Summit Materials, Inc.

Good day and welcome to Summit Materials third quarter 2022 earnings conference call. Please note today's conference is being recorded. 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 during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star followed by the number one again. Thank you. At this time, I would like to turn the conference over to Carly Anderson, Executive Vice President of ESG and IR.

Hello and welcome to Summit Materials' third 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 the historical non-GAAP financial measures discussed in today's call in our press release. We will begin today's presentation with a business update from Summit's CEO, Ann Noonan. Brian Harris, our CFO, will then review our financial performance. Anne will conclude prepared remarks with our view on the path ahead. After that, we will open the line for questions. Please limit your ask to one question, then return to the queue so we can accommodate as many analysts as possible in the time we have available. With that, I'll turn the call over to Anne.

Thank you, Carly, and good morning to everyone joining today's call. Keeping with our promise to put safety first, I'd like to start with an update on our safety trends. Through September, we are tracking ahead of both internal expectations and prior year for virtually all of our key safety performance indicators. Our recordable incident rate, for example, is 45% better than 2021 levels. A critical catalyst for our improvements is a greater emphasis on leading indicators that help to prevent safety incidents before they happen. Led by our safety leadership teams, Summit employees around the country have truly embraced our safety first culture as we continue our journey towards being a zero harm organization. Turning to slide four for a review of our quarterly performance, you'll see that we delivered solid third quarter results as evidenced by a number of records that included record net revenue and adjusted diluted earnings per share, as well as the strongest year-on-year organic pricing growth for aggregate, cement, and ready mix in company history. Our summit teams continue to execute the Elevate strategy and are rising to meet the challenges of a very dynamic operating environment. If you were to exclude the impacts of divestitures in percentage terms, third quarter net revenue was up mid-teens, and adjusted EBITDA increased mid-single digits versus the comparable prior year quarter. These results reflect another quarter of successful strategic execution and emblematic of an organization that's transforming to tackle the opportunities that lie ahead. Particularly in light of the challenging macroeconomic backdrop, It's fair to say that the third quarter was affected by a variety of cross-currents. On the positive side, all lines of business exhibited double-digit pricing growth year on year. And perhaps more importantly, pricing for our aggregates and cement businesses accelerated nicely off run rate levels. Driven in part by successful July 1st pricing actions, pricing accelerated 640 and 450 basis points relative to first half levels for aggregates and cement respectively. In addition to the tremendous price realization, our cement and green America recycling business is executing on their plan and driving profitable growth for Summit, a trend we anticipate extending into future quarters. Now, in terms of third quarter headwinds, we have not seen supply chain constraints ease in any material way. As a result, we continue to encounter historic levels of input cost inflation. And while we have weathered certain cost headwinds, namely energy, better than some, our profitability and margin progress has been stunted by higher input costs. More specifically, we are still facing challenges sourcing capital equipment. And as a result, we are having to absorb unexpected repair and maintenance costs, as well as higher subcontracting and equipment costs. Limited driver availability, as well as shortages of cement, all but capped aggregates and ready mixed volume growth in the water. Those conditions taken together with wet weather particularly related to the preparation for and impact of Hurricane Ian, explains why our volume growth was slightly softer than expected. Despite these industry challenges, I am very proud of the resiliency of our teams displayed as we navigated through uncertain times. On slide five, we cover segment results where growth was led by our West segment and our cement business. West net revenues were up 16.6% driven by robust pricing across all lines of business and all markets. Notably, after lagging in the first half, pricing in Texas inflected significantly in Q3 with double-digit pricing gains in all lines of business. Similarly, aggregates pricing in Utah accelerated in Q3 and was up 10% versus Q3 of 2021. Volumes for aggregates and ready mix, however, were held back as supply chain headwinds I mentioned a moment ago affected several of our markets. However, in Utah, we recognized healthy aggregates growth in Q3, while ready mix volumes were relatively flat year on year. West adjusted EBITDA grew 6.5%, fueled by strong and broad pricing growth that more than offset volume and inflationary headwinds. In the East