Summit Materials, Inc.

hello we are now ready to begin the summit materials first quarter 2023 conference call i'll now hand the call over to andy larkin vice president of investor relations andy you may begin hello and welcome to the summit materials first quarter 2023 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 response 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 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 circle non-GAAP financial measures discussed in today's call in our press release. Today, I am joined by Summit CEO, Ann Noonan, and our new Chief Financial Officer, Scott Anderson. Ann will provide a brief business update, Scott will review our financial performance, and then we'll conclude our prepared remarks with our view on the path forward. After that, we will open the line for questions. 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 we have available. I'll now turn the call over to Anne.

Thanks, Andy, and hello to everyone joining today's call. Before I start, I wanted to publicly thank Brian Harris for his graciousness and generosity during this leadership transition. I also want to welcome Scott to these quarterly calls. As he settles into the CFO role, he is making an immediate and positive impact on our business, and we look forward to more fully introducing him to the investor community in the weeks and months that follow. Now, as you saw in our press release yesterday, Our record first quarter results clearly indicate that we have a head start to 2023 as we enter our prime construction season. This progress was not limited to just our financial results, but extended to our safety performance as well. Through March, our forward-looking metrics are flashing green, and most of our lagging metrics are trending in the right direction. Recordable incidents are down year on year, and we are leveraging new technologies to make continuous safety improvement. and we are tracking ahead of our 2023 goals. Our success, as always, will depend on our safety leadership across our footprint, and more importantly, the buy-in from all Summit employees. As we aspire towards a zero-harm culture, I'm confident our great people will spearhead those efforts and deliver ongoing successes on the safety front. Moving to slide four for a first-quarter financial review, where I'll highlight a few items, but ask Scott to cover our results in more detail. First and foremost, adjusted EBITDA of $41.2 million is a nearly 80% increase year-on-year and corresponds with a 420 basis point improvement to our adjusted EBITDA margins. Strong mid-teams are better pricing growth across all lines of business was the primary catalyst that drove record first quarter net revenue and our outstanding profit performance in the quarter. In fact, 20.6% organic aggregates pricing growth is the largest year-over-year quarterly growth rate in our history. Our team has flawlessly executed on our January 1st pricing actions in all markets. This, in combination with increased contribution from our operational centers of excellence, is fueling our margin recovery. Our fast start to the year, along with improved outlooks for demand and pricing, has prompted us to raise our adjusted EBITDA outlook for the full year. I'll go into more detail for you momentarily, but in short, and consistent with our playbook, we are controlling our controllables and well-positioned to deliver strong financial results amidst ongoing uncertainties in the marketplace. One major way that we're controlling what we can is on slide five, where we provided LIMPS into one of our unique self-help margin opportunities, our Aggregate Center of Excellence. If you recall, our North Star cash gross margin target for our ags business is 60% on a trailing 12-month basis. We closed last year at 48.5% and are intently focused on closing that gap in 2023. Here, our Center of Excellence, led by our East Region President, Bart Boyd, is holding multiple onsite continuous improvement events monthly. These events aim to diagnose sources of operational inefficiencies, design and implement customized corrective actions, and measure progress against clear objectives. This summit capability is rather new, yet we are already making significant progress. For one, we are identifying common themes across our quarries. These include modernizing long-term mine planning, focusing on yield optimization, conducting maintenance blitzes, de-bottlenecking plants, and better utilizing automation. By identifying common operational pain points across our footprint, we can lift and shift proven solutions to deliver tangible results more quickly. For the quarries that have recently undertaken these CI events, overall equipment effectiveness is up on average 7%, and tons per hour is up more than 9% versus baseline levels. And this has translated into approximately $3 million in productivity savings, helping to offset input cost inflation. Let's be clear, we are still in the early innings on our operational excellence journey, but we are organized and incentivized around this strategic imperative and very encouraged by the progress to date. And this progress is enterprise-wide and in every line of business. In cement, for example, we are in the process of installing a new innovative waste fuel technology in our Davenport facility. This FuelFlex system will be the first pre-commercial installation in the world and the first of its kind technology within the United States. Construction is currently underway and the equipment will be commissioned in early 2024. When complete, FuelFlex will allow Davenport to reduce its fossil fuel consumption by at least 50% and move Summit that much closer to achieving its carbon reduction commitment. At the same time, by replacing coal and pet coke with alternative fuels, we will drive significant cost savings for our business and increase our overall competitiveness in the marketplace. Projects like these are underway across our footprint and they are feeding our collective confidence that the unique self-help margin opportunities that we talk about are materializing. Our teams are working hard to gain ground operationally deliver substantive cost savings, and take strides towards our Elevate Summit EBITDA margin target of 30%. Before passing to Scott, let's look at our Elevate Summit scorecard on slide six. Leverage remains well ahead of the Elevate Summit targets, providing ample firepower to pursue portfolio-optimizing transactions. ROIC at 9.6% is up 50 basis points sequentially and up 120 basis points from year-ago levels, as our materials-led strategy coupled with a sharp focus on improving asset efficiency, has put the Elevate Summit ROIC target of at least 10% within reach. And finally, our first quarter boosted our trailing 12-month adjusted EBITDA margin to 22.8%, up 70 basis points sequentially and 30 basis points year on year. With each of these metrics either ahead of target or moving in the right direction, it supports the view that our strategy is working. we have transitioned towards a more materials-led portfolio with 71% of our trailing 12-month adjusted EBITDA generated by our upstream businesses. And where we choose to have a downstream presence, we have advantaged assets, leading market positions, and attractive profitability profiles. From continued and diligent execution of our four strategic pillars, market leadership, asset light, sustainability, and innovation, We are on a pathway towards a more economically durable and profitable organization. With that, let me hand it to Scott to review our financial performance. Scott.

