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.

Thanks, Brian. I'll conclude my prepared remarks with the management outlook on slide 19. We currently expect 2021 adjusted EBITDA will be in the range of $490 million to $520 million. At its midpoint, this would be an increase of about 5% over 2020. We expect to spend $200 to $220 million on CapEx, of which $25 to $35 million will be related to greenfields. The assumptions underpinning that outlook include low to middle single-digit pricing and low single-digit volume increases in most lines of business, and asphalt volume and pricing remaining relatively flat after a very strong 2020. Currently, we plan to hedge about half of our 2021 diesel spend, but will adjust should prices show potential to escalate more rapidly. The outlook for Summit Materials is bright, and we are beginning the year from a position of strength. I want to thank our dedicated employees for working through a pandemic to improve safety performance and achieve record net revenue, net income, and adjusted EBITDA in 2020. I've now got one full quarter in as CEO, and I'm very impressed by the quality of this company, our excellent customer relationships, localized strength, enthusiastic safety culture, and leading positions in attractive markets poised for growth. We produce the materials that are foundational to the comforts of life that are now more important than ever, such as homes, schools, and roads. As we look to the future, we are very encouraged by the results of our strategic review and look forward to sharing our plans for the next chapter of growth and value creation at Summit at our upcoming virtual investor event on Tuesday, March 16th. With that, I'd like to turn it over to the operator for questions. Operator?

As a reminder, to ask a question, you'll need to press star then the number one on your telephone. To withdraw your question, press the pound key. Please limit your ask to one question and then return to the queue so we can accommodate as many analysts as possible in the time we have available. Your first question comes from the line of Stanley Elliott with Stifel.

Good morning, everyone. Thank you all for taking the question. When we think about the guidance in the coming year, two things. One, when does the 53rd week impact or the extra week impact on a quarterly basis? And then two is we're kind of building up the 5% growth. You know, it almost seems that if we get some of the recycling back and then maybe a wind farm, whatever, we're already to the high end of that guidance. We'd love to just kind of hear you frame out a little bit more on the cadence.

Okay, the 53-week impact was in October. If we look at the cadence of growth here on the low and high end, I'll just give you some guiding points on it, Stanley. Okay. So on the low end, as Brian correctly talked about, we're 50% hedged on diesel. Obviously, if that goes up, that could put us to the low end of our guidance. We have a green field that's ramping up in the second half of the year. Right now, we're well on track to have that, but things can happen. So that would be the low end of the guidance. Non-res, we called out as some uncertainty because it tends to be lumpy. In our prepared remarks, we talked about wind farms contributing $5 million of EBITDA last year, and so we're not sure that's going to repeat this year because the business is lumpy. The Green America recycling right now is scheduled to come online fully sometime in Q2, but we are awaiting one point of permission there, working closely with our regulators. So they're all, I would say, on the low end of the range. On the high end, obviously, any more pickup in volume and price would get us there. And as we had this year, some extra days from weather would help us. And residential continues to be very strong for us as we go through it, particularly in Utah and Texas. And the GAR recovery, we believe that we will catch up on that full year, and we have a small expansion that we're already putting in place as well.

Your next question comes from the line of Phil Eng with Jefferies.

Hey, guys. You know, the low single-digit bond growth for aggregate for 2021 is certainly better than many of us was fearing just a quarter ago. Can you kind of give us a little more color and how to think about the shape of the year when those trends kind of improve and just any color you can provide on bidding activity for public and the non-red side of things?

Okay. So I would say when you look at our business, Phil, we actually are predicting pretty steady. So our residential is at the same pace it was last year. So we expect that to draw through ags into ready mix. Same strength in Texas, same strength in Utah. Our Kansas bidding has started from the public perspective. And remember, we do more repair and rebuild, so you're not going to see the big projects come in for us. As we go throughout the year, the one thing I will call out that is a second half impact is we bring that green field on in Georgia. And that's about 5 million of impact from our greenfields at that time. But I would look at us more steady throughout the year than having some big waiting in the second half.

Your next question comes to line of Catherine Thompson with Thompson Research.

Hi, thank you for taking my question today. And you may address some of this with your investor day, but really, and then in the chair for While you've had a chance to review the assets, what has or hasn't changed in terms of priorities for growth and or overall company focus as you go forward? And along with that, your advocates did a bit better this quarter versus expectations given coffee over your comp. Just clarifying how much of that is better weather versus catch-up.

