Summit Materials, Inc.

And thank you for standing by. Welcome to the Summit Materials Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will 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. Please go ahead.

Welcome to Summit Materials' third 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 vary 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 third quarter 2021 earnings call. I'll start today as we start all things at Summit with safety. We are striving for a zero-harm, safety-first mindset among all of Summit's 6,000 employees. As part of our Safety Center of Excellence, we have transitioned to a tech-enabled risk assessment tool that should help both the process of assessing risk as well as for audit and oversight purposes. We are setting high expectations for safety performance, and are committed to continuous improvement. Now let's turn to slide four for an overview of our third quarter financial and operating performance. Net revenue of $662.3 million reflected an increase of 2.6% and adjusted cash gross profit margin expanded by 260 basis points versus the prior year period. The market leadership theme in our Elevate Summit strategy is beginning to be reflected in our results. Q3 adjusted EBITDA increased 7.3%. I'll discuss three factors that drove this performance. First is our team's ongoing commitment to commercial excellence, which is having a real positive impact on how we go to market, especially with respect to value pricing. In Q3, we reported pricing growth in all lines of business. Second is the strong and persistent demand dynamics in our rural and ex-urban markets. This includes a resumption of more normalized letting and operating conditions in the markets that we serve, such as Kentucky and Missouri, with continued strength in residential markets such as Salt Lake City and Houston. And third has been our ability to stay ahead of inflation thus far through a combination of pricing actions, our energy hedging program, and the pursuit of operational excellence. To put a finer point on that topic, we are very mindful of the challenges presented by supply chain constraints and cost inflation in the current operating environment. We are very focused on price execution and cost mitigation to ensure that we continue to expand our margins, as we have done in Q3. For example, we've placed early orders for equipment, purchased some energy forward, and driven multiple price increases in targeted markets. We acknowledge that Summit is not immune to the challenges presented by the global economy, but we can assure you that Summit will take every action possible to address them. Q3 volume growth in materials was robust, with aggregate volumes up 9.2% and cement volumes increasing 2%. Ready mix volumes were slightly lower, due primarily to wet conditions in Texas, where they had fewer than expected working days. Asphalt volumes were down 11.3%, resulting primarily from a divestiture of the business. We reported mid-single-digit pricing growth in aggregate, cement, and ready mix, combined with more modest gains in asphalt. Stepping back to look at the big picture, we continue to make progress across all Elevate Summit goals. First, our leverage improved to 2.7 times net debt to EBITDA, an improvement of 0.8 times versus the prior year. Our leverage is now well below our three times target, as we retired our 2025 notes and paid down $300 million in debt in the third quarter. Next, our adjusted EBITDA margin increased 120 basis points, to 28.7% in Q3, while on a trailing 12-month basis we improved to 23.3%. Summit is currently progressing several strategic divestitures in addition to the five that were completed in the first half of 2021. These are part of Horizon 1 of our Elevate Summit strategy. We are in the process of exiting non-core or non-leading market positions. generating proceeds for more strategic use, and converting some of those businesses to an asset-like model to drive higher aggregates pulled through. All of these activities are resulting in a meaningful improvement in ROIC, now standing at 8.8%, up from 8% at year-end. Summit's asset-light approach is grounded in principles of capital efficiency. In addition to the divestitures I just described, our team has also surfaced asset disposition ideas upon which we are executing. These asset dispositions contribute to reducing our capital base, helping our management teams narrow their focus to the highest returning parts of the business, and serve our broader goal to increase Summit's return on invested capital. As we evaluate our full-year outlook, we believe Summit's organic growth profile and asset-like conversion model position the company to absorb the impact of the approximately $5.6 million in foregone EBITDA from those divested businesses. Another consideration for our outlook involves comparing our 2020 performance. Last year included 53 reporting weeks, which provided Summit with approximately $10 million of incremental EBITDA. By contrast, 2021 is a standard 52-week reporting year. And in any fourth quarter, the construction season can be cut short by weather, and we need to be mindful of that uncertainty. While we are very encouraged by our team's ability to control what we can control in terms of staying ahead of inflation through price realization and self-help, and while backlogs are very strong, we operate in some northern markets where there is always risk of an early end to the season. In consideration of these factors, we are leaving our full year 2021 adjusted EBITDA guidance unchanged. Turning to slide 5 for performance at a segment level, we saw a nice rebound in the East and Cement segments in Q3 2021 versus the year-ago quarter. The West reported third quarter net revenue and adjusted EBITDA down 3.7% and 3.3% respectively versus the year-ago quarter. Revenue growth in aggregates and ready mix was more than offset by a divestiture-driven decrease in asphalt and paving revenues. Moreover, wet conditions, primarily in Texas, resulted in fewer days available to complete ready mix and asphalt jobs. Net revenue in the east benefited from higher aggregates and asphalt volumes, as well as pricing growth across all lines of business. This growth was partially offset by lower ready-mix concrete volume on fewer wind farm projects relative to the year-ago quarter. Despite this, our east segment delivered excellent performance for net revenue and adjusted EBITDA, which were up 10.7% and 21.3% respectively. And finally, our cement business had a strong quarter as organic volume gains at 4.4% pricing growth helped drive 9% higher net revenue and 15% adjusted EBITDA improvement. Our Green America recycling facility, which provides alternative fuel for one of our cement plants, is