Thank you, Anne, and let me start by saying how genuinely excited I am to be joining everyone here today. I know Anne has promoted a strong level of shareholder engagement and transparency, and my plan is to fully embrace that approach as we move forward. Let's turn now to slide eight to review business segment results for the quarter. In our west segment, which includes Salt Lake City, net revenue was negatively impacted by wet and cold conditions in Utah, as well as softer residential demand. These factors more than offset pricing acceleration across all lines of business and very strong volume growth in asphalt. Adjusted EBITDA was comparable to the prior year period as positive price cost offset lower volumes. Out in our east segment, net revenue was up 7.7% as increased greenfield contribution strong public activity in Kansas, and favorable weather in the southeast fueled 18.1% organic aggregates volume growth. Aggregates pricing momentum continued across each market, with strong double-digit gains in the Carolinas and Missouri, followed by high single-digit growth in all other markets. Volume and pricing growth, together with a benefit from 2022 divestitures, helped drive adjusted EBITDA up $10.7 million year-on-year to $18.9 million, and increased adjusted EBITDA margins by 850 basis points year over year. And while Q1 is traditionally a light volume quarter, I will say that we are pleased by the recent progress of our E segment and anticipate it being a major contributor towards achieving our growth and margin goals. Finally, on cement, our continental team is executing on multiple fronts, including value pricing, where our January 1st pricing action saw strong traction. Further growth was sourced from Green America Recycling, a key growth driver and margin enhancer for our cement business. These factors drove net revenue up more than 17% and increased adjusted EBITDA by 5 million in the quarter. Turning to slide nine for pricing by line of business, and the headline message from us remains the same. We are executing our pricing plan in all markets and all lines of business. Aggregates pricing in Q1 was an all-time summit high as 2022 carryover pricing combined with January 1st pricing actions to drive a 20.5% year-on-year increase. By market, notably, Texas registered the strongest pricing gains as the market moved on price in January of this year versus April in the prior year. Elsewhere, Utah also delivered aggregate pricing growth in excess of 20%. The time series pricing chart is especially useful in understanding our pricing cadence for this year as the pricing comps get incrementally more difficult in the back half. Nevertheless, we now expect aggregate pricing growth to approach that double-digit range for the full year. For cement, pricing sustained its momentum, increasing nearly $19 per ton or 14.8% year-on-year in the first quarter. We continue to face and therefore price through higher import costs, including kiln fuels. Ongoing inflation, together with sold-out supply conditions, have prompted a mid-year increase of $10 a ton. This pricing approach is consistent with our value pricing principles and reflects the value we bring to the market through the highest caliber product quality, customer service, and supply reliability. Downstream, passing along higher CMEK costs, ReadyMix prices increased by 15.2%, with both Houston and Salt Lake delivering mid-teens or better pricing gains relative to Q1 2022. So far, even with residential demand softening, our ReadyMix pricing has persisted supported by our go-to-market approach that emphasizes an enhanced customer experience as well as higher quality mixes for our customers. On asphalt, price grew 24.5% in Q1, the strongest growth rate in Summit's history and emblematic of strong demand backdrop we're seeing in our public end markets, especially in North Texas. Shifting to volumes on slide 10, where first quarter organic aggregates volumes were down 3.4%. a sequential improvement from second half 2022 run rate levels as volume growth in each of our east region markets mostly offset declines in our west region. Cement volumes were slightly down in Q1, which is traditionally our lightest volume quarter of the year and reflects, in part, lower import volumes versus the prior year. Ready Mix volumes declined 19.3% organically, only a modest rate of deterioration relative to what we witnessed in Q4 of 2022. We have seen more pressure in Salt Lake City, while Houston has held up relatively well and better than national trends. Asphalt, on the other hand, is beginning to feel the flow through from increased public activity, particularly in repair and rebuild work. Organic volumes were up 38.7%, a sharp reversal from prior trends. And remember, our largest asphalt concentration is in North Texas, where TxDOT funding and activity is robust and poised for continued growth. Turning now to gross margins on slide 11. While costs remain stubbornly elevated, the compounding impacts of our previous pricing actions along with operational improvements has set us on the path towards margin recovery and eventually sustainable expansion. As you can see, the first quarter was a second consecutive quarter of gross margin expansion, up approximately 280 basis points from the prior year, as well as an improvement in sequential growth. This is proof we are executing with more agility, and while market conditions remain dynamic, we have the capability to drive towards and consistently achieve that positive price-cost relationship. By line of business, aggregates gross margins buck the overall trend, declining to 35%. Here, we are still feeling the brunt of higher variable costs. Specifically, higher equipment rental, labor, as well as repair and maintenance costs remain the most elevated. Further impacts were from unfavorable geographic mix, as lower volumes from our high-margin west segment resulted in mixed headwinds in the quarter. For cement, cash gross profit margins were positive in Q1 at 9.6%, a first-quarter high watermark for our business. Gross margins were bolstered by a combination of factors including strong pricing growth, favorable year-on-year distribution costs, and a greater contribution from high-margin Green America recycling. As you know, we target sustainable cement EBITDA margins above 40% on a trailing 12-month basis, and we'll rely on gross margin expansion to provide the primary thrust for us to achieve that North Star cement target. First quarter product margins increased 80 basis points to 12.4%, driven by asphalt gross margins, which expanded significantly on both strong pricing growth that we mentioned earlier, as well as slight cost moderation relative to the prior year periods. ReadyMix gross margins were up on a per unit basis as price net of cost was positive, but when factoring in down volumes, ReadyMix gross margins were down modestly in Q1. Services margins increased to 10.2%, a 570 basis point improvement from Q1 2022, and the strongest first quarter gross margin performance since 2018. Zooming out for a moment to provide perspective on cost trends, if you recall from February, We said that one of the big swing factors that could move us towards either end of our guide was how costs trend in 2023. Recognizing that we are still early, we have not seen a material or wholesale easing of our input costs. Yes, certain buckets like diesel and liquid asphalt have come off peak levels and that the rate of inflation may have moderated, but we still believe our mid to high single digit cost inflation estimate is reasonable and appropriate for 2023. Until we see enough evidence, we believe the hire-for-longer cost mentality reinforces our managerial approach to control our controllables and, more specifically, execute on our commercial and operational excellence plans. I'll wrap up on slide 12, where we reported Q1 adjusted EBITDA margin of 420 basis points year-on-year to 10.1%, driven primarily by cash gross margin growth as well as tight management of our discretionary spend. Adjusted diluted net income and adjusted diluted earnings per share improvement primarily reflects strong operating results partially offset by higher interest expense versus the year-ago period. And finally, for the purposes of calculating adjusted diluted earnings per share, please use a share count of 119.9 million, which includes 118.6 million Class A shares and 1.3 million LP units. With that, I'll now pass it back to Ann for a look ahead.

