Summit Materials, Inc.

Good morning, my name is Brent and I will be your conference operator today at this time, I would like to welcome everyone to the summit materials Q1 2022 earning results conference call. At this time, all lines have been placed on mute to prevent any background noise after the speakers presentation, there will be a question and answer session. If you would like to ask a question during that time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star 1. Thank you. I would now like to turn the call over to Carly Anderson. Thank you. You may begin.

Hello and welcome to Summit Materials' first quarter 2022 results conference call. Yesterday afternoon, we issued a press release detailing our financial and operating results. Today's call is accompanied by an investor presentation and a supplemental workbook highlighting key financial and operating data. All of these materials can be found on our Investor Relations 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 historical non-GAAP financial measures discussed in today's call on a press release. Ann Noonan, our CEO, will begin today's discussion with a business update. Brian Harris, our CFO, will briefly review financial performance. Ann will return to provide some closing remarks, and then we will open the line for questions. Please limit your asks to one to two questions, 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.

Thanks, Carly, and good morning, everyone. Our plan for today is to keep our prepared remarks rather brief, as later this month we'll be hosting an investor day to update you on our Elevate Summit strategy, our accomplishments to date, and our perspective on the path ahead. I'd like to begin with safety, where we made solid progress across multiple safety metrics in the first quarter. Our recordable incident rate was down more than 50% year on year, and we did not incur a single lost time incident in the first quarter. We've increased our use of proactive measures such as expanding participation in risk assessment reviews to maximize safety engagement throughout the business. Sleep preventable incidents remain an important area of continuous improvement as we strive for a safer summit both at our facilities and in the communities we serve. And to help us accelerate our progress, we've added a new Senior Vice President of Safety Performance, Brad Okuniewski. Under Brad's leadership and in collaboration with all Summit team members, we expect to make continued improvements to safeguard the health and well-being of all 5,500 Summit employees. Before turning to our quarterly performance, I wanted to frame up our view on how we see things today. First, we continue to believe it's a tremendous time to be in our industry and a better time to be at Summit. The industry, as well as our local Summit markets, are benefiting from strong underlying dynamics. that have the potential to accelerate price and volume growth over a multi-year time period. Second, as we progress through our Elevate Summit strategy, we are optimizing the portfolio and building a stronger, more consistent summit material. And finally, the current cost environment, while challenging, is accelerating our transformation and sharpening our collective focus on commercial and operational excellence. Bottom line is that we're confident that with disciplined strategic execution, We'll make further progress towards our Horizon One financial objectives and deliver sustainable growth for Summit shareholders. Now moving to slide four, where you'll see that our first quarter performance was consistent with the expectations we laid out in February. If you recall from our Q4 conference call, we said that we anticipated year-on-year declines in Q1 due to comparisons with a prior year period that were roughly double the contribution of our typical first quarter. Notably, we benefited from unseasonably dry and wild weather in Utah and the Mississippi River opening early to barge traffic. As we return to more normal conditions this year, our first quarter adjusted EBITDA as a percentage of our full year total normalized towards our historical average of roughly 4%. Unpacking Q1 further, you'll see that our performance was fueled by strong pricing gains across all lines of business. led by double digit growth in asphalt and cement, and consistent with our general view that the constructive demand environment should support continued pricing momentum. In fact, price increases were communicated across all markets and lines of business, effective between January 1st and April 1st, depending on seasonality. Therefore, we would expect to fully realize those impacts in the second quarter. On the volume side, growth versus the prior year was primarily impacted by the comparison factors I mentioned earlier, as well as divestitures. Bottom line is that in the first quarter, we were able to sustain momentum that we built in 2021, while at the same time providing a solid foundation to build on as we head into prime construction season. Moving to slide five for high-level view on each of our reporting segments. West segment net revenue was up year-on-year on a combination of price and volume growth. As for adjusted EBITDA, the year-on-year decline was due to product and geographic mix divestitures as well as higher subcontractor costs relative to the year-ago period. Despite strong pricing growth in our East segment, net revenue declined on lower volume as wet weather in the Midwest caused a slow start to the season and pushed some work into Q2. Those lower volumes together with product mix and divestiture impact led to the decline in adjusted EBITDA, albeit in a seasonally low quarter for the segment. First quarter cement volume growth was positive, up 0.3%, and price was up more than 10% in the period. We resumed operations after our normal annual winter maintenance shutdown slightly later than expected, resulting in some elevated repair and maintenance costs that impacted adjusted EBITDA. Let's turn to slide six for our Elevate Summit scorecard. There you'll see we continue to maintain net leverage below our Elevate Summit target of three times net debt to EBITDA. At 2.8 times, our leverage improved year-on-year by 0.4 times, and our balance sheet remains in a very healthy position to pursue high return opportunities such as margin agreed of M&A and share buybacks. Each of our three elevated summit metrics did, however, moderate sequentially in Q1 as we lacked a very strong prior year period and took proactive steps to prepare for the prime construction season. The reality was that we exited Q4 with low inventory levels, and the right move for the health of our business was to take on some higher costs to adequately prepare for our highest demand quarters. As we have previously told you, our progress would not necessarily be linear quarter to quarter, but over time with improved execution and more consistent operating performance, we will continue to progress towards each of our Elevate Summit targets. Now on slide seven, you see the four strategic priorities that are core to our Elevate Summit strategy. Market leadership, asset light, sustainability and innovation. Our focus on market leadership within rural and ex-urban markets continues to benefit from migration patterns and megatrends impacting our end markets. As new and prospective homeowners look for more affordable space, they are moving into Summit's geographic footprint. In 2021, Population growth in our top 20 MSAs grew on average at nine times the national average, and projections are for those de-urbanization trends to continue, which should benefit our footprint over the long run. Furthermore, as data centers, distribution facilities, and green energy projects spring up in America's heartland, where Summit has strong market-leading positions, we stand ready to capitalize on our ex-urban and rural footprint. And in Q1, we completed our ninth divestiture, closing in on our Horizon One target of 10 to 12 divestitures. Of the nine completed, eight were primarily downstream assets, and many resulted in long-term supply agreements, ensuring strong aggregates pull through. This exemplifies our asset-light operating model and is at the forefront of how we're reshaping the portfolio. On slide eight, you see how our portfolio optimization has progressed. we continue to divest non-core businesses that do not meet or have no clear path to reach margin and return targets and find better owners for these businesses. The divestiture we completed in Q1 generated roughly $48 million, and to date, our Horizon One divestitures have yielded more than $175 million in proceeds, putting us on pace to exceed our $200 million target. Because we are currently in the process of advancing additionally no-regret portfolio moves, We have reclassified an operating unit in our east segment as held for sale, and we expect to close on the transaction in the second quarter. And as is customary, we will report on the transaction and, if necessary, adjust our guidance accordingly after we close. On our sustainability agenda, so far 2022 has been an active and noteworthy year for Summit Materials. To start, we adjusted our short-term incentive plans company-wide to include ESG-related objectives. which ensures full company alignment and emphasizes the collective importance we place on sustainability. And then in April, we released our sustainability roadmap with the ambitious and what we believe are achievable 2030 and 2050 goals that you see on slide nine. Achieving each of these goals will enhance our social impact, improve our land use practices, and reduce and ultimately eliminate our carbon emissions. For each of these three focus areas, we are taking meaningful steps towards each of our goals. For example, we recently announced the full conversion of our Davenport cement plant to Portland limestone cement. With the full conversion, Davenport, which produces approximately 1.1 million tons of cement annually, will reduce its carbon emissions per ton by up to 10% compared to traditional Portland cement. Meanwhile, we are working hard to fully convert our Hannibal, Missouri plant to PLC this summer. Together, the conversion of our plants is expected to unlock additional capacity, help decisively reduce our carbon footprint, and have a positive impact on our business and the environment. Overall, our revamped incentive plan, our sustainability report, the commitments contained within it, and the actions we're taking demonstrate that we are committed to being transparent and aggressive in our pursuit of both near and long-term strategies to become the most socially responsible integrated construction materials solution provider. On slide 10, I'm pleased to report we have bolstered our team and innovation talent with the addition of a Chief Strategy and Growth Officer, Kaken Ghilani. Kaken joins us from DuPont, where he previously served as Vice President of Strategy, Growth, and Ventures of their water and protection business. With over 25 years of experience leading corporate strategy and marketing functions, Kakan brings a valuable background in corporate development, market-backed innovation and branding, business development, as well as growth strategy development and implementation. Under his leadership, we expect Summit to develop a robust marketing strategy and initiative to support our business plans and overall strategic objectives. We are privileged to have Kakan join our Summit family. and in collaboration with our leadership team, we look forward to further expanding our growth strategy while accelerating Summit's innovation roadmap. Wrapping up on slide 11, where we remain in horizon one of our Elevate Summit strategy. We've achieved our leverage goal and we are within striking distance of our divestiture proceeds target. We continue to optimize the portfolio and free up capital to support sustainable growth. Our unwavering focus is squarely on strategic execution, controlling what we can control, and making further progress towards our Horizon 1 financial objectives of 23% to 25% EBITDA margins and 9% ROIC, which are well within our sights. With that, let me pass it to Brian for a financial review.