Thank you. I think I got the second half of your question, Catherine, but if I haven't, I'll start with our portfolio review. Clearly, we're going to go into that in a lot more detail when we get into March 16th, so I'll kind of hold on getting any kind of specifics on that. I will say this. Our focus on ROIC has already spread throughout the organization. We're seeing our team ask the right kind of questions about capital allocation, coming up with ideas how we improve that. So I've been extremely encouraged. So when I think about a change and how things have changed for us, that's one that we're already seeing play out for our regional presidents and their teams. We will talk more about our growth when we get there. If I got the second part of your question, was it around Ags pricing, Catherine? Okay, I'll address it anyway. Ags pricing. So we talked about the three reasons for the change in our pricing. Let me give you a little bit more color around the multi-sources. So as we said, we went with two price increases. We feel going into 2021, we're very strong now on pricing. The team did a really good job of putting price increases in. I will say, if you look at our organic pricing on the West segment, we were actually up 2.3%. If you include the acquisitions, that brought it down to 1.9%. And with those, as Brian correctly pointed out earlier, we actually increased our volume from acquisitions in our West segment. So we continue to see the price of the levy will go away after this quarter. This is the last time I hope we'll be talking about bad comps year on year. And then the other part around pricing was we just made good decisions around our business. We ran for cash because we had to clear out some inventory and it was base material that was just lower margin, but it improved our overall dollars EBITDA and our cash. And so, net, we had the volume growth in the quarter, but unfortunately, it was just from lower-priced material. But it was the right thing to do to set us up for success in 2021.

Your next question comes from the line of Courtney DeConvenis with Morgan Stanley.

Hi. Good morning, guys. Thanks for the question. Maybe if you can just first just comment on the 53rd week again in October. Did that impact all of your divisions fairly equally, or did it show up any more in a specific product line than any others? And then maybe just specifically on cement, if you can just help us think through how we should be thinking about volume versus price and growth there next year, as well as the margins, given that we'll also be seeing the GAR come back online. Just help us think through the different moving parts to that segment next year.

I'll let Brian talk about the 53rd week because that's an accounting thing.

Yeah, the 53rd week, Courtney, thanks for your question, came in October. So October and the fourth quarter was actually a 14-week period instead of a normal 13-week. It was pretty evenly spread across the whole business, you know, coming in October, which was also a dry month and a dry quarter for us, actually, I think most businesses. of the construction industry benefited from a mild kind of start to the winter there, and that helped us throughout the fourth quarter.

And then, Courtney, on your question on cement, let me just kind of bring you through that. So we've talked about the Green America recycling coming back on. That will add $14 million of impact year over year. We have, through some of our commercial and operational excellence efforts, gone out and secured volume. Volume is just stronger than cement. year over year, so we feel it's very constructive for pricing. Coming into the year, we've announced a $6 price increase, and the team's out there trying to actively get that in place right now. So I would say we're encouraged by cement and the momentum we got in the fourth quarter here, but the team's done some self-help things, too, in improving our commercial excellence and doing some supply chain initiatives. And then with the Green America coming back on, obviously that's our biggest movement year over year.

Okay, great. Thank you. Your next question comes from Paul Roger with Exxon BNP Erebus.

Good afternoon, everybody. So, yeah, can we just talk a little bit more about the cost inflation headwinds? I mean, obviously, we are seeing inflation from hydrocarbons, bitumen from labor. How big could the headwind be? And in that context, Would you still expect margin improvement in the different business lines in 2021?

Hi, Paul. We've got a bit of static on your line here, so I hope you can hear me. But the question is around inflation headwinds. You know, we've identified a few areas of inflation. Typically, we've got our labor cost inflation is going to be in the 2% to 3% range. We expect to see a little higher levels of inflation, which we typically get in health care, which is probably around about 8%. As we mentioned, we've hedged about 50% of our diesel purchases at a price that's already close to the actual full-year cost for 2020. And we've baked in an assumption for higher hydrocarbon prices into those prices. ranges, EBITDA range that we've provided you with for 2021. Insurance premiums, I think, is another area that across the industry and most industries are seeing somewhat higher insurance premiums these days in that market as well. But we've made those assumptions. into our guidance range. Obviously, we'll be recovering some of that with productivity improvements and some of it also from price improvements that we expect to get in 2021.

And your next question comes from the line of trade groups with Stevens Incorporated.

Hey, good morning. Let's see. So I guess the first one, my question is around the Incrementals, you know, you talked about diesel and some other moving pieces, but how should we be thinking about incrementals and aggregates this year, Brian? And then along the same lines of the, you know, you kind of ticked through some inflationary things to consider here. You know, looking at the inputs for ready mix, you know, cement being a big one, you know, what is your expectation around inputs on the ready mix side of your business specifically and then, you know, how that translates into the profitability there?

