Summit Materials, Inc.

Good day, and thank you for standing by. Welcome to the Summit Materials second quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the 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'd now like to have the conference over to your speaker today, Terry Anderson. Please go ahead. Welcome to Summit Materials' second quarter 2021 results conference call. We issued a press release yesterday detailing our financial and operating results. This call is accompanied by our 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'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 Summit Materials' latest annual report on Form 10-K, 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 Noonan. 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 asks to one question 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 Ann.

Good morning, everyone, and thank you for joining our second quarter 2021 earnings call. We begin on slide four of the presentation with an overview of our second quarter performance. Before I brief you on 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 actions of all of Summit's 6,000 employees. We are intent on driving a zero-incident safety culture. To further reinforce this commitment, we've created a Safety Centre of Excellence. that is focused on standardizing and upgrading safety protocols across the entire Summit enterprise. I'm pleased to report that first half 2021 sleep preventable incidents are significantly lower than the first half of 2020. We remain fully committed to the safety of our employees and the communities that we serve. COVID-19 related employee quarantines are up slightly from our last earnings call, so we are re-emphasizing protocols and safeguards. I'll turn now to our financial and operating results. Today, we are reporting Summit's third consecutive quarter of record-adjusted EBITDA. This performance reflects our team's commitment to operational and commercial excellence, which delivered volume growth in most lines of business and pricing growth in all lines of business. Demand fundamentals remain strong in our rural and ex-urban markets, while most of the departments of transportation in states that we serve have returned to typical letting and operating conditions. We delivered record Q2 net revenue of 7.5% from the year-ago quarter on higher aggregates, ready-mix concrete, and cement revenue relative to a year ago on continued favorable market demand conditions and price growth in all lines of business. Specifically, volume growth was robust throughout the quarter, with aggregates volumes of 14.7%, cement volumes of 8.3%, and ready mix volumes of 6.3%. Asphalt was the only line of business with lower volumes, which were down 11.3%, largely due to a divestiture. Q2 was the first full quarter of our Elevate Summit strategy implementation, and we made strides on several fronts. Our leverage improved to three times net debt to EBITDA, an improvement of 0.2 times from the prior quarter, and a full half term versus a year ago. When I conducted a listening tour immediately after joining Summit last year, leverage was one of the most frequently cited points of investor feedback. It's one of our core Elevate Summit goals to be below three times, and it will continue to be a priority for our team. As part of our Elevate Summit strategy, we have now completed a total of five strategic divestitures. As we exit non-core or non-leading market positions, unlock proceeds for more strategic use, and convert some of those businesses to an asset-light model to drive higher aggregates pull-through. We believe Summit's organic growth profile and asset-like conversion model position the company to absorb the impact of the foregone contribution from those five divested businesses, so we are leaving our full-year adjusted EBITDA outlook unchanged at this time. On slide five, I'll discuss our performance at the segment level. Our West segment reported record net revenue of 5%. and adjusted EBITDA in line with the year-ago quarter. Higher aggregates and ready-mix volume and price partially offset fewer working days in Texas due to wet conditions in May and June. Our east segment reported higher aggregates and asphalt volume and price partially offset by lower ready-mix concrete volume on fewer wind farm projects than the year-ago quarter. We set records for net revenue, which was up 9%, and had record adjusted EBITDA, which was up 7%. Our cement business had a strong quarter, with revenue up 13% and adjusted EBITDA up 11% from a year ago. The Green America recycling facility is currently ramping back up to full production, and the expansion of that facility is also well underway. Turning to slide six. We are in full implementation mode on our Elevate Summit strategy. Our focus as a team is on continuous execution, discipline, and creativity to deliver better returns and sustained long-term growth. We have four key strategic priorities. The first involves enhancing our market leadership. Our goal is to be number one or number two in ex-urban and rural markets where we can invest and grow our positions. The divestitures we completed in Q2 involved businesses where Summit did not have a leading position and did not have a clear path forward to improve that situation or Summit was simply not the ideal owner of the business. Of the five divestitures year to date, one was in our west region and the other four were in Summit's east region. The divestitures included asphalt and paving, ready mix concrete, and even an aggregates business that was subject to an unfavorable long-term supply contract. We converted some of the divestitures to an asset-light approach, which is our second strategic pillar. There were some asset-intensive businesses where we were not the ideal owner. However, we still retained