Thank you, Anne. I'll pick up on slide 13 by reviewing our first quarter volume and price performance by line of business. Q1 aggregates pricing was up 4.8%, led by the strongest gains in our east segment, and more specifically, double-digit pricing growth in northern Kansas and Virginia, followed by high single-digit growth in Kentucky. In our west segment, aggregates pricing was up more than 10% in British Columbia, with more muted pricing growth elsewhere, including Houston, where we would expect pricing to accelerate going forward. First quarter organic aggregate volumes decreased 0.8%, as solid organic volume growth in Texas and other markets was offset by volume decreases in the East segment. In cement, favorable supply-demand conditions in our key markets drove Q1 pricing up 10.1%, the strongest percentage pricing growth in company history. Customer acceptance as well as price realization was stronger than the historical baseline and is indicative of a very tight supply environment. First quarter cement volumes were up 0.3% and came despite comparisons with a strong prior year period. In our downstream businesses, ready mix prices increased 7.3% in the first quarter with strong growth in our two key ready mix markets, Salt Lake City, and Houston. Year-on-year volumes for ready mix were down 7.2% due to divestiture impacts as well as more typical weather conditions in Salt Lake City. And in asphalt, average selling price increased 10.2% in Q1, with pricing growth across a majority of markets. Asphalt volumes were down 45.1%, reflecting the impact of divestitures. On slide 14, we provide an adjusted cash gross profit margin comparison by line of business. In the first quarter, adjusted cash gross profit margins declined year on year in each of our businesses. On aggregates, cost inflation, including higher fuel costs, ran ahead of aggregate price increases. Q1 margins were also impacted by a couple of atypical items, such as accelerated repair and maintenance in our east segment that should benefit the rest of the year, and non-recurring subcontractor expenses in our west segment that were incurred to address short-term labor and equipment constraints. Had these atypical items not been incurred in the quarter, we would have reported a gross margin closer to 38.1%, which is about 180 basis points higher than reported. Furthermore, part of these cost increases related to preventative maintenance that we undertook to prepare for a strong upcoming construction season. These higher costs, combined with geographic and product mix, as well as wet and cold weather in certain markets, led to lower adjusted cash gross margins versus the prior year period. Cements adjusted cash gross margins were negatively impacted by three factors. First, lower opening inventory levels after an exceptionally strong 2021 limited sales leverage. Elevated plant costs, including higher energy, as well as repair and maintenance costs were incurred. And third, a slower startup after our planned downtime in the first quarter resulted in a greater reliance on lower margin import volumes to meet demand. Taken together, these three factors drove adjusted cash gross margins lower versus the year ago period. Our products gross profit margin declined versus the year ago on lower volumes resulting from more typically seasonal weather that pushed some work into Q2, despite the realization of high single-digit pricing gains. Recognizing that cost pressures have not yet moderated and have in fact accelerated since our February call, our teams are focused on executing cost mitigation initiatives across the organization. We continue to implement our flexible energy model by hedging diesel, natural gas, coal, and swiftly adding fuel and energy surcharges across the business. We are compensating for supply chain issues with preventative maintenance to extend the life of our assets, as well as sharing equipment across our markets. We are looking at optimizing usage of our subcontractors, and we are exploring ways to fast track operational excellence initiatives all in an effort to improve performance, offset inflation, and upgrade the consistency of our operations. Now moving on to slide 15 for a look at additional non-GAAP metrics. Adjusted EBITDA margin of 5.9% was down from 10.5% in Q1 2021, driven primarily by elevated cost inflation net of pricing. We should note that the prior year did benefit from insurance proceeds of $5.5 million that, of course, did not repeat in 1Q 2022 and also impacted the comparison versus prior year. First quarter adjusted diluted loss per share of $0.41 was $0.08 below prior year levels. Finally, on slide 16, for a view of Summit's capital structure. As Anne mentioned, our Q1 2022 leverage ratio of 2.8 times net debt to EBITDA is down 0.4 times from Q1 2021 and below our Elevate Summit target of three times, thereby providing the company the financial flexibility to pursue the highest return capital allocation options that now includes opportunistically repurchasing our Class A common shares. In March, our board authorized a $250 million share repurchase program, and in the first quarter, we repurchased 1.5 million shares of Class A common stock for $47.5 million. We remain in a very strong liquidity position, closing Q1 with $287 million of cash on hand and the availability of an undrawn revolver. Our liquidity position, together with our improved leverage, means we have a much stronger balance sheet and we will not hesitate to pursue the highest return opportunities for our business and our shareholders. And lastly, for the purposes of calculating adjusted diluted earnings per share, please use a share count of 120.1 million, which includes 118.8 million Class A shares and 1.3 million LP units. And with that, I'll turn the call back to Anne for our outlook and closing remarks.