now operational and wrapping up to full production. Turning to slide six, you will see the four key strategic priorities that we laid out earlier this year as part of our Elevate Summit strategy. First is enhancing our market leadership as we aim to be number one or number two in ex-urban and rural markets where we can invest and grow our position. The divestitures we completed through September of this year included 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. We currently have several more divestitures in process, and we will update you on progress each quarter when we report financial results. We converted some of the divestitures to an asset-light approach, which is our second strategic pillar. These were asset-intensive businesses where we were not the ideal owner. However, we still retained our strong aggregates position. In the coming quarters, you will start to see the impact of those asset-life deals as they have a favorable impact on both ROIC and margin. Our third strategic pillar is social responsibility, as our vision is to be the most socially responsible integrated construction materials solution provider. We recently took a critical step towards reaching that goal with the release of our first SASB compliance sustainability report. In that report, you'll find we are taking a value creation and innovation approach to social responsibility that we believe presents significant opportunities to grow our business, including several initiatives aimed at reducing the emissions from cement production. And although it's still early, we have some notable early accomplishments to point to, including completing our first SASB compliant baseline for emissions, water, and waste impact. We are capturing methane gas at our landfill business in Kansas, with scoping underway to potentially expand that solution to additional landfills in the network. And we have achieved gender parity on the board and among executive officers. So while it's still early in our sustainability journey, we are encouraged by the progress thus far and eager to tackle the challenges in front of us as we plan to publish our future impact reduction targets and strategy in 2022. And finally, our fourth strategic priorities around innovation. Utilizing industry and university partnerships, we plan to enhance our products and services portfolio to help move us to achieve our adjusted EBITDA target. Underpinning these strategic priorities are critical enablers, including our centers of excellence and standardization efforts. Together, these enablers will enhance business performance and advance business critical capabilities across the summit enterprise. 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. We're in horizon one, where we are building tomorrow's summit with a focus on shedding underperforming and or non-core businesses, standardizing best practices across the business, and cultivating social responsibility and innovation expertise. On slide eight, you see the full Elevate Summit scorecard. Our leverage ratio of 2.7 times net debt to EBITDA exceeded our target of three times in Q3. And we believe with continued strategic execution, there is room for even further improvement. Achieving a net leverage below three times was cited as one of the primary investor priorities when we conducted our listening tour a year ago. We hope our progress in this area will enhance financial flexibility and investor confidence. Our third quarter ROIC of 8.8% is 80 basis points better than year-end and up 30 basis points versus Q2. We believe that by conducting and acting on regular portfolio reviews, maximizing asset utilization, and actively pursuing an asset-light model where it makes strategic sense, our goal of greater than 10% return on invested capital is achievable. Our Q3 adjusted EBITDA margin of 28.7% was up 120 basis points versus the comparable 2020 period, and 220 basis points sequentially, reflecting strong pricing gains, volume growth, and lower G&A expenses versus the prior year quarter. On a last 12-month basis, adjusted EBITDA margin is 23.3%. a 40 basis point improvement versus the trailing 12-month period as of Q3 2020. This performance was driven by strong pricing trends and a resumption of normalized letting activities that more than offset the impacts of cost inflation and wet conditions in Texas. While our Q3 results are getting us closer to our Elevate Summit objectives, we continue to play the long game. Although we have notched good progress, The future path may not always be linear. However, we can promise that as a team, we view steady improvement in net leverage, ROIC, and adjusted EBITDA margin as essential to how we operate the business and align our interests with shareholders. On slide 9, we provided a snapshot of our portfolio optimization progress, where we remain on track with our Horizon 1 goals. We're roughly halfway towards our goal to divest 10 to 12 non-core or underperforming assets. We have several divestitures currently in process, and we will update on completion each quarter when we report. To date, the divestitures have generated 103.6 million in proceeds, so we are just over halfway towards our stated goal of 200 million. Our use of proceeds will follow our capital allocation priorities, which center on maximizing strategic flexibility reducing leverage, entering or expanding priority markets through M&A, and ultimately enabling our long-term growth objectives. And finally, on slide 10, we are pursuing an aggregate greenfield development strategy focused on priority markets underpinned by strong growth fundamentals that will foster sustainable organic growth. The picture on slide 10 is of our Jefferson Quarry, where we hosted an investor tour in September. Strategically located in northern Georgia, its aggregates are marketed as Georgia Stone products, and its position is a terrific example of a summit location that provides that connective tissue between rural and exurban markets. At Jefferson, we put a very labor-efficient plant in a high-growth market, giving us several benefits. The plant design is flexible, so we can adjust production to address demand changes quickly and optimize inventory returns to best manage working capital. The site was also designed to optimize low-unit cost production in a clean, well-situated environment for employees and customers. The entire plant site is graded and developed to minimize waste and maximize usable acreage, minimize water runoff, and plant water discharge. 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 approximately 18 million generated in 2021. Expected investment in greenfields is 25 to 35 million in 2021 as part of a 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 our financial results.