Thank you, Scott. As you can see on slide 14, yesterday we upgraded our 2023 adjusted EBITDA guide by increasing each end of the range by $10 million and consequently increasing the midpoint to $510 million. Now, the midpoint represents roughly mid-single-digit year-on-year growth on a pro forma basis. Our forecast for non-operating items, as well as G&A, have not changed relative to our previous calls. nor has our expectations for capex changed versus what we discussed in February. What has changed, therefore, and where we have become incrementally more positive, is our viewpoint on operating conditions, particularly residential demand. Slide 15 details our current outlook assumptions. If you'll allow me, I'd like to take each one by one, starting first with private demand. Our new outlook calls for residential volumes to be down approximately 25% this year, versus down at least 30% in our previous guidance. This view brings us more in line with the consensus forecast from major industry groups and differs from our previous view in two ways. First, we're now incorporating a more resilient outlook for Houston, one of our largest residential markets. Here, permit data reveals a shallower trough to the cycle and a local economy that should support a quicker recovery and single family rebound. In fact, some home builders, saw record traffic in March. We're more confident that Houston will fare much better than the national trend. By contrast, Salt Lake City is still seeing deterioration in permit activity, so we factored in a comparatively harder landing and a more delayed recovery for Salt Lake City. In reality, our demand visibility in that market has been impaired by adverse weather conditions. With 45 days of precipitation and more first quarter accumulation, it's very difficult to reliably determine what is weather-related versus truly demand-driven impacts affecting Salt Lake City. The second positive factor now incorporated into our outlook is not specific to any one market, but is trend data observed over the course of the year. From our point of view and what's been corroborated by many of our customers is that the housing market is experiencing very strong demand elasticity. Buyers sitting on the sidelines are quickly reacting to moderately lower interest rates. Based on National Association of Home Builders data, each 25 basis points decline in 30-year mortgage rates between 6% and 7% could price in and increment 1.3 million households into the home buying market. This, together with the lock-in effect and record low levels of housing inventory, are encouraging signs that single-family construction activity could experience a more swift and more dramatic bounce back either later this year or in 2024. Partially offsetting this optimism is a somewhat more cautious view on non-residential, due exclusively to potential ramifications from tightening credit standards. While it's too early to say what this will mean for our business with any level of specificity, so far we have not seen any impact. Our working assumption is that any impact is likely to be rather insignificant for 2023 and is more likely a 2024 or beyond event. If we were to feel it, it would likely be in light non-residential construction, particularly in lodging, office, and smaller retail build-out. Fortunately, our 2023 outlook doesn't depend on growth from light non-res verticals, and we don't believe these tighter conditions will materially impact the non-res growth verticals on the heavy non-res side. In fact, the momentum on the heavy non-res is picking up with projects in our Kansas and Missouri markets either underway or ready to break ground. Simply put, we're monitoring and assessing the risk from bank failures, but we have not changed our overall expectations for the non-residential end market in 2023. Moving on to public demand, where we are still calling for mid-single-digit volume growth in 2023. However, we are incrementally more positive on that end market, thanks to letting activity that continues to grow and what we expect may be faster flow through of IIJ dollars to the type of work that benefits Summit Materials. While the data is still early, nearly half of the projects funded by IIJA are being devoted to repair and reconstruction work, a summit specialty. If this trend persists, which we think it should, it would mean faster acceleration and realization of IIJA dollars to our business. Let me wrap up our outlook discussion with the price-cost dynamic. As Scott mentioned earlier, higher costs from things like equipment rentals, labor, and kiln fuels are still flowing through the P&L. which we contemplated in our revised outlook today. The reality is we must adopt a higher for longer cost mentality, so we take all the right steps to mitigate their impact. To that end, we are moving forward with a mid-year price increase in cement, effective July 1st, and our value pricing plan includes multiple price increases in each of our lines of business, as warranted by local market conditions and intentionally designed to maintain and extend our positive price net of cost relationships. To sum it up, and I hope what comes across, is that we are incrementally more positive on the year ahead. Our bolstered confidence is supported by a fast start to the year, an improved outlook for demand, strong year-to-go pricing plans, an intense focus on operational excellence initiatives, as well as project-specific margin-enhancing activities. In a market that we acknowledge still has plenty of uncertainties, we will emphasize execution. Our teams have a proven track record of managing through difficult times and we are collectively driven to deliver on or beat our 2023 commitments. I'll close our remarks on slide 16 by regrounding everyone in our Elevate strategy. Externally, we talk a lot about market dynamics and recent data points, but internally, we don't lose sight of our strategic progress, advancing each priority and strengthening each of our enabling capabilities. We are confident that strategic execution, inclusive of portfolio optimization, will over time translate to higher growth and improved profitability. That in turn should deliver superior shareholder returns and be rewarded with a more premium market valuation. We know we are well on our way towards that future. We have a materials-oriented portfolio, advantage downstream assets, a fortified balance sheet, and a high-performance organization capable of powering our progress. Lastly, before taking your questions, I want to extend my gratitude. to my summit colleagues throughout the country and in British Columbia for a strong start, both financially and on our safety progress. The race is not yet won, but we certainly have a substantial head start. With that, I'll now ask the operator to open the lines for Q&A.