Thanks, Brian. Slide 18 is a reminder that we continue to advance our aggregate screen fields with three currently under development in our east segment. We see consistent and meaningful investment in greenfields as critical to sustaining organic growth, and our greenfields are on track to deliver over $50 million in incremental EBITDA on a run rate basis by 2024. As we continue to prospect and pursue new greenfield opportunities, primarily in the East and Midwest, we do so with a discipline and an understanding that the returns of these projects must be as good or better. than traditional M&A as they complement our acquisition strategy. Turning to our outlook on slide 19, you'll note that we updated our full year adjusted EBITDA expectations to include our recently closed divestiture. We now expect 2022 adjusted EBITDA of approximately $529 million to $557 million from $535 million to $565 million previously. also we're revising our full year gna and now expect between 200 million and 210 million in gna spend in 2022. now regarding the assumptions that underpin our 2022 outlook as brian mentioned earlier we are seeing and have incorporated higher levels in of inflation into our year to go outlook that said we firmly believe that our pricing strategy as well as internal cost control measures when executed will help mitigate these incremental headwinds. As a result, the midpoint of our 2022 adjusted EBITDA outlook represents high single digit growth for the balance of 2022, which in light of the challenging cost environment, we see as very positive for our business and our shareholders. Finally, before we open the line for questions, I'd like to take a moment to invite everyone to join our investor day on May 24th. You can find details on our investor relations website. At our investor date, we'll update you on our Elevate Summit strategy and introduce you to the business leaders that bring that strategy to life every day. We are excited for you to join us, and thank you for your continued support of Summit materials. With that, I'll ask the operator to open the line for questions, please.

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. As a reminder, please limit your asks to one to two questions 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. Your line is open.

Good morning, everyone. Thank you all for taking the question. Quick question on the cement maintenance in the quarter. Did you all pull ahead you know, some expected maintenance through the rest of the year, meaning that, you know, now it's kind of done for the year. You know, also was that kind of as part of the conversion to the Portland limestone cement in Davenport? Just any color there would be great.