Thank you, Anne. On slide 12, we've provided our net revenue bridge comparing Q3 2021 to Q3 2020. Summit's net revenue increased $17 million or 2.6% in the third quarter of 2021 to $662.3 million compared to $645.2 million in the third quarter of 2020. On higher aggregates, ready mix concrete and cement revenue relative to a year ago, due to pricing growth and favorable market conditions. Our West organic revenue declined $17.2 million versus the prior year quarter as higher volume and price for aggregates and readymix were offset by fewer working days in Texas, which impacted asphalt and paving volumes. We did benefit from an incremental $4.2 million in revenue associated with acquisitions of operations in Texas and British Columbia that closed in the third quarter of last year. We still see strong demand for aggregates and ready mix, particularly across most of our residential markets, with the strongest demand still being reflected in the Houston and Salt Lake City areas. Our east segment's organic net revenue was up 21.4 million on higher aggregates, asphalt and paving revenue relative to a year ago, reflecting higher volumes, most notably in Kentucky, Kansas, and Virginia, as well as strong pricing gains across all lines of business. This growth was partially offset by lower ready-mix concrete revenue, primarily driven by 2020 Kansas wind farm projects that did not recur in 2021. At cement segments, net revenue was up 7.6 million, or 9% in Q3, relative to the prior year quarter on mid-single-digit pricing growth and higher volumes. Turning to the Q3 adjusted EBITDA bridge on slide 13, we ended the quarter at... 190.3 million, up 7.3% from a year ago, reflecting growth in our east and cement segments that more than offset lower west segment adjusted EBITDA relative to the comparable 2020 period. Not shown, but what can be inferred in our Q3 EBITDA performance is an intense focus on pricing ahead of our cost of revenue. In some instances, we are executing standard pass-through pricing for our costs of materials, which is the thing that's largest cost component at roughly 37% cost of sales. In other areas like labor and energy, which together comprise roughly 15% of our cost of revenue, market conditions are without question challenging. Whether it's tight labor markets driving higher levels of turnover or escalating diesel, coal, and natural gas prices, we have used the full complement of tools to manage through these cost headwinds. For us, that means sourcing productivity offsets, smartly hedging key exposures, and above all, moving swiftly to take price. To be clear, we think that many of these cost headwinds will persist and could intensify as we exit 2021 and head into 2022, especially in the light of global supply chain issues that remain unresolved. It's therefore critical that the commercial excellent muscle that we've built as part of our Elevate Summit strategy continues to evolve, that we operate with agility, and that we continue to make wise investments in our people and capabilities. Turning to slide 14, where we provide year-to-date price and volume trends by line of business. Q3 pricing inflected higher, consistent with the normal seasonality of the business. Year-to-date organic average selling prices have increased across all lines of business, with aggregate cement and ready-mix concrete pricing growth of 3% to 3.5%, while asphalt price is up 1.6% year-to-date. Likewise, volume growth has been strong with mid-single-digit organic volume growth in aggregates, cement, and ready mix, while asphalt was down 8.6%, due primarily to a divestiture. Turning to slide 15, we've provided an adjusted cash gross margin comparison by line of business. There you'll see we've driven significant quarterly and year-to-date adjusted cash growth profit margin expansion across materials and services, which more than offset contraction for our products line of business. Notably, our aggregates margins expanded by 410 basis points in Q3 and 170 basis points year-to-date. Likewise, our cement margins have expanded by more than 200 basis points on both a Q3 and year-to-date basis relative to the comparable 2020 periods. On slide 16, we provide a summary of our non-GAAP financial measures. We achieved significant margin expansion in the third quarter with adjusted cash growth profit margin and adjusted EBITDA margins expanding 260 basis points and 120 basis points respectively versus the year-ago period. On a year-to-date basis, you see similar margin trends with adjusted gross profit margin and adjusted EBITDA margin expansion of 170 and 100 basis points, respectively. This margin growth primarily reflects the pricing relative to input cost inflation I just mentioned, as well as favorable demand conditions in our end markets. And Q3 2021 adjusted EPS of 68 cents was $0.13 higher than the year-ago period, driven primarily by operating performance. Turning to slide 17, you'll see a summary of Summit's capital structure. Our Q3 2021 leverage ratio is 2.7 times, down 0.8 times from Q3 2020 and 0.3 times from Q2 2021, marking the lowest leverage ratio in Summit's history and falling below our three times net leverage target. Opportunistic debt pay down using divestiture proceeds together with solid financial performance has allowed us to reduce our interest expense by over $15 million annually and rapidly improve our balance sheet. Our quarter end cash position was $258.1 million. That, together with our undrawn revolver, means Summit had nearly $600 million in available liquidity, placing Summit on strong financial footing from which to grow the business while providing the flexibility to pursue a broader range of capital allocation opportunities. And finally, a housekeeping item for the purposes of calculating adjusted diluted earnings per share Please use a share count of 119.9 million, which includes 118.3 million Class A shares and 1.6 million LP units. And with that, let me turn the call back to Ann to close.