At this time, if you would like to ask a question, please press star followed by the number one on your telephone keypad. If you would like to withdraw the question, again, press star one. In the interest of time, please limit yourself to one question. Thank you. Your first question is from the line of Stanley Elliott with Stiefel. Your line is open.

Good morning, everyone. Actually, good afternoon, I guess. Congratulations on the strong start to the year.

Good morning.

And you mentioned kind of on the non-risk side, that's something we get a lot of questions about. Could you maybe talk about your business between light and heavy and then Maybe think about how this cycle is different in terms of just the visibility that you may or may not have on some of these larger projects out there.

Yes, Stanley. So if we think about our business between light and heavy, roughly we're split 50-50. I would say the one divergent from that would be cement where we're more heavily indexed towards the heavy side. So on the heavy side, we're seeing the same trends we talked about last quarter. A lot of projects in the onshoring of manufacturing, whether it's semiconductor or electric EV battery factories, but also the energy verticals continue to be very strong for us. So we're really, we've seen substantial tailwinds on that. We've got a very rich pipeline of projects on the heavy non-residential side. Light, as we mentioned in our prepared remarks, we did not put much in our guide, nor is there in the revised guide. And that was basically driven by, you know, interest rates, slow down in residential, and, you know, regional bank complications may occur, but we don't see that impacting us in 23. That may be something that we'll look for in 24. So overall, I would sum up a very rich pipeline of projects right now, whether it varies from, you know, the Panasonic project in Kansas City to warehousing along our east region. We're seeing really a very robust set of projects that gives us a lot of confidence for non-res in the outlook you see today.