Yes, Stanley. So really, good morning, first of all, and thanks for your question. On cement, really our Cost issue there was the fact that we didn't return from our annual turnaround as fast as we had anticipated. And so it really wasn't a maintenance issue. It was multiple smaller issues and just we didn't get back online as fast as we thought we would. There was nothing incurred from the conversion to PLC and no pull ahead of maintenance there. It was just our planned annual turnaround that was a little slower coming back up.

Perfect. And then kind of thinking about the repurchase activity in the quarter, You know, I'm assuming you all will say a little bit more about that at the analyst day. But curious how you're balancing that versus, you know, some of the M&A that you've talked about, given that the balance sheet's in a, you know, much better position than it's been historically.

Yes. So, you know, our capital allocation priorities stay pretty much the same. You know, we've very much heard our shareholders and committed to managing our leverage as our first and primary priority. We have been very focused on investing well in our business and the point of sustaining capital, you know, particularly run profit improvement projects. Our green fields, as we've talked about in our preferred remarks, we have a rich M&A pipeline. And, you know, for the first time in Summit's history, we have a lot of financial flexibility due a lot to the portfolio optimization and strategic execution that we've done. And as a result, we now are in a position to have the financial flexibility to do opportunistic share buyback. And as Brian reported, we did some of that in the quarter, and we'll continue to look at that as a flexible option in the future.

Perfect. Thank you for the time, and best of luck.

Thanks, Tammy.

Your next question comes from the line of Trey Grooms with Stevens. Your line is open.

Hey, good morning, Anne and Brian.

Morning, Trey. Morning.

Could you guys talk a little bit about kind of the margin path here, particularly in aggregates and cement as we progress through the year and any visibility into the two Q margins would be helpful. I know you touched on several things that kind of impacted one Q, but any additional visibility as we go forward around the margins would be helpful.

Yeah, so, you know, we talked a lot about our Q1 pricing, both in aggregates and cement. Let me start with aggregates and Brian jump in here at any time. So aggregates, we were at 4.8% starting in Q1. And a lot, we pointed out that they were January through April price increases and particularly in our Houston market, it was April. So as we go into Q2, you'll see the impact of improved pricing and our pricing is very strong. We have a very constructive demand environment and aggregates. And as we move throughout the year, you'll see that pricing accelerate. Now, as we've talked many times on aggregates, our pricing goes from our East region leading in double digit price increases to more moderated increases. But across the board, I would say we have a very constructive environment for pricing. So as we go into Q2, you should expect that pricing to sequentially improve and then get flat to Q2 and then increase as we go through the year. We're very confident with our strategic plan. our value pricing that we can continue to expand our margins. Cement, similarly, we had a very strong quarter with 10% here and continue to grow that over time and expect mid-year price increases also in cement because we're battling inflationary environment. Now, what I would say on cement as you go through, you should expect it to moderate a little bit. This 10% is the strongest in Summit's history. And as you go through and get into Q3 and Q4, because it's just in July that increase comes in, it will moderate on a pure percentage basis. But overall, as you look at our business, Trey, you can expect us to increase that margin as we've committed to over time as we go through the rest of the year. And we're very confident about the demand and pricing environment.

Great. Got it. And, sorry, just a point of clarity. You mentioned When you were talking about aggregates, you said something being flattened to Q. What were you referring to there?

I'm saying sequentially as we go through our overall margins, they will improve from Q1 to Q2. However, if I just look at step back from the whole business with aggregates and cement driving most of our margin, obviously, from an increased perspective, we expect Q2 to basically catch up to last year, but then as we go through Q3 and Q4, expect a second half, much bigger increase in our margins as we move through. And that's just the compounding effect of both price and volume as you move throughout our seasonality of our business.

Yeah, got it. Okay, thanks for the additional clarification there. That all makes sense to me. And on... Let's see, on cement, you know, your cement volume, you had a very tough comp in the first quarter like you talked about. You know, but your volume was still up slightly there. And, you know, this is typically a time when seasonally you can build some inventory through your network. You know, with this seasonally, I would still say, correct me if I'm wrong, maybe still seasonally strong volume given that very tough comp. How are you feeling about your inventory throughout your network here as we're kind of entering the busier building season? And I think it's clear what any tightness there means for pricing, but any comments there would be helpful too.

Yeah, cement, as you recall in Q4, we had some unplanned downtime as well. So we ended the year in cement with pretty low inventory levels. And in fact, in Q1, one of the things that impacted our margins was the fact, as you know, we had to use more import than domestically produced, which from a dollar EBITDA perspective is the right business choice, but actually does result in a little bit of margin compression because it's not as high a margin as our ongoing business. I would expect typically in a year we do roughly about 5% import. We'll be north of that this year, there's no doubt, especially because we had a little bit of unplanned downtime. That being said, we're being very judicious in how much import we take and the contracts we sign so we don't get caught upside down on price versus cost because it is additional cost to bring this in. And any of the contracts we sign are not very long-term in nature. Most of our business is within the year so we can manage it. Overall inventory levels, as I said, were really quite low on the overall business. That was a choice we made to take incurred cost in the Q1, and that was very much to be ready for our high season. I feel our business is in really good shape going into the prime construction period right now.

Great. Thank you for that, Ann, and good luck as you kind of go through or get into the busier season and look forward to seeing you in a few weeks.

