Summit Materials, Inc.
Q4 2020 Earnings Call Transcript

Published: 24 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing-by and welcome to the Summit Materials Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised, that today’s conference is being recorded.

[Karli Anderson:]

Welcome to Summit Materials fourth quarter and full year 2020 results conference call. We issued a press release yesterday afternoon, detailing our financial and operating results. This call is accompanied by our investor presentation and updated supplemental workbook, highlighting key financial and operating data, all of which are posted on the Investors section of our website. Management's commentary and responses to questions on today's call may include forward-looking statements which, by their nature, are uncertain and outside of Summit Materials' control. Although, these forward-looking statements are based on management's current expectations and beliefs, actual results may 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 as supplemented in our quarterly report on Form 10-Q for the first quarter of 2020, each of which is filed with the SEC. You can find reconciliations of the historical non-GAAP financial measures discussed in today's call in our press release. Today's call will begin with a business update from our CEO, Anne Noonan; then our CFO, Brian Harris, will provide a financial review, and Anne will provide concluding remarks. We will then 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.

[Anne Noonan:]

Good morning, everyone, and thank you for joining our fourth quarter and full year 2020 earnings call. Before we begin talking about our operating and financial results, consistent with our normal practices at Summit, I would like to start by providing an update on safety. Safety is the single most important core value-driving the daily activities of all Summit employees. Enhanced safety and distancing protocols are still in place throughout the organization in response to COVID-19. Ours is an essential business and we take that responsibility seriously. We continue to work towards a zero incident safety culture. Our over 6,000 dedicated employees deserve recognition for their success in 2020, as we improved performance in lost time and recordable incident rates relative to 2019. We'll begin on slide three of the presentation, with an overview of our fourth quarter performance. Summit delivered a strong finish to the year as immigration trends continues to save the world and exurb in residential construction.

[Brian Harris:]

Thank you, Anne. On slide nine, we provided our net revenue bridge comparing Q4 2020 to Q4 2019. Net revenue increased 13% to $571.9 million, which is a record for our fourth quarter. Our West segment led the way, contributing an incremental, $48.7 million organic net revenue on higher aggregates and ready mix volumes, particularly in Utah and from Texas. We also benefited from an incremental $14.5 million in revenue associated with acquisitions of operations in Texas and British Columbia that closed in the third quarter. Our East segment's net revenue was relatively flat for the regions Anne stated in her earlier remarks. Our Cement segment's net revenue was up $2.3 million in Q4, 2020 relative to the prior year quarter as demand began to recover in some of its markets. On slide 10, we've provided our net revenue bridge, comparing full year 2020 to 2019. Net revenue increased 5.1% to a new all-time high of $2.1 billion. Net revenue benefited from increases in volumes, as well as acquisition-related growth.

[Anne Noonan:]

Thanks, Brian. I'll conclude my prepared remarks with the management outlook on slide 19. We currently expect 2021 adjusted EBITDA will be in the range of $490 million to $520 million. At its midpoint, this would be an increase of about 5% over 2020. We expect to spend $200 million to $220 million on CapEx, of which $25 million to $35 million will be related to Greenfields. The assumptions underpinning that outlook includes low to middle single-digit pricing and low single-digit volume increases in most lines of business, as asphalt volume and pricing remaining relatively flat after a very strong 2020. Currently we plan to hedge about half of our 2021 diesel spend, but we'll adjust should prices show potential to escalate more rapidly. The outlook for Summit materials is bright, and we are beginning the year from a position of strength. I want to thank our dedicated employees for working through a pandemic to improve safety performance and achieved record net revenue, net income and adjusted EBITDA in 2020. I've now got one full quarter in as CEO. And I'm very impressed by the quality of this company, our excellent customer relationships, localized strength, enthusiastic safety culture and leading positions in attractive market place for growth. We produce materials that are foundational to the comforts of life that are now more important than ever, such as homes, schools and roads. As we look to the future, we are very encouraged by the results of our strategic review and look forward to sharing our plans for the next chapter of growth and value creation at Summit at our upcoming virtual investor event, on Tuesday, March 16th. With that, I'd like to turn it over to the operator for questions. Operator?

[Question-and:]

[Operator:]

Your first question comes from the line of Stanley Elliott with Stifel.

[Stanley Elliott:]

Hi. Good morning, everyone. Thank you all for taking the question. We think about the guidance in the coming year, two things. One, when does the 53rd week impact for the extra week impact on a quarterly basis? And then two, as we're building up the 5% growth, it almost seems that if we get some of the recycling back, and then maybe a wind farm, whatever, we're already to the high-end of that guidance. I would love to just hear you frame that a little bit more on the cadence?

