columbia remains challenged and is slow to emerge from COVID-19-related economic contraction. Drilling down a bit further on slide five, we've provided an update of the current end market conditions in our top five states by 2020 revenue. Summit's end-use markets are roughly 38% public, 31% residential, and 31% non-residential. Overall, we've characterized conditions as favorable in our largest markets for residential construction, as U.S. average housing permits are up 12% year-over-year and conditions support organic growth. In Texas, TxDOT is projecting $9.6 billion in lettings in the current fiscal year, a substantial increase from last year. In addition, Texas is expected to receive over $900 million from the recent stimulus. Houston continues to be one of the country's most diverse and highest growth residential markets, and single-family home permits were up 18% in November year-over-year. The strategic acquisition of multi-sources further strengthens our position in this high-growth market. Non-residential construction activity has been resilient in many of the suburban and ex-urban markets, except for the Permian Basin and Panhandle areas, which have been slower to recover from the effects of lower oil prices. Single-family permits in Salt Lake City were up 8% in November year-over-year, and inventories of new homes remain at historical lows. UDOT is forecasting a modest revenue increase for the current fiscal year in addition to $87 million in expected stimulus. Utah is one of Summit's highest growth markets and is a great example of where our vertically integrated model is fully leveraged to deliver profitable organic growth and high returns on investor capital. In Kansas, KDOT is planning for $1.9 billion of spending in its current fiscal year budget, growing to $2.2 billion for fiscal 2022. Single family permits are up 16% across the entire state in November year over year. Kansas is an excellent market for Summit, where we are well positioned to continue to leverage past and ongoing investments in our operating companies and greenfields to deliver sustainable organic growth. While Missouri's Department of Transportation initially estimated a decline in tax revenue of up to 30%, they have recently announced plans to deploy approximately $360 million worth of projects that have previously been deferred. Missouri is also expected to receive approximately $236 million of stimulus. Finally, in Virginia, the current budget reflects an increase of 16% over the prior year. Single-family permits are up 12%, while the state is expected to receive $254 million of stimulus. On slide 6, we provided an outlook by end market. The residential end market continues to experience accelerated demand. Mortgage rates are at all-time lows, while homebuilder sentiment is at all-time highs. Consumers are opting for suburban and ex-urban homes in affordable locations, such as those served by Summit, and inventories are at an all-time low in our top markets. The non-residential market has less near-term visibility. Wind farm and distribution center projects for 2021 are in the planning stages, but we know that business and consumer trends favor more wind and solar energy that will drive future demand for our portfolio of materials and services. For example, a wind farm base requires 50,000 yards of ready mix. And given the strength in residential, we believe a corresponding period of growth in light non-residential construction will emerge in the next year or two. With regard to public infrastructure, we are cautiously optimistic about the future. A bipartisan meeting with the new administration occurred earlier this month. We understand that the new administration is currently expected to unveil some version of an infrastructure plan this spring. The chairman of the Environmental and Public Works Committee has stated they will try to get a FAST Act 2.0 legislative effort beginning in May, as the current FAST Act is only funded through September 30th of this year. Otherwise, it will likely be funded with continuing resolutions until a broader infrastructure plan can be adopted. Concluding with the greenfields update on slide seven, our aggregates greenfields are in key strategic growth areas such as Atlanta, Salt Lake City, and Kansas City. Greenfield investment in our targeted growth markets is key to delivering sustainable organic growth. Five aggregates greenfield investments have been completed to date with another five investments under development. It is estimated that Summit will generate $45 million of adjusted EBITDA on a annualized basis by 2024 from these projects once they are in full operation, with $18.7 million generated in 2020. Expected investment in Greenfields is $25 to $35 million in 2021 as part of our cumulative capital spending of approximately $200 million on Greenfields. With that, I'll turn the call over to Brian for a discussion of financial results.