Likewise, Trey. Take care.

Your next question comes from the line of Garrick Shomas with Loop Capital. Your line is open.

Oh, hi. Thank you. I think you mentioned taking on additional subcontract or labor, particularly in aggregates. And I'm just kind of curious if this is something you're going to need to take on moving forward in a more substantial way and if there's any additional cost or margin headwind we should think about with respect to labor costs.

Yeah. Morning, Gary. Thanks for the question. It's Brian here. Yeah, we did have some additional subcontract costs in the quarter, primarily getting ready for the start of the season. As you know, there's been some labor shortages in certain functional areas, so we did have to take on some additional subcontract labor in order to offset that. Yes, of course, it is at a higher cost. We feel, though, that we've got most of that behind us now, as we've prepared ourselves for the start of that higher-level construction season, which for us in the northern markets really gets going underway at the beginning of May. Don't expect this to be a significant factor in the months ahead.

Got it. Thank you. My follow-up question is just on volumes. Just wondering if you could speak to The bidding environment, you know, it sounds positive, but maybe provide a little bit more color on what you're seeing moving forward. And maybe just speak to the low single digit volume guidance that you have and if there's any opportunities to grow off of that guidance level, if you could.

Yeah, Garrick. So, you know, we're very positive about our demand environment. Never have we had concurrent growth as high as it is right now, and our backlogs are really high across all three end markets. I would say residential. The reason we had this low single-digit outlook was primarily because of supply chain constraints in residential, not because of lack of demand, more that projects were elongated over time. And so we remain, you know, believe that residential is going to be very resilient. Candidly, when we look at the amount of permits versus starts, there's backlogs there that have to be filled. So residential, even with high mortgage interest rates, there's a gap there has to be filled in that. And then if I look at non-residential moving forward, we've definitely seen a big pickup in that. I wouldn't have told you that this time last year. And we're seeing that in projects in our Charleston areas, our Georgia areas, where there's increased warehousing, et cetera. And all the indices, the ABI index, index was up to 58 in March versus 51 in February. We're seeing that in the Dodge Momentum Index. So overall, we're very bullish on non-residential and seeing the projects come to life as we speak. And then public, despite the fact that we have nothing in our guide for the infrastructure impact, the funding is just really strong overall in public with respect to COVID relief dollars and increased tax receipts. And every one of our top eight states has very strong funding I would say with respect to answer your question about lettings, you know, March we saw double-digit growth in many of our key states, and year-to-date transportation contract awards for our top eight states are up 50% year-on-year with some real large projects we've already realized in Colorado and Virginia. So very strong demand environment overall.

Thank you very much.

Thanks, Garrick.

Your next question is from the line of Phil Ng with Jefferies. Your line is open.

Hi, this is actually Colin on for Phil. Thank you for taking my questions. I just wanted to dive into the guidance a little bit. You lowered your expectations for G&A by about $20 million at its midpoint from your initial guide, which should be a pretty nice tail end to your prior EBITDA guidance, but you're lowering your midpoint by $6 million on that EBITDA guide. So I was just wondering if you can walk us through really the puts and takes there that gets you to that down $6 million.

Yeah, the $6 million is really from the divestiture we completed. The low end of it's six, the high is eight in the guide. So that's really one factor in the guide, and that's directly as a result of our ninth divestiture that has a full year impact. So that one's a pretty clear number. The other thing I would say at a high level in the guide, you should think about, you know, we've assumed our price. and controlling what we can control on cost and our continued portfolio optimization will more than offset by single-digit cost inflation. Additionally, in the guide, we see adding to our results the greenfield impact, which we've been investing in, and our Green America recycling expansion. What we have not put in the guide, and these are both positive and negative, positive, we could have some uptick if infrastructure spend began in 2022 we're not assuming that in our guidance, however, there are a lot of taxpayers who want to see those dollars put to play, and we do tend to play in the. repair and rebuild and that's the first dollars put into the ground so that's a positive could happen to that guide. On the other hand, i'll point out something we're watching very carefully as well that isn't in the guide, as you know, we're a buyer and a seller of cement. Supply-demand dynamics are very, very tight in cement right now, and so we're very cautious of watching for cement shortages. And additionally, spare parts are becoming longer and longer in their cycle. We're being very proactive with our procurement team and buying ahead, but we are watching those things very carefully on the guide. Brian, maybe you want to talk to the G&A a little bit as well.

Yeah, on the G&A, which I think is the focus of your question, is why the G&A a guide came down, and it was really due to an administrative error that we made when we first issued that guide last time around. We misforecast the split between the G&A and some costs that was in the margin. So apologies for that, but we've corrected that now with this latest guide. So it didn't affect the overall EBITDA outlook, but it did shift costs between the G&A line and the margin line.

Okay, that's helpful, Collin. Thank you. And then just a follow-up question on aggregates pricing. A lot of your competitors are talking about mid-year price increases, and I believe you guys talked about setting the table kind of last quarter with your customers for those. Is that baked into your guidance, and have you started to implement those in any of your markets? And any color as to the magnitude and timing of price realization on those would be helpful as well. Thank you.