[Anne Noonan:]

Okay. The 53-week impact was in October. If we look at the cadence of growth here on the low and high-end, I'll just give you some guiding points on it, Stanley. So on the low-end, we -- as Brian correctly talked about, we're 50% hedged on diesel. Obviously, if that goes up, that could put us to the low end of our guidance. We have a Greenfield that's ramping up in the second half of the year. Right now, we're well on track to be -- to have that, but things can happen, so that would be the low end of the guidance. Non-res, we called out some uncertainty because it tends to be lumpy. In our prepared remarks, we talked about wind farms contributing $5 million of EBITDA last year. And so, we're not sure that's going to repeat this year because the business is lumpy. The Green America recycling right now is scheduled to come online fully sometime in Q2, but we are waiting one point of permission there, working closely with our regulators. So they're all, I would say, on the low-end of the range. On the high-end, obviously, any more pickup in volume and price would get us there. And as we had this year, some extra days, weather would help us, and residential continues to be very strong for us as we go through it, particularly in Utah and Texas. And the GAR recovery, we believe that we will catch up on that full year, and we have a small expansion that we're already putting in place as well.

[Operator:]

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

[Phil Ng:]

Hey, guys. The low single-digit bond growth for aggregates for 2021, certainly better than many of us was fearing just a quarter ago. Can you kind of give us a little more color on how to think about the shape of the year when those trends kind of improve? And just any color you can provide on bidding activity for public and the non-res added?

[Anne Noonan:]

Okay. So I would say, when you look at our business, Phil, we actually are predicting they pretty steady. So our residential is at the same pace it was last year, so we expect that to draw through aggs into ready-mix, same strength in Texas, same strength in Utah. Our Kansas bidding has started from a public perspective. And remember, we do more repair and rebuild, so you're not going to see the big projects come in for us. As we go throughout the year, the one thing I will call out that is a second half impact as we bring that greenfield on in Georgia, and that's about $5 million of impact from our greenfields at that time. But I would look at us more steady throughout the year than having some big weighting in the second half.

[Operator:]

Your next question comes from the line of Kathryn Thompson with Thompson Research.

[Kathryn Thompson:]

Okay. Thank you for taking my question today. And you may address some of this with your Investor Day, but really, Ben and the chair for the value pediment to review the assets. What has or hasn't changed in terms of priorities for growth and/or overall company focuses to go forward? And along with that, your aggregates is a bit better -- this quarter versus expectations given your comp. Just clarifying how much of that is out of weather versus catch-up? Thank you.

[Anne Noonan:]

Okay. I think I got the second half of your question, Kathryn, but if I haven't, I'll start with our portfolio overview. Clearly, we're going to go into that in a lot more detail when we get into March 16, so I'll kind of hold on getting any kind of specifics on that. I will say that our focus on ROIC has already spread throughout the organization. We're seeing our team asks the right kind of questions about capital allocation coming up with ideas, how we improve that, so I've been extremely encouraged. So when I think the change and how things have changed for us. That's one that we’re already seeing play-out for our regional presidents and their teams. We will talk more about our growth when we get there. If I got the second part of your question, was around agg pricing, Kathryn? Okay. I’ll address. aggs pricing, we talked about the three reasons for the change in our pricing, let me give you a little bit more color around the Multisources. So as we said, we went with two price increases. We feel going into 2021, we're very strong now on pricing. The team did a really good job of putting price increases in. I will say, if you look at our organic pricing on the West segment, we were actually up 2.3%. If you include the acquisitions, that brought us down to 1.9. And with those, as Brian correctly pointed out earlier, we actually increased our volume by -- from acquisitions in our West segment. So we continue to see the price of the levy will go away after this quarter. This is the last time, I hope we'll be talking about bad comps year-on-year. And then the other part around pricing was, we just made good decisions around our business. We ran for cash, because we had to clear out some inventory, and it was base material that was just lower margin, but it improved our overall dollars EBITDA and our cash. And so net, we had the volume growth in the quarter, but unfortunately, it was just from lower price material. But it was the right thing to do to set us up for success in 2021.

[Operator:]

Your next question comes from the line of Courtney Yakavonis with Morgan Stanley.

[Courtney Yakavonis:]

Hi. Good morning, guys. Thanks for the question. Maybe you can just first just comment on the -- or the 53rd week again in October. Did that impact all of your divisions fairly equally? Or did it show up anymore in a specific product line than any other? And then maybe just specifically on Cement, if you can just help us think through how we should be thinking about volume versus pricing growth there next year as well as the margins, given that we'll also be some the GAR come back online. Just help us think through the different moving parts to that segment next year?

