Summit Materials, Inc.

Ladies and gentlemen, thank you for standing by. 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 second quarter 2022 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at 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. It is now my pleasure to turn today's call over to Carly Anderson, EVP.

Hello and welcome to Summit Materials' second 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 factor 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 on today's call in our press release. Ann Noonan, our CEO, will begin today's discussion with a business update. Brian Harris, our CFO, will review our financial performance. Ann will return to discuss the path ahead, and then we will 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.

Thank you, Carly, and good morning, everyone. Let's first start with our progress on safety. Through June, we are tracking ahead on most of our safety KPIs on both the year-over-year basis and versus our internal expectations. This includes our year-to-date reportable incident rate. which is down 55% versus the comparable prior year period. And although our journey to zero harm is ongoing, I would like to thank our safety leadership and Summit employees everywhere for the collective progress we've made and for their commitment to living our safety first value. Now let's turn to slide four for a look at our second quarter performance, where today we are reporting record quarterly earnings. Our team overcame challenging operating conditions and divestiture impacts to deliver growth across net revenue, adjusted gross profit, and adjusted EBITDA. In fact, if you exclude the impact of acquisitions and divestitures, second quarter adjusted gross profit would have increased more than 7%, and adjusted EBITDA would have increased nearly 6% versus Q2 2021. At a high level, our quarter was characterized by three overarching factors. First, continued pricing growth with gains across all lines of business, and led by our downstream businesses, as we moved swiftly to pass through higher input costs. Second, volumes that were held back by divestiture impacts, as well as cement shortages in certain markets. Despite this, we view underlying near-term demand conditions in each of our end markets as relatively healthy, albeit at varying levels. And the third factor impacting results is a challenging cost environment, coupled with continued supply chain constraints that continue to face the industry and our business. In light of these conditions, I am pleased that we've been able to navigate these challenges, grow our business while protecting margins through a continued focus on self-help initiatives in both commercial and operational excellence. With a solid second quarter under our belts, the takeaway from the quarter is that we are in a position of strength heading into the second half and are well positioned to deliver on our adjusted EBITDA outlook for the year. Slide 5 covers segment results, where growth was led by our West segment and our cement business. West net revenue was up 12.4%, driven by robust pricing across all lines of business, and led by high single-digit aggregates pricing growth in Utah. Aggregates volumes in the West segment increased 7.3%, fueled by growth in Texas and British Columbia. Pricing flow-through and aggregates volume growth more than offset lower downstream volumes and inflationary conditions to drive adjusted EBITDA of 7.5% in the second quarter. Staying with the West segment for a second, if you recall from our investor day, we had flagged issues with cement availability in Salt Lake City, one of our largest residential markets, where a supplier cement operation experienced downtime. Our team moved quickly to collaborate, and for the first time in Summit's history, we began railing in cement from our Davenport cement plant. Those actions helped triage the situation, and I'm happy to share that the cement situation in Utah has improved. We are still receiving about 10 real cars from Davenport per week, but we believe we have successfully navigated through the more difficult supply challenges. In fact, June was a record EBITDA month for our Kilgore business in Utah, and we remain encouraged by the momentum we've built out west. In our east segment, net revenue and adjusted EBITDA were lower versus the prior year, due mainly to our 2022 divestitures. Setting those impacts aside, we saw lower aggregates volumes in Kansas due to wet weather that was mostly offset by aggregates volume growth in Georgia. Aggregates pricing in the East segment was up 6.6% in Q2 and is up 6.7% year-to-date. Unpacking this further, pricing differs by geographic market within the segment. For example, in Virginia, Georgia, the Carolinas, and the Kansas City metro area, we can expect high single to low double digit pricing growth on a consistent basis. In contrast, the more rural areas in Kansas and Missouri command low to mid single digit pricing growth, which is why we are actively working to tilt our central region sales exposure towards a higher growth Kansas City metro area. That being said, demand conditions and cost pressures continue to warrant a more aggressive pricing posture. We therefore have more back half pricing planned and believe the East should ultimately be firmly within that high single digit to low double digit territory in this demand environment. East segment adjusted EBITDA was adversely impacted by higher repair and maintenance costs, as well as higher subcontractor costs as sourcing capital equipment in certain markets has been difficult, resulted in higher, albeit necessary, operating costs to extend the life of our assets. Turning lastly to our cement results, where we are seeing significant momentum. In June, we realized a record monthly EBITDA and a very strong revenue month as well. For the quarter, net revenue increased 9.1% to $93.7 million, driven by pricing growth of 7.5%. As expected, pricing growth moderated versus first quarter 2022 levels as we lapped April 2021 pricing That said, the pricing environment remains very constructive, and we have moved forward with an $8 per ton price increase as of July 1st. And so far, we are witnessing higher-than-normal price realization as our sales team continues to implement and execute our customer segmentation and value pricing principles. Cement volumes were slightly lower year-on-year in the second quarter. Despite this, demand conditions in cement remain very strong, as our customers continue to express concerns over cement supply and ability to meet high seasonal demand. EBITDA margins for cement in Q2 were 46.2% as pricing gains combined with favorable demurrage costs relative to the prior year period drove margins roughly 25 basis points higher versus the prior year period. In the long run, through a combination of commercial and operational excellence initiatives, successful completion of the Davenport cement storage dome investment, as well as the full recovery and expansion of the Green America recycling facility, we have a credible