Yes, as you know, Colin, we've been going through very keen focus on value pricing since the end of 2020 and since we launched our strategy. And we continue to have that focus, which is pricing to our markets and pricing due to inflationary environment. We have the difference, I would say, between when we talked to you in February and now. We have built into our guide bid year price increases across all lines of business. And that's due to supply-demand dynamics as well as high inflationary costs, which I'll have Brian kind of talk you through a little bit here, which I think is an important factor we want to get out. But our teams are actively discussing price increases, particularly in aggregates and in cement with our mid-year price increases. And I would say our downstream businesses, if you look at our Q1 results, have done a very nice job of passing through the increased materials costs that they've had, and in our ready mix business managing to, you know, suddenly actually a little bit expand our margins. So you will continue to see price increases from us due to the environment we're in. And Brian, maybe you talk a little bit to the cost assumptions that we've changed as well.

Yeah, so from that, then you, in my prepared remarks there, you would have heard that we've seen accelerating cost inflation, most notably in hydrocarbons. So from our first forecast and outlook, we've seen diesel costs will increase now in this latest outlook by approximately $20 million over where we were thinking they would be. And obviously, we need to recover that in our selling prices. We've seen, to a lesser extent, increases in other areas of natural gas and other energy components of our cost base. which we're also going to recover in higher selling prices. Of course, our biggest input cost is cement. You've heard the outlook for cement of at least one to two price increases in an $8 to $12 range. And as Anne just mentioned, we'll be very active in passing along those input costs that we incur in cement, which flow through our ReadyMix business. So continuing... pressure on cost, forcing us to be very active on the areas of cost that we can control.

Great. Thank you very much. Thanks, Tom.

Your next question is from the line of Anthony Petinari with Citigroup. Your line is open.

Hi. This is Asher Stone, and I'm for Anthony. Thanks for taking my question. And just following up on those comments you just made around cement cost pass-through, You know, in the quarter, your organic pricing for cement was about 10%, while, you know, ready mix was up 7%. So just over the next couple of quarters, how do you see the cost pass through mechanism and ready mix playing out, you know, on a delayed basis, et cetera? And then, you know, given how well telegraph cement inflation is at this point, are you maybe able to get out, you know, ready mix hikes ahead of cement increases, maybe shortening that pass through window?

I'll just Speak to the fact that Q1, I was very encouraged by how our team executed in both ready mix and asphalt. As you correctly pointed out, our ready mix went to about 7.3% price increase, very effectively passed through all of the cement costs. I would say it was a bit of a mixed bag, though. Our Utah business was well ahead in double digits in doing that, and our Houston lagged a little bit. So that's kind of the value of having a portfolio. However, that being said, Houston has started to pick up, and so our two leading markets are effectively passing through cement price increases to their customers as we speak. And we will expect, that's just our model, we expect that to happen right throughout the year without a lag. As we go through then looking at asphalt, we've had record double-digit price increases in Summit's history here, and our team's done a very nice job of passing through. And at a minimum in our downstream, we expect to hold margin, if not expand it over time. So I think the teams executed very well would be my summary on this one.

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

Your next question comes from the line of Tina Teners with Wolf Research. Your line is open.

Yeah. Hey, good morning. Just wanted to follow up on the cement side with regard to just one clarification point. I think we heard from a competitor there was a – April price hike and July price hike of around $12 a ton, just confirming that that's also your experience roughly and if there could be another one or if that would be unprecedented. And then on the Davenport, it looks like the upgrade, you're back up to full running. Just wanted to make sure and a reminder on where you'd be full run rate once those two upgrades are complete. Thanks.

Okay, so let me address just the pricing question, then a clarifying question around your Davenport comments. So the April and July, you probably heard from a competitor specific to the Houston market. I would say on cement, we went with a January price increase and plan to go with a mid-year July price increase as well. And there is a little bit of difference between how you price in the various markets. We play along the Mississippi River. so if you look at what we did we went with ten dollars price increase the teams worked very closely with their customers to try and pass that through and make sure that we're working very carefully to meet their high demands with high quality and service over time while investing in our plant as well as we go into july now we're out actively having those discussions with our customers to make sure that they are prepared to pass that price right through the value chain tina i'm not 100 clear on what your question was around Davenport. Was it around the PLC conversion or was it around our coming back from our turnaround?

Oh, on that coming back from the turnaround, I just wanted to confirm that you're back to full run right now in the second quarter and just some thoughts on what the full run rate will be production-wise once both of those are converted and what the timing is.

Yes, so both our plants are back up and running, and we're very focused on operational excellence. As you know, cement plants are high fixed cost plants with capital intensity, so our goal is always to have limited to minimal downtime, and we've actually upgraded a lot of our operations folks in both plants to make sure we continue to do that. So operating well right now, the PLC conversion will give us 5% capacity addition. which is a key way for us to be able to add capacity without impacting current customers, and then we use imports to augment our capacity. We do not release capacity and run rate information on a real-time basis in our business for competitive reasons.

And just the timing on that, sorry? The timing on when you'll be complete with the 5% addition?

We're completed Davenport, and we are actively converting most of our customers in Hannibal, Missouri, I don't have an exact date on that because it's very much reliant on how customers can get that done. We would hope to be late third quarter in that timeframe, but very dependent on customers' conversion rates.

Gotcha. Okay, thanks.

Your next question is from the line of Brent Thielman with DAA Davidson. Your line is open.

Hey, great. Thanks. Good morning. Anne or Brian, it's a little difficult to see the effects from the divestitures just on the surface, thinking in terms of margins, just given the cost inflation impacts in the industry. Is there some things you can point to or a way for us to think about the underlying improvement, profitability you're seeing, just sort of taking away inflation?