[Anne Noonan:]

I'll let Brian talk about the 53rd week, because that's an accounting thing that impacted us.

[Brian Harris:]

Yes. The 53rd week, Courtney, thanks for your question. Came in October. So October and the fourth quarter was actually a 14-week period instead of a normal 13 week. It was pretty evenly spread across the whole business, coming in October, which was also -- it was a dry month and a dry quarter for us. Actually, I think most of the construction industry benefited from a mild kind of start to the winter there, and that helped us throughout the fourth quarter.

[Anne Noonan:]

And then Courtney, on your question on Cement, let me just kind of bring you through that, so we've talked about the Green America Recycling coming back on. That will add $14 million of impact year-over-year. We have, through some of our commercial and operational excellence efforts, gone out and secured volume. Volume is just stronger in cement year-over-year, so we feel it's very constructive for pricing. Coming into the year, we've announced a $6 price increase, and the teams out there, trying to actively get that in place right now. So I would say we're encouraged by cement and the momentum we got in the fourth quarter here, but the team has done some self-help things too. In improving our commercial excellence and doing some supply chain initiatives. And then with the Green America coming back on, obviously, that's our biggest movement year-over-year.

[Courtney Yakavonis:]

Okay. Great. Thank you.

[Operator:]

Your next question comes from the line of Paul Roger with Exane BNP Paribas.

[Paul Roger:]

Hi. Good afternoon, everybody. So yes, can we just talk a little bit more about the cost inflation headwinds? I mean, obviously, we are seeing inflation from hydrocarbon, insurance, and labor. How big could the headwind be? And in that context, would you still expect margin improvement in the different business lines in 2021?

[Brian Harris:]

Hi, Paul. We've got a bit of static on your line here, so I hope you can hear me. But expected, it's around inflation headwinds. We've identified a few areas of inflation and typically, we've got our labor cost inflation is going to be in the 2% to 3% range. We expect to see a little higher levels of inflation, which we typically get in health care, which is probably around about 8%. We've seen, as we mentioned, we've hedged about 50% of our diesel purchases at a price that's already close to the actual full year cost for 2020. And we've baked in an assumption for higher hydrocarbon prices into those ranges, EBITDA range that we've provided you with for 2021. Insurance premiums, I think, is another area that across the industry and in fact most industries are seeing somewhat higher insurance premiums these days in that market as well. But we've baked those assumptions into our guidance range. Obviously, we'll be recovering some of that with productivity improvements and some of it also from price improvements that we expect to get in 2021.

[Operator:]

And your next question comes from the line of Trey Grooms with Stephens, Inc.

[Trey Grooms:]

Hi. Good morning. Let's see, so that's the first one, my questions is around the incrementals. You talked about diesel and some other moving pieces, but how should we be thinking about incrementals in aggregates this year, Brian? And then along the same lines of the -- you kind of tick through some inflationary things to consider here. Looking at the inputs for ready-mix, cement being a big one, what is your expectation around inputs on the ready-mix side of your business, specifically and then how that translates into the profitability there?

[Brian Harris:]

Thanks, Trey. Yes. So start with the aggregates margins, obviously, we've explained the reasons by Q4 and the full year, frankly, for 2020, was down a little bit. We had a couple of quarters there where we're around about 64% for our gross margins, and we would typically expect to be in those mid-60s. So with some of those things behind us, which we said were non-recurring, we would expect to get our aggregates margins back into -- more like that normal mid-60s kind of range. As for ready-mix pricing, as you know, when the volumes are good, when there's strong demand, it's a little easier to pass on the cement price increases. Our cement suppliers are indicating that they will have price increases in a $6 to $8 per ton range. We typically are able to pass that on, providing the demand levels remain strong, which in our big ready-mix markets, which are Salt Lake City and Houston, we are seeing continued strength in the residential markets there that underpin that ready-mix demand. So, all being well, we will -- that pattern of being able to pass cement prices on will continue.

[Trey Grooms:]

Great. Thanks for the color. I look forward to seeing you guys March 16th at the Analyst Day.

[Brian Harris:]

Likewise.

[Operator:]

Your next question comes from the line of Garik Shmois with Loop Capital.

[Garik Shmois:]

Great. Thank you. Questions on aggregates, just some picking around the guidance. Just given the Multisources' pricing, sounds like it's been able to get back up to market levels in Houston, should we assume your pricing guidance doesn't have any mix headwinds in it? And then also on the aggregate volume outlook, does there any -- is there any assumption of the benefits from the acquisitions from 2020 rolling into 2021? Or is the outlook for aggregates volumes just organic? Just wanted to be clear there.