Thanks, Brian. On slide 19, we provided our outlook for the year, which is unchanged in the guidance we provided on our last earnings call. We believe our organic growth profile and conversion of certain businesses to an asset-light model support our current adjusted EBITDA outlook, despite wet conditions that impacted Q3, the divestiture of five businesses and a few smaller assets this year, and the difficult comparison of the next reporting week in 2020. For 2021, we expect to generate adjusted EBITDA of $490 to $520 million. which at its midpoint represents growth of 5% over 2020. We expect to spend $200 to $220 million on CapEx, of which $25 to $35 million will be related to Greenfield. 2021 thus far has played out more or less as expected, and we see those trends continuing through year-end. We continue to expect low to mid single-digit pricing increases for Aggregate, Cement, and ReadyMix, and low single-digit volume increases in those lines of business on a full-year basis. We expect asphalt pricing to be relatively flat on lower volumes due to a divestiture. And our outlook for our end markets has become incrementally more positive. Regarding residential construction, we don't see any slowdown on the horizon as demand dynamics remain strong. In non-residential, we're seeing some green shoots emerge as activity, which typically lags residential, is picking up. And on the public infrastructure side, we are starting to see stimulus dollars flow through to states, as is the case in Kentucky, and remain bullish that federal spending will have the potential to positively impact both volume and price. Concluding on slide 20, since announcing the Elevate strategy earlier this year, our employees have really stepped up. Thanks to them, we have successfully navigated very challenging economic conditions, labor market constraints, and the COVID pandemic, to drive significant progress against our three metrics, net leverage, return on invested capital and EBITDA margin. This progress is evidence that we are laser focused on commercial and operational excellence and are motivated to close 2021 with strong exit velocity that we can carry into 2022. Our teams are aligned behind our strategic objectives and collectively we are committed to making our goals a reality. We firmly believe the Elevate Summit approach of market leadership, asset light, social responsibility, and innovation will build the future fit summit of tomorrow and deliver greater and more consistent returns to our stakeholders over the long run. Before opening Q&A, I want to extend a special thanks to those who participated in our recent perception study. We believe that it's very important to have a continuous feedback loop with our stakeholders. We value your opinions and look forward to continuing the dialogue. Now we'd be happy to take your questions. Operator, please go ahead.

As a reminder, to ask a question, you will need to press star 1 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 that we have available. Please stand by while we compile the Q&A roster. And your first question comes from Stanley Elliott with Stiefel.

Hey, good morning, everyone. Thank you all for taking the question. Given what we're looking at with the strong demand outlook, improving markets into next year, one would assume that the pricing momentum that you're seeing here would continue. Curious if you had any early thoughts on how to think about pricing into next year.

Morning, Stanley. When we think about pricing, clearly we're very encouraged by the pricing growth that we had in Q3 across all lines of businesses and sequentially. And we continue to see strong demand in all of our markets. So as we look into 2022, we are not at a position where we're going to actually give guidance on pricing at this point in time. I will say our pricing is working out in Q3 exactly as we said. low to mid single digit pricing. In Q3, we saw aggregates really increased double digit in some of our eastern regions. And across the board, we had strong price execution by the team driven primarily by our commercial excellence. As we go into 2022, we will continue this strong focus. And I think we're underpinned by very strong demand dynamics as well as execution. So if I take into account the value pricing, the backlogs and demand support, I think you can expect continued price momentum. And I'm really proud of the focus of our team in this area. And this has been something as they faced a lot of headwinds throughout 2021 on inflation, et cetera. They've managed to not only expand margins through their price execution and cost management, but also have had very strong strategic execution.

Perfect. Great news, and congratulations on the success on the elevated strategy. Thanks. Thanks, Stanley.

Our next question comes from Trey Grooms with Stevens, Inc.

Hey, good morning, everyone. So first off, I guess my question is around the cement pricing, where we saw a sequential improvement there. in the quarter and, you know, was there some mixed impact there or was there some, you know, maybe slight benefit from the August increase that you had put out there? And then, of course, the, you know, we've heard of some pretty healthy announcements for the January timeframe as well. Can you talk about, you know, what you're doing for cement pricing announcements as we look into January or into the early 22, Tom Trey.