segment, reported results reflected the impact of divestitures. Therefore, let's focus on organic price and volumes. Organic aggregates pricing increased 8.2%, led by the strongest growth in Virginia and the Carolinas, followed by mid-single-digit growth in Missouri. In Kansas, pricing differs by market, with Kansas City commanding stronger pricing than more rural areas. Even so, adjusted EBITDA margins in Kansas are typically comparable to the segment average due to advantage cost dynamics. In the downstream, pricing growth remains robust, with 15% and 29.2% organic pricing growth versus the prior year in ready mix and asphalt respectively. Each segment adjusted EBITDA declines versus the prior year due primarily to divestitures. Excluding those impacts, lower adjusted EBITDA was due to a combination of higher repair and maintenance costs, elevated subcontractor costs, and organic aggregate volume declines due to Hurricane Ian impacts that were only partially offset by growth in Kansas City and Virginia. Finally, on cement, strong and persistent demand conditions combined with customer preference for material quality and reliability is driving continued momentum in our cement business. For the quarter, net revenue increased 29.6% to $119.9 million, with strong and balanced growth from price and volume. Pricing growth of 12.8% is a high watermark for Summit and reflects a combination of inflation-justified pricing, and sharp execution of commercial excellence principles. Third quarter cement volume of 841,000 tons is our highest sales volume in five years and represents 12.4% growth versus Q3 of 2021. This volume uptick was driven by three factors. First, PLC conversion unlocks additional capacity. Second, we had better asset utilization. Finally, we supplemented our production with some imports in order to satisfy robust customer demand. Cement-adjusted EBITDA was up 6.2 million or 15.5% relative to the prior year, fueled by top-line growth and greater contribution from Green America Recycling. Before moving on, we did want to note two items that will have implications for our cement business. First, as you may have read, drought conditions from the plains through the Mississippi River Basin are resulting in historically low river levels and are impacting barge traffic along the Mississippi River. So far, our operations have not incurred significant disruptions, but we are not immune to these conditions. Although we are well positioned along the river relative to our competition, low river levels are slowing delivery times. To date, we've limited stock outs and are working proactively with customers to manage expectations. If, however, conditions do not improve, There is clearly risk to future quarters, and we've incorporated our latest view into our updated guidance. All that being said, our Continental Cement team has a tremendous amount of expertise, as well as deep and durable relationships that are especially valuable when navigating through these uncertain conditions. The second cement item worth discussing is around the pricing letter we recently issued, effective for January 1st. If you recall, we said in August that we were going to exhaust favorable energy supply contracts on natural gas, pet coke, and coal beginning in 2023. As we have locked in 2023 prices at higher rates, we need to share those higher costs with our value chain partners. As such, we have announced a $17 per ton price increase going into place at the beginning of 2023. Our pricing actions are commensurate with the higher costs facing the business. and we believe they adequately represent the value we provide the market. Our January 1st move, as always, is grounded in our pricing principles, which are to maintain a positive net-of-cost relationship, protect margin, and price to what the market will bear. Given the strong supply-demand conditions, sound value pricing will be a critical lever in achieving our 40% or better adjusted EBITDA margin goal for our cement business. Let's now turn to slide six for our Elevate Summit scorecard. We have achieved or have made significant progress on two of the three Elevate Summit financial targets. For net leverage, we set another record in Q3 at 2.3 times net debt to adjusted EBITDA and are well below our three times target, thereby preserving maximum optionality to invest in organic growth initiatives, further strengthen the summit portfolio via value-enhancing M&As, and drive superior shareholder returns. Similarly, on ROIC, we set an Elevate Summit high watermark of 9% of 20 basis points from year end and prior quarter. As we annualize our divestitures and rigorously analyze the return on each of our remaining assets, we will move towards and eventually beyond our 10% ROIC target. Progress on this front is especially critical in light of the higher cost of capital in this rising rate environment. Adjusted EBITDA margin on an LTM basis decreased 50 basis points sequentially to 21.9%. Our efforts on commercial and operational excellence initiatives are helping to stem the impacts of inflation, and our focus has been on protecting margin to the best of our ability while growing EBITDA dollars in a sustainable way. Ultimately, closing the gap on our elevate margin target will occur in a material