[Anne Noonan:]

Well, I would say, on the pricing, we should see improvement because we'll now have gotten the two price increases in, Garik and we are at prevailing market rates in Houston now as we've done those increases. So, we've gone through the noise of that. We don't have the Con Agg, the levy work comparison as we go into 2021. So, we are -- and we think the market in general has strong demand. So, it is constructive to strong price execution. So, we are forecasting to be that low to mid-single-digit price increase. And from the Multisources, when we talk about the volume from acquisition, we only had what, five months of the year this year, and that was about $5 million of EBITDA, so we will have a full year of that impact in 2021.

[Operator:]

Your next question comes from the line of Anthony Pettinari with Citi.

[Anthony Pettinari:]

Good morning. Can you talk a little bit more about the impact of the winter storm on your business, if you anticipate any sort of hit to 1Q in terms of earnings or loss demand or loss production? And is that sort of delayed job site activity just get pushed out a week or two or have some of these power outages, water disruption, disruption of freight? Is there any potential for that to impact your business in a way that could -- could kind of linger on?

[Anne Noonan:]

Yes, I would say, Anthony, if you look at our business, Q1 is our lowest quarter anyway, and it was one week of impact. We would normally have that impact in our Southeast and Midwest business anyway from weather. The real impact was in Texas and we did lose the week. However, I would say they're back up and running already. They tend to be able to catch-up and in general, residential is so strong in Texas and public funding is so strong that we believe we could catch-up. We're looking at -- we look at our business on a full year basis, maybe one week isn't going to make the year. And it would have much more impact if we lost that week in September versus lease losing week in the first quarter.

[Operator:]

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

[Mike Dahl:]

Thanks for taking my question. Anne, I just wanted to follow-up on Multisources. And maybe just -- could you elaborate a little bit more on, kind of, why the business was positioned the way it was in the market prior to what you've since done with it? And as you've implemented the price increases, have you seen any effects on local market share? Just a little more color on competitive position in there would be great.

[Anne Noonan:]

Yes. Yes, Mike. So, when we look at the business, clearly, one of the reasons we thought we were the right -- for that business was that the margins were lower; the pricing was lower in the market. And we knew that based on our other business, we could get more prices. So, a key part of the team's integration plan was to go for price increases. So, we had built in candidly into that plan, a little bit of volume loss, but the team really did a very fine job of putting the price increase in place and having strong EBITDA growth. So, they're running at least at or above our projections on integration at this point in time. But we did not like to share.

[Mike Dahl:]

Thanks.

[Operator:]

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

[Jerry Revich:]

Yes, hi. Good morning, everyone and nice quarter.

[Anne Noonan:]

Thanks, Jerry.

[Jerry Revich:]

Anne, I'm wondering if you can talk about where the M&A pipeline stands today and the type of assets that you're looking at today versus a year ago. Any change in focus? Can you just provide some high-level comments? I'm sure you'll have more details at the Analyst Day, but I'm wondering if you could address those items from a high-level standpoint now.

[Anne Noonan:]

Sure. We will address in a much more specificity when we get to March 16, but our M&A pipeline is active. The team continues to look at opportunities, as has been our strategy and will continue to be. It's always aggs-led and pull through of aggs into markets where it makes sense, that we can actually have high ROIC. And -- so every market is not equal, I believe, that’s been showing in this business very thoroughly, that we are -- where we play, for example, in Salt Lake City, our vertical integration is very high on ROIC and profitability, and that's why we pull through our aggs very successfully. So when we look at targets, we're looking at that same kind of model. It's either pure aggs or its pull-through of aggs where we can return a lot back to our shareholders.

[Jerry Revich:]

Thank you.

[Operator:]

Your next question comes from the line of Nishu Sood with UBS.

[Nishu Sood:]

Thank you. I wanted to just get your sense on the quarterly cadence that we might see out of aggs pricing and the gross margins. So, obviously, there's been a good bit of discussion about the factors that weighed on those, Kentucky and Multisource on the products mix issues. So, as those -- the impact as we look at 2020 was mostly in 4Q. So as those issues unwind or come to an end, is that in the first half of 2021 or maybe in the latter half of 2021? And then how does that tie to the low-single-digit pricing? Is that mix adjusted? Or is it just overall pricing?