Sure, Trey. And, you know, we're very encouraged by the cement pricing. And again, this is a testament to the execution by our team. As we talked about in our last quarterly report, we had announced the mid-year price increases, $6 in our northern regions and $4 in our southern. And, you know, there was some pushback and some competitors chose not to take price increases at that time and push it on to a January increase. We did continue with a very heavy focus on our commercial excellence. And again, the cement team did very well here in that there was a heavy focus on customer segmentation and on driving value pricing. And so what you saw here, which we were very encouraged by, is basically a year-to-date increase of 3%. And most notably, in Q3, year-over-year, a 4.4% increase, which is actually the best pricing performance we've had in cement for 19 quarters. So we're very encouraged by the execution by our team here. And as we go into 2022, as you said, there's healthy price increases across the board supported by very strong demand dynamics in cement. And we've gone out with a $10 price increase in addition to the mid-year price increases that we've done. Again, we're early in the season to announce on that, but our team's very focused on your January price increase and the continued price momentum in cement.

Well done, and thanks for taking my questions. Good luck. Thanks, Troy.

Your next question is from Anthony Pettinaru with Citigroup.

Hi, this is Asher Stone in Sydney for Anthony. Thanks for taking my question. So you're at EBITDA margin at the close end of the Horizon 1 range, towards the bottom of it. So when you first outlined your horizons, was that kind of timing flexible? I was just wondering if maybe you had any additional visibility on the timing of when you're going to be finished Horizon 1 and moving on to Horizon 2, or is that still up in the air?

Yeah, I think when you look at the four strategic priorities of our overall strategy, which, as we remind, is market leadership, asset life, our ESG, and our innovation, they're all moving at different paces, right? So we said from the beginning that our horizons will actually overlap a little, which has been our reluctance to put timing on each horizon, because let's think about market leadership, for example. Our focus here in Horizon 1 has been about divesting, dilutive businesses or non-strategic, non-core businesses. As we move into Horizon 2 there, it's much more about continuing to have that portfolio discipline, but really driving that market growth to be number one or number two in rural and exurban areas. Asset light has been an absolute critical focus for us in Horizon 1. That will continue to be a focus, whether through small asset dispositions, as I said in my prepared remarks, or divestitures that make sense to drive shareholder value. As we look at the timing of the other two strategic priorities, they're really just getting going. As I said in our ESG part, we really hit a major milestone here for Horizon 1 in getting our baseline out, and we're one of the first in our industry to get a SASB compliant baseline out. We really look forward to getting to you on our strategic priorities with ESG in a much more targeted, results-oriented strategic roadmap as we go into 2022. And innovation, we're just building capabilities. So if you want to think about it, Asher, think about how we think about it is the horizons overlapping. And what we haven't done is said one horizon ends and the other starts because it's a continuous strategy over a three- to five-year period is how I would think about it.

Great. Thanks. That's really helpful. I'll turn it over.

Your next question is from Courtney with Morgan Stanley.

Hi, good morning, guys. Thanks for the question. Maybe if we can just go back to the, you know, leaving the 21 guidance unchanged, you know, after, you know, kind of beating our numbers for the quarter, it seems like it's implying, you know, a step down in EBITDA growth year over year. If you can just kind of walk us through, I know you called out, you know, the lapping of the 50s. three-week year and obviously have the divestitures. But if you can just walk us through some of the dynamics that are impacting the fourth quarter and how that would compare to how we should be thinking about EBITDA growth in 2022.

Sure. And thanks for the question, Courtney. As we think about our guidance for the rest of the year, we really believe it's realistic and objective. If you take our year-to-date numbers, they're at $395.8 million in EBITDA. That would imply $110 million in the fourth quarter if you went to our midpoint of our guidance. Now, there's three factors that kept us within this realistic range. One, we've talked about in our prepared comments. We're comping against a 53rd week that we had in 2020 that we won't have in 2021 that accounts for $10 million of EBITDA. Secondly, our divestitures that we completed, we've said before, is $5.6 million on an annualized EBITDA basis. And that actually accounts for about 80 million of revenue as well. So we're basically absorbing the impact of those without changing our guidance. And then the other factor, which is always a factor in this business, is weather is a wild card, particularly in Q4. And so a cold snap can cut short our season. So we just thought that it was realistic and objective to keep our guidance where it is. That being said, we are very encouraged by the momentum that we have both in pricing and demand and execution by our team. So I would not read into it any kind of negativity around how I believe the business is performing and how we can execute moving into 2022.

Okay, thanks. That's helpful. And you didn't really call out cost headwinds at all on the material side or in energy, you know, Is it safe to say that those are also coming in line with your expectations given the reiteration?