That's great. Thanks so much. Best of luck.

Thanks, David.

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

Good morning, everyone. Hope you're all doing well. Hey, Trey. Hey, Anne. So first off, you know, higher costs still flowing through the P&L. You talked about that. And, you know, you're raising prices, you know, there, especially, I guess, in aggregates is the one I'm specifically talking about here. So are you contemplating mid-year price actions and aggregates? Sorry if I missed that, you know, to help with this, you know, these higher costs. And how should we be thinking about aggregates margins and the outlook there for the balance of the year?

Okay. So on your right, we are adopting on the cost a higher for longer mentality. And we saw that in the P&L and Q1 trade. We have been raising prices. The January price increases were very strong across the board. We went across every line of business, and the execution was really flawless, I would have to say, across our business. We are planning, as we talked about in cement, mid-year price increases of $10 per ton. And then across the rest of the business, we have price increases planned from April through the end of the year, multiple price increases. So it's not just a July 1st price increase. a little bit more variance there by market and by customer and region and geography. So, when we think about, think about we're more positive on price momentum and we plan to continue with that price as we go through. Now, with respect to aggregates margins, clearly in Scott's comments, he talked about the fact that in Q1 they were lower. What drove that was primarily a mixed effect. Salt Lake City has had, as I mentioned in my comments, 45 days of rain and record accumulation. That particular market is 60% gross margin, and we were down 40% in volume. So as you think about the impact of aggregates margins in Q1, while we were disappointed, it's very clear where it came from. But as we go through the year, now we've got this price momentum that we're looking forward to. We've got the mix now adjusting because I'm happy to report Salt Lake City is now all of two weeks back in production. And we've got our operational excellence. So as we go through the year, expect us to sequentially improve that ag margin and continue on our path to our 60% adjusted cash gross profit margin as our north star over time.

Great. Thanks, Anne. And congrats on the quarter and good luck for the rest of the year.

Thank you, Trey.

Your next question is from the line of Keith Hughes with Truist. Your line is open.

Thank you. Just building on the last question with the West and the weather, are you set up to get back to a normal quarter there in the second quarter? Or was some of the rain that disrupts in April that's going to play a role in whatever you report in the second quarter result?

Yeah. I mean, in reality, Keith, we have literally been running for two weeks at Salt Lake City. We've had that much rain and accumulation. So we've lost some days. I will say we've got one of our highest executing teams there, and they're extremely focused on continued price momentum and operational excellence to continue the growth. And we have, you know, what I've said in my prepared comments is true. We've kept our view on Salt Lake City for residential quite bearish because we can't really see through the weather and demand right now. As we get through a few more weeks and into Q2, we'll be able to give you more guidance in that direction.

And are your contractor customers, are they able to get back to working, or is there still a dry-out effect that's going to have to go on before you get back to a normal run rate?

There's still some flooding and dry-out effects going on, but everyone's starting to get back to work in Salt Lake.

Okay, great. Thank you very much.

Thank you, Keith.

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

hey thank you um hey ann it seems just from the commentary that the contributions of your your new greenfield investments were were pretty relevant in the east this quarter obviously you had markets conducive with uh good demand but you know i guess we assume that continues going forward i would think these continue to drive some positive contributions for you this year i i guess i'm just wondering how all of this informs you about the capital allocation priorities right now towards these greenfield operations over M&A at the end of the day?

Yeah, absolutely. So if you look in our guide for the year, greenfields, we have been investing, and we did call it out last quarter, that you can count on about $5 million per year EBITDA, incremental EBITDA, over the next three years. And we have that built into our guide, so we're pretty confident on that. And we are starting to see the impact of Jefferson, Carnesville coming out in a high margin, high growth. So it's very accretive to our margins. Now from a capital allocation perspective, really our priorities have not changed. We're very focused organically on really expanding our margins, whether it's through capital improvement projects such as our Davenport Dome, our Green America recycling expansion. So we've got a lot of very good organic growth opportunities. But then we are also extremely focused on greenfield investments, which we basically term as organic growth in our regard. So we'll continue to invest over time. And then after that, think about us as a growth story. It's M&A. We've got a very rich pipeline. And I'm very happy to report that we have a very strong balance sheet, low leverage, and a great position to buy through the cycle. So think of us as a growth story and our capital allocations being very focused. We'll remain very disciplined as we've talked to.

our strategy over time. Very good. Thank you. Thank you.