way when inflation headwinds abate, materials pricing endures, and our self-help margin initiatives really take hold. And our journey to 30% will likely coincide with the progress against the three North Star objectives we introduced earlier this year. The first is to have cement EBITDA margins sustainably above 40% on an LTM basis. The operative word is sustainably, as we have proven in the past that we can achieve that level of profitability, but not as sustained as we'd like. The second North Star objective is to reach 60% adjusted cash gross profit margin on aggregates. We'll get there by pairing commercial excellence and operational excellence initiatives. Through standardization, best practice sharing, a sharp focus on continuous improvement, and together with value pricing, we have the self-help levers available to us to add considerable points of margin to our aggregates business over time. And finally, our third North Star objective embodies shifting the portfolio to being more materials-led. Going from 63% of adjusted EBITDA generated from materials in 2020 to 69% in year-to-date 2022 reflects the deliberate efforts to shed low-margin, low-growth, downstream businesses while bolstering our aggregates and cement lines. By the end of Horizon 2, our portfolio will generate over 75% of its EBITDA from aggregates and cement, and we are bullish that our public market valuations should reflect the higher margin business we retain. All in, these three metrics are commitments that we've made and are guideposts you can use to track our progress. Slide 7 contains our Elevate Summit strategic roadmap with our four priorities layered on top of our foundational and enabling capabilities. Let me take a moment to review how we're advancing sustainability and innovation in a meaningful way, and then highlight two recent portfolio moves that will make Summit even more materials-led. On slide eight, we detailed two noteworthy items that fortify Summit's reputation as a leader in social responsibility and a trusted innovation partner. First, we have partnered with the Minnesota DOT and the National Road Research Alliance Project on an innovative research project to develop and test the lowest carbon cement option for future transportation infrastructure. Our continental cement team produced a 20% Portland limestone cement, the lowest carbon PLC to date, as part of a research study to evaluate its performance characteristics to potentially provide the pathway to further reduce cement's carbon footprint by producing a PLC of the future. And the second item relevant to sustainability surrounds our environmental production declarations for our asphalt plants. In recent months, we've obtained EPDs for six of our plants, three in Texas, two in Colorado, and one Arkansas asphalt plant, and we've planted the rest of our permanent asphalt facilities in Texas completed by the end of the year. With Carly's leadership and exceptional engagement throughout the Summit business, we are taking a leading role on social responsibility, a commitment we've made to our stakeholders and the communities we serve. Moving to slide nine, where I'm excited to share two recent portfolio moves that further tilts the mix towards higher margin materials lines of business. The first is the sale of an asphalt and paving business in the east segment to a strong and capable local market partner. And consistent with our asset-light approach, we have entered into a long-term supply agreement with the buyer, thereby permitting our aggregates and ready-mix volumes to grow in the southeastern Kansas market. By selectively exiting downstream businesses for which there is a better owner, the lower resulting asset base can favorably enhance our ROIC, and we retain higher quality businesses that are creative to margins. This is the 11th no-regret divestiture as part of our Elevate Summit strategy, and with this sale, collective proceeds have topped $500 million, well in excess of the original target for $200 million. Selling these assets at over 10 times EBITDA demonstrates the sharp price discipline our team has employed, while also indicating that the assets we've retained, in our opinion, should be valued in excess of those we sold. The second portfolio move is the acquisition of SCI Materials, an aggregates-based business in the high-growth Florida market that was completed on October 14th. With SCI, Summit is acquiring an irreplaceable reserve, expanding our geographic footprint, and advancing our materials-first strategy. SCI materials will integrate with our Georgia Stone Products business and contribute to our e-segment. While relatively small in size, this acquisition can be a blueprint for how we are thinking about M&A. If you recall, last quarter we laid out a three-pronged criteria for Horizon 2 M&A that included richening the portfolio mix, focusing on bolt-ons, and entering or building strong footholds in high-growth strategic markets. The SEI acquisition clearly checks all three of these boxes. We are extremely pleased to add a high-value platform asset into the portfolio, and it's a clear signal that Summit is well-positioned to play offense in Horizon 2. Let me now turn it over to Brian for a detailed review of our financial performance. Brian.