So if we talk about 2021, we believe that we were prudent in some of the estimates that we made in our original budget and guidance that we gave to you in what cost would be. And Brian can talk us through some of the cost elements here and give you a little bit more comfort around that. What I will say is looking into 2022, As I said in my prepared remarks, we are very vigilant around this, and our whole goal has always been and will continue to be driving commercial excellence to keep price ahead of inflation, focused on operational excellence. Brian will talk you through some of the hedging that we have. We've also bought some energy ahead for our cement kilns, and we continue to have long lead items on our supply chain that we're proactively buying ahead to make sure that our team's doing everything to mitigate cost as well as do value pricing. So a couple of things that we would point you to in 2022 just to share our thinking as we kind of put our budget together is around one is more an impact of Q1. So if you recall, in Q1, we had a very strong Q1 in 2021. If we step back and look at our typical Q1 performance, it normally accounts to 4% of our EBITDA on an annualized basis. In reality, in 2021, it was 8%. And that was driven by two main factors. One, Utah basically didn't have a winter. And the second factor was the Mississippi River opened up two weeks earlier, so we were able to move product faster to our markets in cement. Those factors really did drive a huge Q1. So we're considering that as we think about going into 2022. The other factor that we're thinking about, I made reference to, is supply chain constraints and our capital orders in particular. If our products and our mobile equipment gets delayed, we have to think and we are actively thinking today about how we look at preventative repair and maintenance costs moving into 2022 and what impact delays might have on that cost factor and on our growth from new equipment that we have in the supply chain. So that's just kind of sharing our thinking with you. I'm going to turn over to Brian to give some specifics on our cost that might help you, Courtney, with your question.

Yeah, thanks, Anne, and thanks, Courtney. Yeah, so our biggest input cost is for materials is 37% of our total cost of sales, and a large portion of that is the cost of cement that we purchase from third parties. And as you know, our goal is always to pass on those cost increases, and we've seen some pretty significant ones from the cement producers this year in the markets where we We purchase cement, primarily big purchases, third parties in the Salt Lake markets and the Houston market. So we've been successful, I think, in passing those cement price increases on. Wages and salaries is about 13% of our overall cost. And again, we've managed, I think, quite well. There obviously are challenges there, particularly in the very strong markets where The demand for drivers is at its peak, again, notably in the Texas market, Salt Lake and others, where there is, I think, a national shortage of drivers right now, and we've had to respond to those demands. And then on the fuel and energy side, you know, we manage our fuel costs through a forward purchase hedging program. That doesn't necessarily give us the lowest possible cost, but it gives us a lot of certainty around what our cost is going to be And in the peak months in the June through to September, October timeframe, we have about 70% of our diesel already purchased. We've got about 40% for the whole of 2022 pre-purchase. So we have certainty around our costs, and we think that's an effective way to manage what can be a volatile input cost. And then on things like natural gas, coal, again, we utilize contracts with our vendors, and we're working very hard with them to try to manage these input costs, which can be quite inflationary in the current environment. So hopefully that gives you a little bit of color behind how we're managing that cost base.

Very helpful. Thank you.

Your next question is from Derek Schmois with Loop Capital.

Hello. Hi, thanks for taking my question. Just wondering if you could expand a little bit more on your thoughts on different end markets that you service, residential, non-meds, public. It looks like you're maintaining your broader volume guidance and the commentary seems pretty consistent with prior quarters, but just curious if there's been any incremental change in trends across those different end markets that you service.

Sure, Garrick. Let me kind of bring you through our various end markets. So let's start with residential. Overall, Bottom line summary is residential continues to be very robust. If we look at national U.S. homes, sales records have been hit. They're at all-time lows. The gap between supply and demand is at 5.24 million of homes, and that was 1.4 in 2019 as a point of reference. If we take our states, which we look at very keenly, August year to date, just to give you a few stats, Salt Lake City is up 24%. Houston, 19%. The Dallas-Fort Worth is in the 30% ranges. We look at Virginia, it's about 18%. Kansas City, 25%. And they're our top five. All of our other growth states in the Carolinas and Kentucky are all in double digit above 20% growth year to date on residential. So we're not seeing a slowing and we continue to have both national and state averages. And we're seeing that in our numbers. And we believe that will continue into 2022. If I kind of shift gears then to non-res, we're seeing some encouraging indices around the ABI, non-residential construction activity, which is up to 56.6 in September from 55.6 in August. The Dodge September non-res was up 15% versus year-to-date trends of up 7%. So we've talked about non-res before and said it's lumpy. It's our hardest to predict. It happens within the year. Indeed in 21, we are lower in our wind farms than we were in 20. But we've always said that we believe this light non-res will follow our residential. And there's been enough of a lag that we believe that that will be positive going into 2022. So we remain long-term bullish and even median term bullish on non-res. Public across the board has shown continued strength. I would say we're seeing a lot more confidence in our states. as we look across the board. So Texas, one of our biggest states, their fiscal levings are estimated for 2022 at $10 billion. That's a 20% increase over 2021. UDOT had a surplus budget that was in the legislature in March, and $870 million of that was allotted to UDOT. Kansas has gone from $700 million in 2021 to $900 in 2025. Missouri, a gas tax is put in that will result in $500 million per year of additional spending on roads and bridges. Virginia is up 16% year on year. And then if we take our growth states where we're very focused around our green fields, North Carolina has a gas tax, total spending of $5 billion. South Carolina has excess surplus budget, total spending of $3.1 billion. Georgia has its $10 billion major mobility budget. program where we will be in a great position with our jefferson quarry as we quoted in our prepared remarks to really exploit that and continued growth organic growth in our business and kentucky's one we've talked about all year long where we've had you know reduced spending but we're definitely seeing some strength and backlogs and increased landings in kentucky so bottom line is demand is very resilient right now and we see that continuing into 2022. great thanks for the rundown thanks next time