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

Hey, guys. Great quarter. Hey, Anne, what's your expectation for ready mix pricing? That tends to be a business line that's a little more sensitive to the volume component.

Yeah, you know, ReadyMix, our teams have done a great job. Frankly, they have all the last year through all these high cement increases, they've expanded their margins. And it's because we have our center of excellence really focused on value pricing, adding value for our customers and quality and service. Our expectations moving forward is that we get our pass-through of our cement and we add, you know, incremental margin. Now, as we look at where our markets are overall, we've said that residential will be down 25%. In Q1, it was down 19%, so we see Salt Lake going down a little further. I believe that pricing will hold for a couple of reasons. One, our cement pricing maintains very high. Cement is very tight in all markets, so we're going to have to pass that along. That's going to support that. I also think our team's doing a great job with respect to value pricing. And third, I believe we're in very strong downstream markets. We've exited all of the markets that were weak for us, and we have leading positions. So we remain pretty bullish on the rating mix pricing, and that was demonstrated in our Q1 performance.

Good color. Thanks, Anne. Thank you.

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

Hey, guys. Strong start to the year. And Scott, looking forward to working with you going forward. My question is on cement. If I look at cement prices sequentially, it was up only about $6 a ton. I don't know if there was any noise with mix or timing. Just wanted a little more color on how that price increase kind of went through. Margins were actually quite good, and I just wanted to get a little more color if you saw the step up in energy that you've talked about, or was the big contribution coming from better performance out of Green America?

Yeah, so it's all the above still. So really just let me address the pricing first of all. So the Q4 to Q1 sequential pricing, we did a lot of imports in Q4. So that put our pricing up to about $147 per ton. And so if you just look at the ASP, it looks like we got to your point about $6 a ton. We actually got $18 a ton in our base business. So the imports, as you know, are higher price, lower margin. But from a dollar-even-dollar perspective, you saw that flow through in our margins, both from the strong pricing in our base business and our strong Green America recycling operations and operational excellence was also very strong. So the cement business is operating very well, and we're seeing that price go through to the margins.

And you saw the step up in energy because I know the hedges kind of roll off. Yes, absolutely.

The energy continues. Yeah, yeah, you should include that in your guide. The step up in energy is absolutely there, and we continue to go mid-year because we continue to see cost escalation in our cement business, and so we've gone for a $10 per ton mid-year price increase, and those costs have not subsided at all, and that energy will persist over time.

Okay, thank you.

Thanks, Bill.

Your next question comes from Dylan Cumming with Morgan Stanley. Your line is open.

Hey, good afternoon. Thanks for the question. Actually, I wanted to build on that last one, Ann. I think you kind of mentioned in the prepared remarks you were still kind of preparing for a, you know, higher for longer, for lack of a better term, cost environment. I think, you know, I know that there are some hedging structures that limit the direct benefit to you for, you know, I guess a couple of quarters or so. But just thinking more structurally, diesel prices follow the move we've had or seen, I guess, in, you know, spot crude more recently. If you look back, it should be more of a tailwind. I feel like you've heard commentary from your peers about labor and freight costs getting better. you know, are you seeing any evidence of cost inflation that could make the margin outlook a bit more robust from here, or, you know, is there any, like, limiting factor that would kind of flow through to you guys?

I'm going to let Scott bring you through some of the specifics around our cost structure and what we've assumed in our guide, and that might help answer your question, Dylan.

Hi, Dylan. When you think about cost inflation, you know, you will see your guide at mid to high single digits, and I think that stands for us When we look at diesel fuel, for example, we're hedged at 50%, and our hedging rate is really just a little bit higher than last year's average. However, we feel like the other half of that, we can get a spot pricing, which right now is a little more favorable. So, it should balance out. But when you look at labor costs, we're still in that mid to upper digits, single digits. Our repair and maintenance, as you saw in the first quarter in the ags business, definitely elevated on the repair and maintenance side, which is driving some of the rental costs as well. I am on Ann's point about operational excellence, though. I am excited about the view going forward with our COEs and the performance that they're going to drive and the productivity gains that we're already seeing in the business from those, but not ready to change the cost inflation ratio.

Okay, that's very helpful. Thank you.

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

Good morning. I think you pointed to infrastructure and markets up mid-single digits this year, and I was just wondering if it's possible to talk about maybe the cadence of when incremental IIJA spending may flow through to your volumes? You know, is there a quarter where you expect that to really step up or, you know, do you see any in one queue? And, you know, should we expect that to kind of accelerate each quarter of the year and further into 24 or kind of any limiters around contractor availability? Just any additional color you can give us on IIJ flow through.