our strong aggregates position. In those cases, we were able to negotiate long-term aggregate supply contracts, thus strengthening an existing customer relationship while reducing capital deployed and complexity of our business. To recap, our criteria for an asset-light deal is that the business be A, an isolated downstream asset market where we are not the number one or number two player. B, competing with different competitors in the downstream versus the upstream. C, lacking a clear path to meet our financial goals of greater 30% EBITDA and greater than 10% ROIC. And finally, to have the opportunity to pull through our aggregates with a long-term supply contract. Roughly half of the businesses that are being divested have the potential for an asset-like conversion. we've experienced a powerful shift in how our team evaluates the strategic efficiency of our assets. Our leaders are proactively identifying the value generators in each region and line of business, and we are allocating resources intentionally to businesses that will move the needle for us. It's a focus on capital efficiency that is helping Summit to be more effective in its current business, as well as in evaluating future opportunities for both organic and inorganic growth. For example, leaders are looking at the asset utilization of their plants and mobile equipment to determine what is really driving value creation. Then they are relocating, reallocating, or divesting what isn't driving value. We want to be deliberate and intentional on giving summit the opportunity to grow and invest in markets where we can thrive. Our third pillar of social responsibility is a vital differentiator. because it is not only the right thing to do, but it also has significant importance to all of our stakeholders. We've completed our CO2, water, and waste baseline, and we'll be publishing those results later this fall. Just as important, we're using that data to determine how Summit can best drive value creation through enhanced social and human impact, land use, and emissions performance to help us achieve our Elevate Summit goals. For example, our business leaders are strategizing on how best to retain and attract a diverse employee base that offers more growth and development opportunities. And they are looking at options to enhance our land use practices to ensure our existing operations and greenfield projects align with the interests of our stakeholders. We are measuring energy use to improve efficiency in our aggregates business and undertaking pilot projects to understand the most optimal path forward to address the emissions impacts of our cement and ready-mix concrete businesses. Finally, our fourth strategic priority is a commitment to invest in innovation. We've developed an inventory of projects and products that we already sell or have been developing through industry and university partnerships. These opportunities will help Summit be less reliant on one line of business or one geography and drive us towards greater than 30% EBITDA margins for the long term. We have created Centers of Excellence to enhance performance and critical capabilities across our lines of businesses. Safety, operational, and commercial excellence are areas of focus across the entire Summit enterprise. For example, we are leveraging our commercial excellence function to further heighten our focus on value pricing, which is essential as markets grow. Value pricing provides Summit a greater ability to stay well ahead of inflationary impacts on labor materials, maintenance, and energy. Additionally, we have committed to standardization to drive best-in-class practices across the business and improve consistency of results and agility of decision-making, while optimizing our overall cost structure and productivity results. For example, we have RFPs out to standardize on our purchasing activities that were less coordinated in the past due to our decentralized operating company model. Our business leaders are also scrutinizing asset utilization, adjusting their market plans, and developing the tools required to optimize return on invested capital across all of our assets. On slide seven, you'll see a graphic that we introduced during our Elevate Summit Investor Day that summarizes our strategic execution plan and deliverables over three horizons. Transparency and consistency are very important to us, so we will evaluate our performance in this context and update you each quarter along the way. We're in Horizon 1, which is depicted at the bottom of the page. We've completed our portfolio review and are in the process of divesting underperforming and non-core businesses while focusing on key drivers of value creation, standardizing across the business, and cultivating social responsibility and innovation expertise. Our Elevate Summit quarterly update is on slide eight. We're pleased to report that our leverage ratio has improved to three times, an improvement of 0.2 times since last quarter. We believe our goal of less than three times is within striking distance this year, which we believe will enhance some financial flexibility and improve investor confidence. Our ROIC of 8.5% is a full half turn better than year end and in line with last quarter. We believe our goal of greater than 10% is achievable through a combination of divestitures, maximizing asset utilization, and pursuing an asset-like model where it makes strategic sense. Our adjusted EBITDA margin of 22.9% is still well ahead of our 2020 actuals. However, it's a 30 basis point decrease from what we reported last quarter. As I told you at that time, we are playing the long game, and it may not be a linear upward trajectory each quarter. Our Q2 adjusted EBITDA margin on an LTN basis reflects the impact of wet conditions in Texas, which were a drag on