[Anne Noonan:]

That is overall pricing. I would start there. I would say, our price increases go in throughout the year. April 1 is when most of our pricing goes in. So we don't really look at quarter-to-quarter cadence being driven by our pricing per se, unless the market facilitates another price later in the year. However, I will say, if you look at the quarterly cadence of these particular impacts. So think about multi-sources, it is done. We've done the two price increases. We should not be talking about that next quarter. If we talk about the flood work is done, the difficult comps on that are now complete versus our 2019 work, and really, when I look at operation-by-operation, what we did, we're always going to be optimizing our product mix. So I'm never going to say, we're not going to have mix adjusted pricing, because we pay our people to manage cash properly, and that's exactly what they did in the fourth quarter of this year, and it was net, the right business decision. So, the other thing I would say is, geographically, we naturally have some adjustments on our pricing. So our price can range anywhere from -- on aggs can range in the high $7s to over $15, depending on the geography that we're in. So, you will have some natural geographic splits that will have some mix adjusted. But the big ones, the acquisition that we've had and the flood work they will be out, as we go through the rest of 2021

[Nishu Sood:]

Got it. Thank you.

[Anne Noonan:]

Thank you.

[Operator:]

Your next question comes from the line of Adam Thalhimer with Thompson Davis.

[Adam Thalhimer:]

Hey, good morning. Great quarter.

[Anne Noonan:]

Hi, Adam.

[Adam Thalhimer:]

What was the comment, can you clarify? You said something about January, and I feel like you were saying that the volume strength from Q4 carried into January, but I couldn't quite get there. I don't know if you took it to that level.

[Anne Noonan:]

We didn't really -- I think, as you were talking about in our prepared remarks, we said looking through January into 2021. Clearly, first quarter is always our lowest. We did start the year, though, with the same kind of strength that we have in residential. Our public spending continue to be strong. The one area that we did call out, Adam, was the non-residential. Wind farms tend to be lumpy. We had $5 million in our results from -- on a full year basis from Kansas, for example. We're not sure that will repeat. We are more bullish about non-residential in the long-term, but in short-term, it's probably our most uncertain market. But the residential continues to be strong and public spending continues to be strong, as we left 2020 and into 2021.

[Adam Thalhimer:]

Got it. Thanks, Anne.

[Anne Noonan:]

Thanks, Adam.

[Operator:]

And your last question comes from the line of David MacGregor with Longbow Research.

[David MacGregor:]

Yes. Good morning, everyone. And Anne, congratulations on a great first quarter, a great way to get things started.

[Anne Noonan:]

Thanks, David.

[David MacGregor:]

Thanks. I wanted to ask you about cement capacity, and it just seems as though that market is shaping up maybe a little more strongly than we had thought it would. But can you just talk about where you are right now in terms of your operating rates? And how much more can you get out of these assets just through debottlenecking versus having to go spend more significant amounts of capital either organically or through acquisitions? And just help us think about your longer term view, I guess we'll talk a little bit more about this when we get to the 16th, but anything you could help us with today would be much appreciated?

[Anne Noonan:]

Yes. I would say, we don't actually quote our cement capacity utilization, obviously, for competitive reasons. But I would say the team has -- first of all, volume is stronger in our markets in general, and so that has given a lift on volume, as you saw come through in Q4. Secondly, as we look at some of the work that we've done ourselves from the point of view of commercial excellence, the team has done a nice job of optimizing our customer mix. So that's in there as well. So our operating rates are pretty strong. We are constantly debottlenecking, whether it's -- we've actually had more of a focus on our supply chain than on actual capacity in the plan this year, but that's an ongoing continuous effort that the team is working on. Frankly, we need to get our price increase nailed. As we go through the year here, that's the single biggest lever you have on improving performance overall and getting our jar back in full operation will improve our cement as we move forward.

[David MacGregor:]

Okay. Thanks very much. Look forward to 16th.

[Anne Noonan:]

Thank you, David. Okay. With that -- operator?

[Operator:]

Please go ahead.

[Anne Noonan:]

Okay. So with that, I'll leave you with a few key takeaways. Our solid -- we have solid end market demand driven by our residential, exurban and suburban, and migration trends are very strong in our key states. Public spending is robust with $1.6 billion of COVID relief going into our top five states. We also have the option of additional value creation from a broader infrastructure bill. As I said, non-residential is a little near-term less certain, but long-term, we're bullish on that because it will follow residential. And we're poised for growth with our greenfield investments to sustain organic growth over time. Our improving liquidity opens up some optionality for us, and we are very encouraged by the momentum in cement and the improvement there and some of the self-help the team has done. So with that, I'll just leave by thanking all of our analysts and our shareholders for participating in our perception study. We heard your feedback, and we look -- we hope that our strategic roadmap will be very informed by that. We look forward to sharing that with you on March 16. Thank you for your time today.

[Operator:]

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