Your next question is from Phil Ng with Jefferies.

Hi, this is actually Colin on for Phil. Thank you for taking my question. I just wanted to touch on the aggregate gross profit margin in the quarter. You guys did a great job expanding that despite those rising inflationary costs that everyone's seen. Can you just walk us through some of the puts and takes of that gross profit bridge and maybe quantify some of those drivers and just how we should think about aggregate gross margin and cash gross margin per ton improvement going forward? Thank you.

I'll just give you some high-level comments, then Brian will bring you through kind of a bridge on us, Colin. So overall, as I've said, the team's done a great job on price execution, and our ranges are very strong in the east. We've had double-digit year-on-year price increases in aggregates. Additionally, our team's focus on operational excellence and cost reduction plus cost containment have been huge. And then underpinned by demand, we've had that continued strength. that has allowed us to expand margins over time. So Brian, maybe you want to bring through a little bit more color to that.

Yeah, Colin, thanks for the question. It's really when you get that combination of both volume and price, which is what we hope and what typically happens when we get to the third quarter, that's our biggest season of the year and September's usually the biggest month in the biggest quarter. So we saw over 9% volume growth in aggregates, 4% average selling price, and that 4% is an average. So there are pockets of our business in certain locations where we had significantly higher than that. And the fact of the matter is that we ended up with incremental margins on aggregates of about 83%, and one of the strongest quarters we've seen for a long time. And, of course, that volume really is helpful. Not every variable cost is truly variable. And so when you start to see this kind of high single-digit volume growth, that's what really drives those incremental margins and the underlying margins. So volume and price is really what drove those higher.

Thank you.

Your next question is from Tim Natanis with Wolf Research.

Yeah, hey, good morning. I wanted to zero in a little bit on the cement market. So it sounds like the conditions are as tight as we've seen them in a long time. So I wanted to see if you could actually expand a bit on the supply side, elaborate on your potential for expanding supply and what you're seeing from any competitors. Do you also see this as unusually strong and continuing to be strong? Just a little more detail would be great.

Yeah, as we said, when we look at the cement market, definitely supply-demand dynamics are rather tight right now. We've seen that evidenced in strong volume demand. We've also seen that evidenced in price execution and stickiness on price, and our numbers reflect that. As we think about the supply side, We are continuing to work on an operational excellence focus to get every single ton out of our plants. Every single incremental piece of capacity has been a key focus of our team, and that's been ongoing since last year. Additionally, working through the supply side to do that, our supply chain to make sure we're optimizing our entire network has been a key area. If you think about further expansion, we have bought a small amount of imports to supplement our volume to meet our ongoing customers' demands. That being said, import volume is not as profitable as what comes out of our plants, so we are limiting that to the point where we can absolutely secure the margins and maintain our margin profile over time. So if you think about our emphasis, our emphasis around commercial excellence, pricing the volumes we have, and being operationally excellent in our current plant. To get to any additional form of capacity, expansion, we would have to see a much broader expansion in margins in this market. I do believe supply demand dynamics will continue to be strong, and we will continue to drive improvement in our business. Additionally, in our cement business, we didn't speak to it too much in our comments here, but our Green America recycling facility is back up and running, and we're doing the expansion of the Green America recycling facility, which we think is very important from our ESG, but also for our ongoing improvement in our business. We also have the Portland cement installation that we've been doing that's going to help supplement our additional capacity in our cement, and that's to the order of about 8% over time. And so that will help improve capacity as we move through that. But really, our focus is very much on value pricing and operational excellence.

Yeah, it's helpful. It sits tight before the infrastructure stimulus happens, assuming it happens, and it could be a long runway ahead. So thank you for that.

Yes. Thank you.

Your next question is from Brent Thielman with DA Davidson.