our largest segment, the West segment. It also reflects slightly higher G&A as we invest in the implementation of our Elevate Summit strategy that we expect will yield sustainable margin improvement through efficiency gains. The good news is that these impacts are temporary, and we do not fear this detracts from our North Star goal of greater than 30% adjusted EBITDA margin. Rather, it solidifies our resolve to drive better performance in future periods. As I also said last quarter, while we can't promise a perfectly steady climb towards our goals, we can promise transparency and a relentless focus on execution. On slide nine, we've provided a snapshot of our Elevate Summit portfolio optimization progress. Our portfolio review has focused on shedding non-core assets, conducting a right owner analysis, and converting businesses to asset light under the right circumstances. We're roughly halfway towards our goal to divest 10 to 12 of those assets. As of July 3rd, we've completed five, with the balance of five to seven divestitures all in process to some degree. While we have not provided a strict timeline for Horizon 1, we are pleased with portfolio optimization progress to date as we continue to focus on maximizing value for our stakeholders. The divestitures have generated 103.6 million in proceeds to date, so we are also roughly halfway towards our stated goal of 200 million in total gross proceeds from Horizon 1 divestitures. Our use of proceeds will fall within our capital allocation priorities. which center on maximizing strategic flexibility, reducing our leverage, entering or expanding into priority markets, and ultimately serving our goals to achieve our long-term growth objectives. Wrapping up on slide 10, we are pursuing an aggregates greenfields development strategy focused on priority markets underpinned by strong growth fundamentals that will foster sustainable organic growth. We congratulate our East Region team on a successful launch of the Jefferson Quarry in the Atlanta Exurbs, which began operations in July. That location has favorable migration trends and job growth in a state with a strong DOT funding profile and a major mobility program. Our greenfield development in the Carolinas is also advancing and will expand our presence in one of the fastest growing markets in the country. It is estimated that Summit will generate $45 million of adjusted EBITDA on an 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 cumulative capital spending of approximately $200 million on greenfields. These greenfield projects complement our existing business and provide another avenue for long-term sustainable organic growth. With that, I'll turn the call over to Brian for a discussion of financial results.

Thank you, Anne. On slide 12, we've provided our net revenue bridge comparing Q2 2021 to Q2 2020. Summit's net revenue increased 43.3 million, or 7.5% in the second quarter of 2021, to 618.5 million compared to 575.2 million in the second quarter of 2020, on higher aggregates, ready-mix concrete, and cement revenue relative to a year ago due to continued favorable market conditions. Our West organic revenue was essentially flat versus the prior year quarter, as growth in the Intermountain West and British Columbia was offset by wet conditions in Texas that resulted in fewer working days. We also benefited from an incremental $14.3 million in revenue associated with acquisitions of operations in Texas and British Columbia that closed in the third quarter of last year. Our east segment's organic net revenue was up $17 million on higher aggregates, asphalt, and paving revenue relative to a year ago, reflecting higher volumes in parts of Kansas, the Carolinas, and Georgia, as well as improved letting and market conditions in Kentucky. Our cement segment's net revenue was up $10.2 million in Q2 relative to the prior year quarter on higher volume and price. Turning to slide 13, we've provided a Q2 adjusted EBITDA bridge. We ended the quarter at $163.8 million, up 2.4% from a year ago on organic growth in our east segment and in cement. West segment adjusted EBITDA performance was flat relative to a year ago in similar proportion to its net revenue contribution. Turning to slide 14, you'll see key GAAP financial metrics. We reported operating income of $95.9 million in the second quarter of 2021, a decrease of 4.1% versus Q2 2020, as higher aggregates, cement and ready mix volume and price increases across the business were offset by a $7.7 million increase in G&A expenses and a $4.3 million increase in DD&A. On a year-to-date basis, however, the first half of 2021 operating income is up nearly 22% over first half of 2020, reflecting strong volume and price trends in most lines of business, offset by a $17.7 million increase in G&A and an $8.9 million increase in D-DNA, as well as the impact of wet conditions in Texas. If you exclude the impact related to our Elevate Summit implementation that is included in our G&A, our operating income would have increased 4% in the second quarter 2021 over prior year quarter and approximately 30% in the first half. This is the key takeaway because we're intensely focused on driving price ahead of our cost of revenue. Our Q2 and first half results, once you remove the impact of higher G&A, reflect those efforts. When we set our 2021 outlook, we assumed labor costs up 2% to 3%. Labor is roughly 13% of Summit's cost of revenue. In the first half of 2021, we've seen it play out more or less as we expected, with slightly more pressure in areas where labor markets are tighter. However, pricing has kept pace in many of those same markets as our Q2 organic aggregates and ready mix pricing is up 5% and 3% respectively. In terms of other input costs, we are passing along our cost of materials, which is one-third of Summit's