thank you ann on slide nine we've provided our net revenue bridge comparing q4 2020 to q4 2019. net revenue increased 13 to 571.9 million which is a record for a fourth quarter Our West segment led the way, contributing an incremental $48.7 million organic net revenue on higher aggregates and ready mix volumes, particularly in Utah and from Texas. We also benefited from an incremental $14.5 million in revenue associated with acquisitions of operations in Texas and British Columbia that closed in the third quarter. Our East segment's net revenue was relatively flat for the reasons Anne stated in her earlier remarks. Our cement segment's net revenue was up 2.3 million in Q4 2020 relative to the prior year quarter as demand began to recover in some of its markets. On slide 10, we've provided our net revenue bridge comparing full year 2020 to 2019. Net revenue increased 5.1% to a new all-time high of $2.1 billion. Net revenue benefited from increases in volumes as well as acquisition-related growth. Drivers for a full year and acquisitions growth were the same as the fourth quarter. A cement segment's net revenue declined $20.1 million in 2020 relative to the prior year, as some of the key markets experienced weakness due to a combination of COVID-19, oil price, and weather-related economic slowdowns in the first nine months of the year. Turning to slide 11, we provided a Q4 adjusted EBITDA bridge we ended the quarter $130.6 million, up 8% from a year ago. The increase was driven by record organic West segment performance relative to a year ago, as well as higher returns from cement, despite a negative $4.2 million adjusted EBITDA impact from downtime at Green America. Inclusive of strategic acquisitions, aggregates volumes increased 24.7%, and red events volumes were up 6.4% in the fourth quarter relative to a year ago. Turning to slide 12, you'll see a four-year adjusted EBITDA bridge. We ended the year at $485 million, up 5.1% from a year ago, and our highest ever. Record West segment performance was partially offset by lower contributions from the East segment and cement. The impact from the Green America downtime was estimated at approximately $14 million over the full year. Our strategic acquisitions of multi-sources in Valley closed in the third quarter, so the $5 million cited from West segment acquisitions reflects a little less than half a year's contribution to results. Turning to slide 13, you'll see key gap financial metrics. Operating income improved for both the fourth quarter and full year 2020, with higher revenue and gross margin more than offset higher general and administrative costs associated with approximately $10.6 million of CEO transition and related stock compensation adjustments, along with other year-end accrual true-ups. Reported 2020 net income attributable to Summit, Inc. of $138 million was $79 million higher than 2019. This reflected substantially higher performance in our West segment relative to a year ago. As Anne noted earlier, we also benefited from a $7.6 million credit resulting from a reduction to our TRA liability and an income tax benefit of $12.2 million resulting from the reversal of an uncertain tax benefit during 2020. Turning to slide 14, we presented several non-GAAP financial metrics where we compare Q4 2020 to the prior year, as well as the full year results. Adjusted cash gross profit margin contracted by 70 basis points in the fourth quarter, yet expanded by 80 basis points year-to-date on a combination of volume and mix-adjusted price improvements from aggregates and ready-mix. Adjusted EBITDA margins contracted 110 basis points to 22.8% for the quarter, and on a four-year basis, we were at 22.7%, which is flat relative to 2019. Adjusted diluted net income is down significantly versus the prior year quarter, and in 2020, due to the non-cash reversal of unrecognized tax benefits and the reduction of our tax receivable agreement liability. Turning to slide 15, we have provided a comparison of price and volume for 2020 versus 2019. Organic average selling prices decreased 0.5% for aggregates and increased 1.5% for cement, 4.7% in ready mix, and 1.4% in asphalt. Organic volumes increased 3.6% for aggregates, 5% for ready-mix concrete, and 4.7% for asphalt. Cement volume contracted by 4.6%. You can also see the significant impact of the two strategic acquisitions we completed in 2020 with multi-sources of Houston and Valley of British Columbia. Both transactions drove higher aggregates volume in 2020. We instituted two price increases at multi-sources in late 2020, and we have now aligned this business to market pricing. Turning to slide 16, we provided adjusted cash gross margin in the quarter and full year in all lines of business. Aggregate margins contracted in the fourth quarter and the full year. There were three key drivers behind the lower margins. all of which are non-recurring and are related to the slightly lower pricing environment driven by cash optimization in Kentucky, the ramp of multi-sources to market pricing, and the impact of product mix as we sold through some excess inventory and lower-priced product. Our products margins expanded by 10 basis points for fourth quarter and 170 basis points for the full year 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 150 basis points in Q4 and 420 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 expanded in the fourth quarter reflecting well-managed production and cost control methods. Full-year cement margins contracted by 70 basis points, which reflected winter storage costs early in the year and locked closure disruption, together with the impact of the explosion in Green America recycling facility. Despite these headwinds, our cement business reported a cash flow yield of over 80%. Materials and products comprise 88% of our full-year 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 2021, we estimate that interest expense should be in the range of $22 to $24 million, G&A will be in the range of $72 to $76 million, and DE&A should be 54 to 57 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 TRA payments until 2024. When comparing 2020 to 2021, it's important to understand that 2020 included 53 reporting weeks which bolstered Summit's results by approximately 10 million of adjusted EBITDA. 2021 will be a standard 52-week reporting year. Early in 2020, we elected to defer roughly 20 million of CAPEX as we were in an uncertain COVID environment. We'll catch up on that CAPEX in 2021, and it's included in this year's guidance. We highlighted that wind farm work contributed about $5 million to our 2020 adjusted EBITDA, and whether we have similar work in 2021 remains to be confirmed. The solid waste processing unit of our Green America recycling facility has still not resumed processing. We are optimistic it will return to normal operation soon, but until it does, the impact will be approximately $4 million per quarter in foregone adjusted EBITDA. We are in a rising hydrocarbon market and actively monitor coal, natural gas, and diesel futures. We have a hedging program and policies in place with flexibility to adjust along with the markets. For the purposes of calculating adjusted diluted earnings per share, please use a share count of 117.2 million, being 114.2 Class A shares and 3 million LP units. Turning to slide 17, you'll see a summary of Summit's capital structure. Last July, we strengthened our balance sheet by redeeming all of the outstanding $650 million 618 notes due 2023, which is our nearest term maturity, with proceeds from $700 million of 5.25 notes due 2029. We set a new record in generating $246 million of free cash flow in 2020, resulting in a closing cash position of $418 million, which was an increase of over $100 million from prior year end. Combined with our undrawn revolver, Summit had $747 million in available liquidity at the end of the fourth quarter. Our leverage ratio is now 3.2 times net debt to adjusted EBITDA, which is the lowest in company history and is a full turn lower than five quarters ago. By completing two strategic acquisitions totaling $123 million in 2020, we demonstrated our ability to balance M&A with efforts to improve our leverage ratio and maintain high levels of liquidity. And with that, I'll turn the call back to Anne for her closing remarks.