Summit Materials, Inc. (NYSE:SUM) Q4 2022 Earnings Call Transcript

Summit Materials, Inc. (NYSE:SUM) Q4 2022 Earnings Call Transcript February 16, 2023

Operator: At this time I’d like to welcome everyone to the Summit Materials Q4 22022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there’ll be a question-and-answer session. . Thank you. Andy Larkin, Vice President of Investor Relations for Summit Materials, you may begin.

Andy Larkin: Hello, and welcome to Summit Materials’ fourth quarter and full year 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 supplemental workbook highlighting key financial and operating data. All of this material can be found on our Investor Relations website. Management’s commentary and responses to questions on today’s call include forward-looking statement, which by their nature are uncertain and outside of some of the materials. Although these forward looking statements are based on management’s current expectations and beliefs, actual results may differ in a material way. For discussion, some of the risk factors that could cause actual results to differ, please see the risk factor section Summit Material’s latest annual report on Form 10-K, which is filed with the SEC.

You can find our consolidation of the historical non-GAAP financial measures discussed in today’s call in our press release. Today, presentation will begin with Summit CEO, Anne providing business update. Brian Harris, our CFO will review financial performance and an annual conclude our prepared remarks with our view on the path ahead. After that we will open the line for questions. Please limit your ask one question and then return to queue so we can accommodate as many as possible in the time we have to build. I’ll now turn the call over to Anne.

Anne Noonan : Thank you, Andy, and thanks to everyone joining today’s call. Yesterday we released full year results that highlighted a number of Summit records. But the ones I’m most proud of our unsafety. As you see on Slide 4, we certainly raised the bar on safety with all time records for reportable and last time incident rates, among others. We owe this improvement to our dedicated employees to the truly internalized and lit our safety person culture every day. From an organizational standpoint, we made an intentional shift towards focusing on more forward looking data, empowering our people to goal based production processes and endorsing an evergreen approach to continuous safety improvement. Our commitment to safety as a core some its value reflects our view that our people are our greatest assets.

And we take personally our responsibility to help safeguard the health and wellbeing of all 4,800 plus Summit colleagues. Turning now to Slide 5 for 2022 financial review, you’ll see that our team delivered admirable results in the midst of dynamic cost and macro conditions. We’ve had annual records for operating income, net income and pricing growth across all lines of business. The year as you know, it was however negatively impacted by significant and unrelenting cost headwinds supply chain constraints as well as unfavorable weather conditions. With most of these factors outside our controls, and not particularly unique to Summit, I believe we did an incredible job controlling what we could and progressing our Elevate Summit strategic priorities.

On Slide 6, you’ll see our strategic priorities and enablement capabilities to essentially capture but allow me to elaborate on two areas of focus and achievement for our business. First slide 7 snapshot optimizing the portfolio. Here we’ve made further inroads towards reaching our horizon two objectives probably 75% of our last 12 months of adjusted EBITDA contribution from aggregates to Summit. We chose 2020 to about 70% of two percentage points from the prior year and seven points from 2020. We plan to double down on both organic and inorganic growth opportunities to reach and eventually surpass our 75% tariff. Take for example, our portfolio is the best in three global growth, mostly downstream businesses in 2022 and then more recently, in two aggregates lead acquisition and targeted high growth priority markets.

The second such acquisition is south of Salt Lake City was completed at the end of January and will elevate our aggregate positions, strengthen our customer coverage and capitalize on the strong growth expected in that market. On the organic side, driving towards our profitability Northstars for aggregations meant, combined with upsize growth and contribution to Greenfield will help us on our path to 75% and improve our overall quality of our service. Moving to Slide 8, where we highlight and dimensionaliize tremendous achievement of our Continental Cement team to be the first in the industry to fully convert all of our cement production to Portland Limestone Cement. PLC helps unlock much needed capacity and a very tight cement arm. We sold 1.5 million tons of PLC in 2020 to 300,000 times ahead of our initial target, as customer adoption and plant conversions happens faster than originally anticipated.

PLC reduces our carbon emissions per ton to such a level that it’s equivalent to taking 20,000 cars off the road. And PLC enhances the margin profile of our cement business, lowering our 2022 variable costs by approximately $2.3 million or $1.47 per ton. We highlight the success not to take advantage of that but rather to emphasize PLC as an ongoing strategic imperative that’s better for the environment, largely enhances our business and underlines our commitment to being the most socially responsible construction materials company in the industry. I’ll close my upfront remarks with our Summit scorecard on Slide 9. Here’s the refrain to symbol and one we’ve heard from other people. Once again as expected, we close the 2022 setting Elevate Summit records for both leverage at ROIC.

With an average of 2.1 times our attention to be more aggressive in pursuit of materials led M&A, is supported by a fourth life and flexible balance sheet, that says we’ll remain price disciplined and dedicated to maximizing shareholder value as we evaluate the opportunities. Our ROIC in 2022 was 9.1%, 30 basis points better than the prior year, and more than four point better than 2020 levels. Shaping underperforming assets moving towards a more accurate pipe model and getting more from existing assets is our playbook for improving ROIC. And we don’t see any reason why we won’t close the gap toward a 10% Elevate Summit target in the year ahead. Finally in Q4 our LTM adjusted EBITDA margins improved 20 basis points sequentially to 22.1% as Summit helps commercial and operational initiatives have at least partially offset historic levels of inflation and supply chain pressures.

Bottom line is that we ended the year improving each one of our Elevate scorecard metrics have a year of tremendous progress while at the same time providing significant strategic momentum heading into 2023. Now before I get into our plans for 2023, let me first turn it over to Brian for a more detailed review of our financial performance. Brian.