Thanks, Trey. Yeah, so start with the, you know, with the aggregates margins. Obviously, we've explained the reasons why Q4 and the full year, frankly, for 2020 was down a little bit. We had a couple of quarters there where we were around about 64% for our gross margins, and we would typically expect to be in those mid-60s. So with some of those things behind us, which we said were non-recurring, we would expect to get our aggregates margins back into more like that normal mid-60s kind of range. As for ready mix pricing, as you know, when the volumes are good, when there's strong demand, it's a little easier to pass on the cement price increases. Our cement suppliers are indicating that they will have price increases in a $6 to $8 per ton range. we typically are able to pass that on, providing the demand levels remain strong, which in our big ready mix markets, which are Salt Lake City and Houston, we are seeing continued strength in the residential markets there that underpin that ready mix demand. So all being well, that pattern of being able to pass cement prices on will continue.

Great. Thanks for the color. I look forward to seeing you guys March 16th. Yeah, and I'll stay. Bye, Clay.

Your next question comes from Garrick Schmois with Loop Capital.

Great. Thank you. Questions on aggregates. Just some picking around the guidance. Just given the multi-source pricing sounds like it's been able to get back up to market levels in Houston. Should we assume your pricing guidance doesn't have any mixed headwinds in it? And then also on the aggregate volume outlook, is there any assumption of the benefits from the acquisitions from 2020 rolling into 2021? Or is the outlook for aggregate volumes just organic? Just wanted to be clear there.

Well, I would say on the pricing, we should see improvement because we'll now have gotten the two price increases in Garrick. And we are prevailing market rates in Houston now as we've done those increases. So we've gone through the noise of that. We don't have the CONAG. The levy work comparison as we go into 2021. So we are, and we think the market in general has strong demand. So it is constructive to strong price execution. So we are forecasting to be that low to mid single digit price increase. And from the multi sources, when we talk about the volume from acquisition, we only had what, around five months of the year. this year, and that was about $5 million of EBITDA, so we will have a full year of that impact in 2021.

Your next question comes from the line of Anthony Petunari with Citi.

Good morning. Can you talk a little bit more about the impact of the winter storm on your business? If you lost demand or lost production? And is that sort of delayed job site activity just get pushed out a week or two or have some of these power outages, water disruptions, disruption of freight? Is there any potential for that to impact your business in a way that could kind of linger on?

Yeah, I would say, Anthony, if you look at our business, Q1 is our lowest quarter anyway. And it was one week of impact. We would normally have that impact in our Southeast and Midwest business anyway from weather. The real impact was in Texas, and we did lose a week. However, I would say they're back up and running already. They tend to be able to catch up. And in general, residential is so strong in Texas and public funding is so strong that we believe we can catch up. We look at our business on a full year basis, really. One week isn't going to make the year. And it would have much more impact if we lost that week in September versus losing that week in the first quarter.

Your next question comes from Mike Dahl with RBC Capital Markets.

Thanks for taking my question. And I just want to follow up on multi-sources. And maybe just could you elaborate a little bit more on kind of why the business was positioned the way it was in the market prior to what you've since done with it? And as you've implemented the price increases, have you seen any effects on local market share? Just a little more color on competitive positioning there would be great.

Yes. Yeah, Mike, so when we looked at the business, clearly one of the reasons we thought we were the rightful owner for that business was that the margins were lower, the pricing was lower in the market, and we knew that based on our other business, we could get more prices. So a key part of the team's integration plan was to go for price increases. So we had built in candidly into that plan a little bit of volume loss, but the team really did a very fine job of putting the price increase in place. and having strong EBITDA growth, so they're running at least at or above our projections on integration at this point in time. But we did not lose share.

Your next question comes from the line of Jerry Rivage with Goldman Sachs.

Yes, hi. Good morning, everyone, and nice quarter. Thanks, Jerry. And I'm wondering if you can talk about where the M&A pipeline stands today and, you know, the type of assets that you're looking at today versus a year ago, any change in focus. Can you just provide some high-level comments? I'm sure you'll have more details at the analyst day, but I'm wondering if you could address those items from a high-level standpoint now.

Sure. We will address it in much more specificity when we get to March 16th. But our M&A pipeline is active. The team continues to look at opportunities, as has been our strategy and will continue to be. It's always ag-led and pull through of ags into markets where it makes sense. that we can actually have high ROIC. And so every market is not equal. I've learned that since joining this business very thoroughly. That we are, where we play, for example, in Salt Lake City, our vertical integration is very high on ROIC and profitability, and that's where we pull through our ags very successfully. So when we look at targets, we're looking at that same kind of model. It's either pure ags or it's a whole slew of ags where we can return a lot back to our shareholders.

Thank you.

Your next question comes from the line of Nishu Sooth with UBS.