I'll jump in at a high level on what our goal is around the divestitures and why we think we've made such good progress. So a key part of our overall portfolio optimization program, which is both divestitures and M&A, is to be very aggregates and cement led. So richening the mix and the quality of our earnings through our portfolio optimization activities. And we're actually very pleased with eight out of the nine divestitures we've done have been in the downstream. And with that, we have exited businesses that, frankly, would never meet those quality of earnings targets that we've had over time, and they had rightful owners. We've also gotten multiples and or books value for our assets that exceeded where we were in returns, great value to our shareholders, allowing us to have the financial flexibility to move forward. And really, as we move from horizon one to horizon two, expect more M&A, and less divestitures as we continue to richen that mix. Brian, have you anything to add to that?

Yeah, no, Brent, I think the other thing just to keep in mind here is one of the agenda items for our investor day is to provide more clarity around our EBITDA Elevate Summit goal of 30% and our bridge to get there. Obviously, portfolio optimization is a critical part of that, and we'll provide more detail around that then. So if I'd ask you just to be a little patient until we have that investor day when I think you'll see the kind of clarity that you're looking for on the impact of the divestitures.

Okay. Well, fair enough. I may ask another one that may preempt the investor day, but the actions around share repurchase activity, it's obviously a new phase in the allocation philosophy here, which is great to see, and Obviously you see value in your shares here. Does it say anything about the opportunities and multiples you see for potential transactions in the market today or is that even something you're looking at?

No, I don't think it's either or by any stretch. We just saw, we felt frankly that our shares were undervalued and we could return value to our shareholders at a time when the stocks traded low and we still by going with a $250 million dollar repurchase plan, we felt that that did not overly weight us on share repurchase. We're still an M&A machine. We're still very focused on acquisition targets and have a very rich pipeline. We set up our strategy as part of our Elevate Summit strategy on the types of businesses we would target, and we've stayed very disciplined around that. And so we are, you know, multiples are quite high, which is why our divestitures have been very value creating for our shareholders. But it has not stopped us entering into multiple processes and evaluating high-value targets.

Okay.

Very helpful.

Thank you. Thank you, Brent.

Your next question is from the line of Jerry Revich with Goldman Sachs. Your line is open.

Yes, hi. Good morning, everyone. I'm wondering if we could just talk about in the aggregates line of business, can you just comment on the cadence of inflation that you folks have seen over the course of the quarter and what you're expecting into year end? And you mentioned that you expected margin expansion back half of the year. On a year-over-year basis, maybe you could just expand on what's the assumed price cost to get there. Thanks.

Yeah, thanks, Jerry. It's Brian here. Thanks for the question. Yeah, we're seeing that the pace of inflation is probably accelerating. It's come in a little faster, even although we had some fairly, what we thought were lofty assumptions at the beginning. But as I mentioned there earlier in a previous question, hydrocarbon costs are coming in higher. And even although we do hedge, and thankfully we do hedge a portion of our volume for diesel purchases. Q1 is the lowest volume hedging that we have, so there's more purchased spot in that quarter than any other quarter. But having said that, we do expect the self-help initiatives on our centers of excellence together with our price increases to offset some of that increased inflation that's coming at us. So as we get into the season and the volumes increase, you see a bigger proportion of our higher priced product in the mix than you do in Q1, which is a very low quarter. You see the benefit of the volume throughput, which makes a big difference to our margins. And so sequentially, they will increase in Q2, Q3. As we've seen historically, we don't expect that trend of margin sequential increase to change. And ultimately, the realization of the selling prices will offset the cost inflation that we're experiencing.

That's helpful. And maybe just to put a finer point on that, if pricing accelerates to call it the 8% to 10% range over the next couple of quarters for you folks. If that's offsetting inflation, that assumes I think inflation accelerates to the mid-teens range given the fixed cost nature of the business. And I just want to make sure that that ties to the inflation that you're seeing. And, you know, obviously diesel is clear, but maybe you comment on wage inflation, other purchase components. Is that the level of inflation that you're seeing on those markets? inputs, if you could comment, Brian. Thanks.

Yeah, wage inflation, Jerry, I think is around about 6%, probably a little bit above that in certain very strong markets, but averaging out around about that 6% range. Samantha, as we've talked about, is our biggest single material input cost, and that is going to probably see two price increases this year in an $8 to $12 range, depending on the market. And other inflationary items are probably at least in the mid to high single-digit range. So it does vary. The percentage varies depending on that input cost. Spare parts availability and pricing there is another factor that It goes into our repair and maintenance, and I'd say that was running, you know, in the high single-digit range as well, and certain parts, which can be in short supply, but essential can be even more than that.

Okay. Thanks. Thanks, Jerry.

Your next question is from the line of Adam Selheimer with Thompson Davis. Your line is open.

Hey, good morning. Anne, can you break out the timing and magnitude of the aggregates price increases?