Yeah, I would say, you know, overall, very positive on our state's funding, just as a base of funding across all of our states. We remain very positive on that, but we are starting to see the IIJ flow through. And if you look at ARPA's data, they have estimated that 50% of those funds are going to repair and rebuild, which is Summit's specialty, right? So, we are starting to see those, and we saw that in our Q1 volumes, frankly. The other thing I would point you to is we look at our backlogs. So our backlogs with respect to our public ed market, if we look at asphalt, it's at 21%, 23%, and our construction's at 53%. Our aggregates are up 20%. So our backlogs have improved year on year. And then specific to our North Texas market, in Q1, That is 50% of our public revenue, and it was up 40% in activity. So, with respect to public funding, so we're starting to see those dollars fall through and I would expect more as we go through the second half of the year. And then, as we go into 2024, we've talked before that. You know, the 1st, year of funding is about 25% federal funding. The 2nd is 40%. It won't be an exact equation, but these projects tend to be 9 to 12 months in duration. with Summit more balanced towards repair and rebuild at the front end. So we are starting to see the dollars flow through. We're very positive. We're seeing it in our backlogs. We're seeing it in actual numbers on our asphalt volumes. So that is an area where we feel pretty good about what's in the guide right now.

Okay. That's very helpful. I'll turn it over.

Your next question comes from David McGregor with Longbow Research. Your line is open.

Yes, good afternoon, everyone, and congratulations on the really strong results. Nice to see. I wanted to dig in on cement a little bit, and you noted in your press release that your import times were down, and then in the previous question you responded, they were down from 4Q into 1Q. Is that weather-related, or was that sort of a decision based on market economics? And just maybe as part of that, talk about how the landed cost of imports may have changed versus the fourth quarter, and just maybe where you think terminal inventories are right now.

Yeah, I won't give you specific of terminal inventories, but I will say we were incrementally down in 1Q versus 4Q was a high import quarter for us. We were down in 1Q and a lot of that was driven, frankly, by what we had in our own domestic inventories and volumes and how we were running our plants. As you know, the margin is much lower on imports. So as we're pushing towards 40% EBITDA margins and trying to grow our dollars EBITDA, it's always better for us to use our domestically produced material. And we also had material where it needed to be in one queue. So with the import, the DAB import facility, et cetera, we were in good shape with respect to our cement. Now, the landed cost of imports, we're still seeing quite high. And with Turkish imports down a little bit, We're looking at multiple sources of imports around Vietnam, Indonesia, et cetera. So we don't expect imports to be that high this year. We will, as always, prioritize our domestic production, and we'll augment with imports to meet our customers' needs. But we're always going to drive more towards our domestically produced product. Hopefully that answers your question, David.

Yeah, it does. Thanks for the detail. Congratulations on the results.

Your next question comes from the line of Catherine Thompson with the Thompson Research Group. Your line is open.

Hi, thank you for taking my question, Dave. Just stepping back and appreciated the color that you gave on your cement ops and all the progress that you're making there. Last year as an industry and actually for the previous kind of year and a half, two years, there were just all the plants across the U.S. were working so hard and imports were also constrained somewhat that you were just seeing extended outages and candidly, you know, extreme tightness and demand available to meet demand. Given where we are today, looking at your current capacity, do you feel like your plants are able to meet the demand for the year? And how do you think about holistically looking at the industry, not just for this year, but over the next couple of years, how do you expect the ability for the industry as a whole to meet demand and what that means for pricing? Thank you.

Thanks, Catherine. So, you know, let me address first of all, yes, cement is extremely tight across all markets. And as you know, we're both a producer and a buyer of cement, so we see that intimately on both ends. I will answer first of all, from our current capacity, our plants are running extremely well. We went through our annual turnaround. We came back up from that. We're very focused on operational excellence, expanded our guard capacity. Our PLC is running at 100% across both our plants. So that's giving us some extra capacity and some little bit more flex that we had past year. So operating very tight and will augment with imports as needed. Now, with respect to the industry, I believe that overall the industry is going to be a net importer of cement, as it always has been. But I do think it's going to be very tight for multiple years here, and that's going to be driven heavily by non-residential, by public, and by residential will rebound. And as we said earlier, we're more positive on residential than we have been. So all three end markets are going to be strong, and cement will be tight over that time frame. So our planning mode is to continue to manage our uptime, continue to put our PLC conversion in, expansion of Green America, and expand our Davenport flex fuel as we move forward.

Great. Thanks. Thanks, Catherine.

Your next question comes from the line of Mike Dahl with RBC Capital Markets. Your line is open.