Thank you. I wanted to just get your sense on the quarterly cadence that we might see out of ags, pricing, and the gross margins. So, obviously, there's been a good bit of discussion about the factors that weighed on those, you know, Kentucky and multisource and the products, you know, mix issues. So, as those, you know, the impact as we look at 2020 was mostly in 4Q. So, as those issues unwind or come to an end, is that in the first half of 21 or maybe in the latter half of 21? And then, how does that tie to the low single-digit pricing? Is that mix-adjusted or is it just overall pricing?

That is overall pricing. I would start there. I would say our price increases go in throughout the year. April 1st is when most of our pricing goes in. So we don't really look at quarter to quarter cadence being driven by our pricing per se, unless the market facilitates another price later in the year. However, I will say if you look at the quarterly cadence of these particular impacts. So think about multi sources. It is done. We've done the two price increases. We should not be talking about that next quarter. If we talk about the flood work is done, the difficult comps on that are now complete versus our 2019 work. And really, when I look at operation by operation, What we did, we're always going to be optimizing our product mix. So I'm never going to say we're not going to have mix adjusted pricing because we pay our people to manage cash properly. And that's exactly what they did in the fourth quarter of this year. And it was net the right business decision. So the other thing I would say is geographically, we naturally have some adjustments on our pricing. So our price can range anywhere from on ags can range in the high sevens to over $15. depending on the geography that we're in. So you will have some natural geographic splits that will have some mix adjusted, but the big ones, the acquisition that we've had and the flood work, they will be out as we go through the rest of 21.

Got it. Thank you.

Thank you. Your next question comes from the line of Adam Thelmer with Thompson Davis.

Hey, good morning. Great quarter. What was the comment? Can you clarify? You said something about January, and I feel like you were saying that the volume strength from Q4 carried into January, but I couldn't quite get there. I don't know if you took it to that level.

We didn't really, and I think you're talking about our prepared remarks. We said looking through January into 2021, clearly first quarter is always our lowest. We did start the year, though, with the same kind of strength that we have in residential. Our public spending continued to be strong. The one area that we did call out, Adam, was the non-residential. wind farms tend to be lumpy we had five million in our results from on a full year basis from kansas for example we're not sure that will repeat um we are more bullish about non-residential in the long term but in short term it's probably our most uncertain market but the residential continues to be strong and public spending continues to be strong as we as we left 2020 and into 2021. got it thanks yeah thanks thanks

And your last question comes from the line of David McGregor with Longbow Research.

Yes, good morning, everyone. And, Anne, congratulations on a great first quarter, a great way to get things started. Thanks, David. I wanted to ask you about cement capacity. And it just seems as though that market's shaping up maybe a little more strongly than we had thought it would. But can you just talk about where you are right now in terms of your operating rates? And how much more can you get out of these assets just through de-bottlenecking versus having to go spend more significant amounts of capital either organically or through acquisitions? And just help us think about your kind of longer-term view. I guess we'll talk a little bit more about this when we get to the 16th, but anything you can help us with today would be much appreciated.

Yeah, you know, I would say we don't actually quote our capacity utilization, obviously for competitive reasons, but I would say the team has, first of all, volume is stronger in our markets in general. And so that has given a lift on volume as you saw come through in Q4. Secondly, as we look at some of the work that we've done ourselves from the point of view of commercial excellence, the team's done a nice job of optimizing our customer mix. So that's in there as well. So our operating rates are pretty strong. We are constantly debottlenecking, whether it's we've actually had more of a focus on our supply chain than on actual capacity in the plant this year. But that's an ongoing, continuous effort that the team is working on. Frankly, we need to get our price increase nailed as we go through the year here. That's the single biggest lever you have on improving performance overall. And getting our GAR back in full operation will improve our cement as we move forward.

Okay. Thanks very much. Look forward to the 16th.

Thank you, Dave. Okay. With that, operator? Go ahead. Okay. So with that, I'll leave you with a few key takeaways. We have solid end market demand driven by our residential, ex-urban, and suburban. In-migration trends are very strong in our key states. Public spending is robust with $1.6 billion of COVID relief going into our top five states. We also have the option of additional value creation from a broader infrastructure bill. As I said, non-residential is a little near-term less certain, but long-term we're bullish on that because it will follow residential. And we're poised for growth with our greenfield investments to sustain organic growth over time. Our improving liquidity opens up some optionality for us, and we are very encouraged by the momentum in cement. and the improvement there in some of the self-help the team's done. So with that, I'll just leave by thanking all of our analysts and our shareholders for participating in our perception study. We heard your feedback, and we hope that our strategic roadmap will be very informed by that. We look forward to sharing that with you on March 16th. Thank you for your time today.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.