Yeah, they do vary by different regions. I will tell you, if we look at just Q1, as we said in our prepared comments, the east region led pricing on aggregates. And even within the east region, we had double digit increases in our northern Kansas markets and in Virginia and high single digit in Kentucky and Georgia. And then in our West region, we had British Columbia leading with 10% and we had more muted in the rest of the West region, but still in that mid to high single digit aggregates. And we're calling for that as we go throughout the year. Um, we did in some regions, we did a January price increase others, you know, some of our West region areas have done may increases. And to a fault, every one of them will probably be going with mid year price increases. So the order of magnitude does vary between our west and east segments, but that's kind of the plan. And then as Brian said, cement, we're both a buyer and seller of cement, and you can expect that to be in that $8 to $12 with mid-year price increases again.

Okay. And then the disposition in the quarter, which segment line should I take that out of as I model going forward?

take it out of the pricing.

So I think if you look at the West... The six to eight million of EBITDA, like which segment do I pull from in terms of the... Oh, that's from the East.

It's in our East. Yes.

Oh, no, but which, like ReadyMix, Paving?

It's primarily, the divestiture was primarily downstream businesses, which if you look at the headline numbers, 48 million, we got an eight times multiple, which is a very strong multiple in the market. And that business went to a strong strategic partner with long-term supply agreement on aggregates. So good for everyone around.

Great. Thanks, Anne.

Thank you. Your next question is from the line of Catherine Thompson from the Thompson Research Group. Your line is open.

Hi. Thanks for taking my questions today. Just on the cement and tight supply, how much of this is a function of, you know, high demand, which we're obviously seeing, but also we're hearing of more extended plant outages and then also less supply from certain international players, including Turkey, providing product. Which of these factors are a greater impact now? And do you see this abating, the situation abating as the year progresses? Thanks.

yeah catherine um thanks for your question i i would say overall it's high demand dynamics is driving this more than anything and the industry you know as we said before we are supplier and a buyer of cement so we we see both sides of this and it is tight across the board it does vary by region summary we had some down time we were able to augment that with some import materials being careful how we price that in the market obviously and we did that in q1 and we'll do that as is our typical model moving moving forward but it is definitely overall driven by higher demand driving tightness across every single market that we have and we could we see that continuing which is why i called it out as a very significant watch out as we go through the year keeping an eye on and making sure we're very agile in our cement purchases as well as making sure that we give our customers the highest quality service we can over time.

Okay. And have you seen any improvement in the import situation?

We have our imports established. I would say the price is higher, and so it's requiring us to pass along certain high pricing and any cost escalation we see. We have several, as you know, there's several big LNG jobs coming through, and we've been bidding on those, but we've made sure we bid in a way that if we're using import material, that cost is priced right into our model over time. So we have not had a problem getting the material. I would say it's more the price.

Okay, great. And in your prepared commentary, you cited weaker pricing in Houston, which seems counterintuitive given the stronger market, but I wanted to see if Houston also does have a greater residential mix, particularly on the west side. Maybe a little bit more of a clarification on that pricing weakness in Houston, and does it have anything to do with softer housing? Thanks.

Yeah, Catherine, I can see why you asked the question. It actually wasn't anything to do with weaker demand or pricing. competitive situation, it was more around timing. So cement price increases, for example, did not go in place until April, and so that's why the ready mix lagged some of our other regions, like our west region. And in our ags, we've continued to put stronger pricing in in January, and we'll continue to do that as we move through mid-year. So it's not a market dynamic, it's more a timing dynamic, is how I would describe it.

Okay, perfect. And then I guess the final question for me is just on residential, and you have given some helpful color on today's call, but I just guess more pointedly, have you seen any type of change in demand or in the upper markets with the residential end market simply due just to inflation or any other factor?

Yeah, we have not seen it in our markets. As we said, we're watching mortgage rates. Obviously, they're a factor. They're higher. But when you look at historical mortgage rates, they're a lot higher than that. We're balancing that around where we play. So we play in markets that have a better affordability index. And then against that, as you well know, Catherine, there's, you know, the whole migration trends go into our footprint is particularly significant. served by suburban and ex-urban markets, and a lot of people are moving there. So if we look at just some of the actual states, like Salt Lake City, we're seeing double-digit increases in permits in 2022 with less than a half a month of inventory. Houston, Austin, and Texas all saw double-digit single-family permits go up. Kansas, we had 10% growth, and in Missouri, 2%. uh, Kentucky continued to grow in 2021 with 15% single family growth, 4% even year to date. And as I said, you know, when I look at the overall, there's this gap between supply with between permits and starts, that's going to continue to drive that. And long-term we just see residential continuing to be strong. Clearly we're watching it, um, every day, but we do think that there's going to be a gap that has to be filled where there is some backlogs. And then we'll continue to watch that as we go into 2023.

Okay, perfect. Thank you. Thank you.

We have reached our allotted time for the Q&A session. I will turn the call over to Ann Noonan for her closing remarks.

Thanks, everyone. Let me leave you with the following comments. First, while energy costs and supply chain constraints have become more challenging, we are taking the right steps to achieve our 2022 outlook. Early year price increases will be more fully realized in the second quarter of 2022, And current market conditions are favorable for mid-year price increases in all lines of business. Second, we know what works and the plan is to double down on our proven Elevate Summit playbook in 2022. That means a sharp focus on value pricing, investing in capabilities, optimizing the portfolio, and executing on our operational excellence initiatives. And finally, we think it's a great time to be in our industry and a better time to be with Summit. We're in position to benefit from the rare concurrence of continued strong demand fundamentals in public and private end markets. Plus, we have unique self-help margin levers that will continue to leverage in 2022. Thank you for your time today.

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