Hey, great. Thank you. On the green field, the incremental contributions here get to be pretty interesting relative to the EBITDA base. I guess the question is, Are you exploring or have you identified more of these opportunities in addition to what's already sort of proposed here for the next few years that aren't in the slide deck? I think about that especially with some of the freedom of capital you should have. So any thoughts there?

Yeah, you know, it's a great question, Brett, because as we think about our capital allocation, it continues to be a focus for us. Obviously, our first focus is on managing our leverage, and we've done that. But, you know, investment in greenfields is very important in the depleting resource to continue to sustain organic growth. And the Jefferson Quarry is a great example of that in a market that has high growth, high margin potential, strong pricing dynamics where we can continue to expand our margins. And I will say we are constantly exploring new greenfield opportunities as we look through our business. And we'll continue to do that. And as we continue to refine our strategic plans, greenfield investment continues to be that over time. As we look at the contribution in 2021, it's $18 million. And by 2024, it should be $45 million per year. And we will expect and continue to add upon that over time as this is a constant focus of sustainable organic growth for our business.

Thank you.

Your next question is from Jerry Revich with Goldman Sachs.

Yes, hi. Good morning, everyone. Congratulations on hitting the leverage ratio target. I'm wondering, as you look out ahead, what's M&A pipeline look like for you folks at this point? And, you know, if you're unable to find acquisitions that meet your financial criteria, you know, what sort of timeline would you look at before you ramp up stock buyback, et cetera? Can you just give us your updated thoughts around those items? Thanks.

Thanks, Jerry. And, you know, we are very encouraged by our leverage ratio, and we'll continue to improve upon that based on the performance that we've had You know, when I think about capital allocation, I mentioned our greenfields were obviously very focused on sustaining capital, but we are an M&A company and we continue to have a very robust M&A and acquisition pipeline and continue to develop that over time and continue to grow out to our team. So it will continue to be a key focus in organic growth. And we have a number of targets in our sites that were actively working. We have always tried to position ourselves as the buyer of choice. with our model and our focus on rural and ex-urban markets to be number one or number two, continues to be that. So we would rather put that cash to use in that regard. However, that being said, we look at all forms of capital allocation to drive value to our shareholders over time. So there's not a timeline on that, Jerry, because we believe we have a lot in the pipeline right now. To the last question, I got a lot on greenfield investment and continued growth of our business is a key focus for us while managing our leverage. Hopefully that addressed your question.

Your next question is from Adam Thalheimer with Thompson Davis.

Hey, good morning, guys. Great quarter. Similar question, I guess. I was just curious if the dispositions are done by the end of next year, and then how surprised should we be if we see you announce small but just a tuck-in acquisition?

I wouldn't be surprised. We have nothing that we're ready to report on at this point in time, but we're very active on the M&A side. Truly, in Horizon One, our team's been very focused on deleveraging, getting these divestitures, having some proceeds. So we have strategic flexibility to drive increased shareholder value and drive growth of our business. So We will report on them as we have them. And as I said, we're about halfway through the divestiture part, but all very actively in progress. And we'll look forward to giving you more report outs in Q4 and Q1 on those divestitures and continue just asset disposition discipline within our organization. But over time, we will hopefully have some acquisitions to also talk about that would range anywhere from Bolton to significant ags-led acquisitions that's fit our criteria of discipline and being number one or number two in rural and ex-urban markets where we play in adjacencies.

Thanks, Anne.

Thank you, Adam.

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

Thanks for taking my question and appreciate the details so far. Brian, I wanted to go back to the comments you made around costs and some of the hedging and it's helpful and. But for us and then for planning purposes to have some of the hedging, I was wondering if you could talk a little more about, you know, as these hedges roll, presumably that the cost is still gone up. So what would you expect your average? cost to be based on your 22 hedges versus 21?

So on the portion of the material that we've hedged so far, which is roughly 40%, we're probably going to see about a 10% to 15% increase in cost for the part that has already been hedged. The unhedged portion, which we continue to buy spot, is unknown at this point in time. But that would be approximately the range for the portion that we have locked in. Okay, great. Thank you.

We have reached our allotted time for Q&A. I will turn the call back over to Anne for closing remarks.

First, Summit is in the right place at the right time. Megatrends are coalescing in Summit's key exurban and rural markets, and all require some form of aggregates, ready-mix concrete, cement, asphalt, and or paving, and a combination thereof. Second, we are reporting our third consecutive quarter of progress towards our Elevate Summit goals. It may not be a linear upward trajectory each quarter, but our leverage ratio, ROIC, and EBITDA margin are all markedly improved today versus where we started. And we are now more than halfway towards our Horizon One goals for divestitures and proceeds. We are finishing the year strong, continuing with a sharp focus on price execution and cost mitigation, with the business underpinned by strong growth fundamentals. With continued strategic focus, we are setting our company up for success in 2021. With that, I'll conclude our call and thank you for your continued support of Summit Materials. And thank you for your questions.

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