Hi, thanks for all the details so far. I guess just a quick clarification. And in the new guidance, you know, you've obviously talked multiple times here on the call about the different price increases through the year. Just as a point of clarification, are all these price increases and the associated costs that you expect currently embedded within the updated guide? Or how should we think about

um pricing actions in the second half with respect to what's what's in guide yes so what's in guide is as you think about overall we have high single digit price increases and that's our january price increases and really what drives the pricing in that is if you think about aggregates in the past we've said high single digit i would call us bumping up on double digits percentages as we go throughout the year Samantha, we talked about the $10 per ton. What is not in the guide is multiple more price increases as we go out throughout the year. So very confident on the January, what we see in front of us. But we are also planning with that price momentum and what we see on demand at multiple more price increases. So think about more incremental positive. And we'll update you that as we get through our prime season between May and October.

We'll see how much more price we can actually build in as we go through it. Great, thank you. Thanks, Mike.

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

Yes, hi. Good morning, good afternoon. Anne's gone handy. Nice quarter. Anne, I wonder if we could just pull a little bit on your comments about weather impact in the first quarter and volumes were still pretty resilient. So I'm wondering based on the weather comments and normal seasonality. Does that, do you suggest volumes could actually be up slightly year over year in the second quarter? Curious what the demand trends look like. And, you know, similar context, given the margin performance of the quarter, applying normal seasonality to it would get you to record 2Q EBITDA margins for summit with a three handle in it in the second quarter. And I just want to, make sure I understand the moving pieces around what seasonality might look like this year versus a typical year. Thanks.

Yeah, so let me talk about the volumes, first of all, with respect to Q1 and the rest and the whole year. And then I'm going to let Scott kind of talk you through the margin cadence, what makes sense. So with respect to the first quarter, very odd quarter, we had very strong in our all-season markets. So our central and our south, our volumes were very robust. And, you know, our cement was as anticipated. Our volumes were up in asphalt. Where we were down in volumes was our highest margin park in Salt Lake City. So to your point, Gerry, we did surprisingly well on volumes and just think about how good the quarter could have been if Salt Lake City was actually operating. So that's why we are confident we will improve ag's margins sequentially over the remainder of the year as Salt Lake City gets up and running. And we get the compounding effect of the price increase that they were very strong across the board on executing. So volume wise on a full year basis, we are calling for it to be down across all product lines, mid single digit. That is different from what we had in our last guide, which was mid to high single digit. That's largely driven by residential, that difference that we talked about in Houston. and staying bearish on Salt Lake City. Now, if Salt Lake City comes in better, there could be some upside to our guide with respect to that, just like we talked about pricing. Scott, how about you cover for Jerry the margin cadence throughout the quarters?

Yeah, I think you kind of picked up on it, Jerry. When you think about first half comps, very favorable for us for margin expansion, especially once we get out from under the snow in Utah and they start contributing. And then as you move through the year, Jerry, I would say that the comps get more difficult. If you recall, the last half of last year, we really started accelerating our pricing. And so that'll make the comp a little more difficult in the back half of the year, but really excited, you know, about what the pricing's doing this year. And we should see that margin expansion you're talking about.

Yeah, Jerry, I'll just add to that. Overall, our margins were, as we said in our last guide, that we were going to have a floor of you know, back to 2020 levels, which was 22.6. Obviously, we started in Q1 at 22.8, which was a record for us. Q1 does not make a year, but we are more positive on price. We're more positive on residential volume. And then as we go throughout the year, we'll update you on margins because we'll see how Salt Lake picks up and how our cost position works out over time. And then we'll give you a better guide on margins overall.

Well done. Thank you.

Your next question is from the line of Garrick Schmois with Loop Capital Markets. Your line is open.

Oh, hi. Thanks. I wanted to ask on cement and just the improved performance out of Green America. Is it possible to indicate how much profitability that added in the quarter? Is it at full capacity at this point? And what could that mean for the rest of the year?

Well, CEMENT will add, we had 9 million last year of contribution from EBITDA and we'll add another 4 million in 2023 with our expansion. So, the one thing about CEMENT that, you know, if you just think about it, GAR is 25 million of revenue and you have 14 million of EBITDA built into the 2023 guide. So, that's how we always talk about it. GAR is being very margin accretive. So the team's doing a great job on really executing on this, so I feel pretty confident we'll deliver that as we go through 2023. Great, thank you.

That is all the time we have for today's questions. I will now turn the call over to Ann Noonan for closing remarks.

Thank you. 2023 is clearly off to a strong start for our business. We're ahead of the original plan and we're more encouraged by trends in the operating environment as we enter into our prime construction season. Our more positive outlook and raised guide incorporates a better outlook for residential demand, stronger year-to-go pricing plans, and the self-help margin opportunities that are being actioned across our business. The environment will remain dynamic and we, as an organization, must meet the moment with agility and our own energy. have plenty of work ahead of us but our team is motivated by and focused on our strategic progress and delivering our 2023 commitments as always we thank you for your continued support for summit materials and we hope you have a nice day ladies and gentlemen thank you for participating this concludes today's conference call you may now