cost of revenue and the single biggest driver of our cost of revenue as is standard practice. Total energy dollars spent are actually down $2 million year-to-date 2021 relative to year-to-date 2020. But that's partly a function of selling an asphalt business, so dollars are spread across a lower volume. On a per-unit basis, we are experiencing higher costs for liquid asphalt and diesel. To provide more context, energy is only 2% to 3% of our total cost of revenue, It includes things like coal where the cost has decreased substantially and also natural gas where prices were lower in Q2. We evaluate the quality of our business over the period of an entire fiscal year rather than an individual quarter that can be impacted by temporary events such as reduced selling days or weather at an individual point in time that do not reflect the value created by the business over an entire reporting year. Reported second quarter 2021 net income attributable to Summit Inc. of $56.7 million or $0.48 per share is slightly behind a year ago when we reported $57.1 million or $0.50 per share. However, the year-to-date trend is very strong as we have generated $34.1 million in net income, an increase of 183% over the first half of 2020. Turning to slide 15, we've presented several non-GAAP financial metrics. When you compare the second quarter of 2021 to the second quarter of 2020, there has been a slight contraction in our adjusted cash growth profit and adjusted EBITDA margin of 90 basis points and 130 basis points, respectively. However, on a year-to-date basis, our adjusted cash gross profit and adjusted EBITDA margins have expanded by 140 basis points and 110 basis points, respectively. On a similar note, our adjusted diluted net income has expanded on a year-to-date basis significantly to $19.1 million in the first half of 2021 versus $2.6 million in the first half of 2020. Turning to slide 16, we've provided a comparison of price and volume trends on a year-to-date basis. Organic average selling prices in the first half of 2021 increased 2.7% in aggregates, 2.1% in cement, 3.4% in ready-mix concrete, and 1.6% in asphalt. While most of Summit's geographies reported higher average selling prices for aggregates, In the 2% to 6% range in the first half of 2021, higher volumes of base material in the product mix in our Kansas and North Texas markets early in the year are also reflected in that year-to-date total. Furthermore, it is typical for quarter-and-quarter price increases to improve as the year progresses due to the timing of price increases and the seasonality of the business. Organic sales volumes in the first half of 2021 increased 4.6% in aggregates, 9.9% in cement, 6.9% in ready mix concrete, and contracted 6.1% in asphalt due mostly to a divestiture. Turning to slide 17, we've provided adjusted cash gross margin comparisons. While we experienced contraction in all lines of business in the second quarter 2021 versus Q2 2020, we believe the first half of the year comparison in all lines of business presents a more meaningful comparison. The margin declines in Q2 can be attributed to a number of factors, including rain days, which not only resulted in lost revenue, but negatively impacted aggregates productivity. We also experienced higher input costs on labor and hydrocarbons. Our aggregates margins have expanded by 40 basis points, and our cement margins have expanded by 210 basis points in the first half of 2021 relative to the first half of 2020. Our products margins contracted by 40 basis points, while our services margins expanded by 430 basis points on a first half of the year basis in 2021 versus 2020. We continue to experience sustained volume and pricing growth for our downstream businesses, particularly in Utah, to the extent there are cement input price increases. Those increases get passed along to customers. On slide 18, I'd like to recap some modifications to our reporting structure for fixed production overhead and transaction costs, which resulted in changes to our guidance for G&A expenses that we announced last quarter. As we told you on our last earnings call, beginning in 2021, we are reporting fixed overhead expenses related to production in cost of revenue. Previously, we reported fixed production overhead expenses as general and administrative costs. Transaction costs, which were previously included in operating income or loss, have been moved into G&A. We believe these reporting changes will foster greater transparency and comparability to our peers as we measure our performance. For quarterly modeling purposes for 2021, we estimate that interest expense should be in the range of $22 to $24 million, that G&A will be in the range of $50 to $55 million, and DD&A should be $54 to $57 million. These estimates are unchanged from the guidance provided on our first quarter earnings call. For the purpose of calculating adjusted diluted earnings per share, please use a share count of 119.3 million, which includes 117.4 million Class A shares and 1.9 million LP units. Turning to slide 19, you'll see a summary of Summit's capital structure. Our Q2 2021 leverage ratio at three times was down by 0.5 times from Q2 2020, and we are now at the lowest leverage ratio in Summit's history. Proceeds from our Elevate Summit strategic divestitures, combined with a strong financial performance, allowed us to significantly improve our net debt to EBITDA. Our closing cash position was $469.1 million, which was an increase of over $215 million from Q2 2020. Combined with our undrawn revolver, Summit had over $800 million in available liquidity at the end of the second quarter. Our Elevate Summit goal is less than three times leverage, and we believe that is within our sights in 2021. And with that, I will turn the call back to Anne for her closing remarks.