and fair path to drive cement margins sustainably above 40%, which is our North Star objective for that business. Now let's turn to slide six for our Elevate Summit scorecard. There you'll see that we reached two summit records. First, on net leverage, we once again set a new low. At 2.4 times net debt to adjusted EBITDA, we are down 0.4 times from Q1 2022 and remains firmly below our three times Elevate Summit target. Armed with much enhanced financial flexibility, Summit is in a strong position to pursue a broad array of value-creative capital allocation priorities, including investments to drive organic growth, aggressive pursuit of high return M&A opportunities, and opportunistically repurchasing shares when they represent compelling value. And the second record was ROIC of 8.8%, which matches a previous high watermark for Summit. ROIC increased 40 basis points sequentially, 30 basis points year on year, and as our divestitures flow through results, we expect that ROIC should continue this upward trajectory. Adjusted EBITDA margin on an LTM basis decreased 10 basis points sequentially, and reflects the challenges in this operating environment as the realization of our price increases lagged cost inflation, particularly in early 2022. Having said that, our centers of excellence are relentlessly focused on improving operation and commercial excellence in each of our lines of business. We have efficiency projects underway to optimize our cement mixes, reduce washout times in ready mix, and improve tons per hour in aggregates. Each of these initiatives is designed to drive out costs and improve margins. These, together with our commercial excellence initiatives, are self-help margin opportunities unique to Summit as we drive best-in-class practices enterprise-wide and are critical to reaching our greater than 30% EBITDA margin target. Slide 7 displays the four strategic priorities and enabling capabilities that are foundational to the Elevate Summit strategy. As we move each of these forward, I'd like to highlight two recent areas of progress. First, on slide eight, we are proud to announce that as of tomorrow, August 5th, we will have fully converted both cement plants to 100% Portland limestone cement. As you know, we converted Davenport in the first quarter, and our continental team worked diligently to successfully convert Hannibal on time and on budget. The benefits of this conversion are worth reiterating. First, PLC reduces concrete and body carbon by approximately 10% without compromising resiliency or quality. Second, by replacing plinker with PLC, it unlocks additional capacity. And finally, PLC carries a lower cost and therefore has positive margin implications for our cement business. These benefits are more quickly realized thanks to the rapid adoption of PLC by our customers, including state DOTs. The bars on the right show our 2022 planned sales volume for PLC, and the gold line indicates that we are tracking well ahead of our internal forecast of PLC sales for 2022. What a finer point on market acceptance. In 2022, we expect to sell approximately 1.25 million tons of PLC, which will be up from 25,000 tons in 2021, a tremendous accomplishment for our continental team. and proof that Summit is taking aggressive steps towards being the most socially responsible construction materials provider in the industry. The second item I'd like to highlight is on slide 9, and that centers on portfolio optimization. In Horizon 1, we moved through no-regret portfolio moves, investing 10 mostly downstream businesses, generating $470 million in proceeds, and delivering considerable value for our shareholders, at more than 10 times EBITDA across all divestitures. Now, in Horizon 2, our goal is to invest to grow priority markets. What does that mean exactly? It means three things. First, it's about richening the mix to be more materials-led. We are targeting high-quality assets in aggregates and cement, and we'll be very selective about anything in the downstream. Second, portfolio optimization is about sourcing bolt-ons, both large and small, that will deliver higher margin higher return, and less earnings volatility to our portfolio. Everything we do is through the lens of bringing increased value to our shareholders. And finally, it's about entering or building our leadership position in high-growth strategic markets. We want to expand our market presence in both geographic adjacencies as well as targeted rural and ex-urban markets where we see an achievable path to being the number one or number two player. Summit is pursuing opportunities to lead in key markets from a position of strength. We are in the best financial shape in the company's history, with ample liquidity and the lowest net leverage ever. While there is a universe of about 5,000 targets in aggregate cement and related businesses, we have prioritized about 60 opportunities in our current M&A pipeline. And within those priority targets, we are in active discussions with several of them and have many LOIs in place. While we are eager to grow, we are also disciplined and structured in our approach, and our team is intensely focused on our Horizon 2 portfolio optimization principles. In other words, we will pursue opportunities that we believe will help us grow and that will move the needle towards our Elevate Summit goals while transforming the portfolio to be more materials-led. Which leads me to slide 10, where we want to emphasize just how much change the portfolio has undergone. Year-to-date, approximately 72% of our 2022 adjusted EBITDA has been generated by aggregates and cement. This is a major step up from 2020 levels, a roughly 4 percentage point increase from 2021, and significant progress towards our Horizon 2 goal of at least 75% of EBITDA sourced from materials. This is proof that we are no longer yesterday's summit. We are transforming into a higher-margin, materials-led business and we believe we should be valued commensurately. Now, before passing to Brian, let me wrap up on slide 11, where we lay out the three horizons of our Elevate Summit strategy alongside our financial targets. As we said at our investor day, we are fully in horizon two with respect to our portfolio transformation and our sustainability agenda. Meanwhile, we are still in the early innings of our innovation priorities, and we will update you as we make progress against that strategic initiative. Overall, we are making progress, improving leverage and ROIC, while maintaining adjusted EBITDA margins despite stiff cost headwinds. We are confident in our strategy, staying focused on controlling what we can control, and driving continuous improvement throughout the enterprise. This approach will ultimately set the stage for margin expansion, assisted by self-help commercial and operational excellence, and the compounding effects of additional July price increase. as we move into our biggest volume quarter of the year. I'll now pass it to Brian for a financial review before coming back to discuss our second half outlook. Brian.