Brian Harris: Thank you, Anne. I’ll begin with Slide 11 with full years of by segment where results were strongest in our best and cement segments. In both cases, price fueled revenue growth more than offset inflationary conditions to drive healthy levels of year-on-year adjusted EBITDA growth. Now in each divestitures weighing on reported results and wet weather conditions combined with supply chain disruptions to hold that organic volume growth and lead to additional cost headwinds. These factors more than offset high single digit pricing growth and lead to lower adjusted EBITDA in 2022 for each segment. Turning to slide cloud for pricing growth by line of business. In Q4, we were able to build on our pricing momentum with year-over-year outpacing growth accelerating further across all lines of business.

In aggregate pricing increased 13.9% in Q4, and registered 8.2% growth in 2022 ahead of expectations, that the compounding effect of previous pricing actions, along with a fourth quarter increase in taxes drove a record aggregates pricing year. For cement pricing accelerated to 16.6% to close out a double digit pricing year reflective of federal demand conditions and very tight cement supply in our rural markets. Furthermore, we saw very strong price realization on our two pricing actions in 2022, which is a positive signal for price reflection in the year ahead. Downstream fourth quarter pricing for ready-mix and Asphalt that’s increased by 19.6% and 22.8%, respectively, both quarterly reports demonstrating our team’s ability to swiftly pass through higher input costs.

All in record pricing in 2022 underlyings our value pricing focus emphasizes controlling what we can and at the same time provides a very strong exit velocity and carryover pricing momentum heading into 2023. Volume bridges by lines of business are provided on Slide 13, with the impacts from acquisition and divestiture clearly quantified. Fourth quarter accounting volumes and aggregates Ready-mix and Asphalt when negatively impacted by cold and wet weather in many of our markets. For added context, our top 20 MSAs experienced 57 more days of precipitation and 52 more inches of precipitation versus Q4 2021, with the harshest conditions affecting our Texas and southeast markets. Because these markets had the longest construction season, unfavorable weather experienced there and an outsized impact on our water volumes.

Aside from weather, we’re seeing moderating residential demand impact volumes, particularly in Salt Lake City, which also contributed to the sequential decline in organic volume growth for aggregates and Ready-mix in the period. Cement volumes on the other hand continued to be strong, up 1.7% in q4, and 4.2% in 2022, representing back to back years of mid-single digit volume growth for Continental Cement. Moving down to the P&L to gross margins on Slide 14. For our materials lines of business, we closed the year on a high note, expanding fourth quarter adjusted cash gross profit margins in aggregates and cement by 210 and 440 basis points, respectively. Accelerating pricing growth and take variable customization our Q4 margins also benefited from higher onetime costs incurred in the prior period.

Products and services margins were relatively flat year-on-year, while products margins decreased 120 basis points relative to Q4, 2021. Lower products margins were driven predominantly by Asphalt as adjusted cash gross profit margins in Ready-mix were up modestly in Q4 versus the year ago quarter thanks to swift pass through price execution. Asphalt gross margins were adversely impacted by elevated weaker Asphalt costs, which can approach 50% of the total variable costs of the finished product. And although we arrived to the index on liquid asphalt, there can be a lag before price fully catches up with costs. Stepping back, like others in our industry, 2022 was a challenging year for margins, driven by unprecedented levels of inflation, due in large part to supply chain disruptions.

And in many respects, our gross margins were able to hold up better than thanks to portfolio optimization transactions that unloaded less profitable downstream businesses by retaining targeted integrated operations to drive greater aggregates pull through and as a result, better end-to-end profitability. Now in a moment, Anne we’ll discuss our views on the path of inflation. But in 2022, has taught us anything is that this dynamic operating environment favors businesses that build organizational and operational resiliency. With that in mind, we continue to press forward on our commercial and operational excellence initiatives in an effort to optimize operational costs and taking every opportunity further increase efficiencies without sacrificing growth.

I’ll ramp up on Slide 15, where we reported adjusted EBITDA margin in Q4 up 80 basis points year-on-year to 23.2%, driven primarily by materials cash gross margin growth I just discussed record of adjusted diluted net income and adjusted diluted earnings per share for the year reflects growth in operating income and lower DD&A expenses versus 2021 levels. Before turning the call back to Anne, I’d like to quickly recap two recent moves we’ve made to strengthen our capital structure and liquidity. First, we’ve amended and extended our 2024 term loan, which now comes due in 2027 and in the process converted to SOFR as the benchmark reference rate. And second, we increase the size by a revolver from $345 million to $395 million. This together with the 520 million of cash on the balance sheet, means that we have access to approximately $900 million of liquidity to pursue that as return capital allocation opportunities and further our strategic objectives.

And a final housekeeping item for the purposes of calculating adjusted diluted earnings per share, please use a share count for 119.7 million, which includes 118.4 million Class A shares, and 1.3 million LP units. And with that, I’ll now pass it back to Anne, for our view on 2023.

Anne Noonan : Thank you, Brian. Before jumping into the specifics of our 2023 outlook, I’d like to first take a moment to characterize the similarity of the current operating environment. Because we are on the precipice of a recession, as many of us think we are, it will be the first recession in my memory that was not predominantly driven by demand disruption. Rather, today’s environment as I see is the result of three interrelated factors. First, exceptional levels of uncertainty, particularly on cost trends. Second, a supply chain that is improved and more fragile and less responsive than originally thought. And third, a shifting geopolitical landscape that inserts additional volatility into our system. Each of these in isolation, would carry considerable challenges to our planning cycle and process.

But when taken together, it really created the perilous and unparalleled planning conditions that certainly tested the mettle of our leadership team. So the plan you’ll hear today is the result of inverters scenario planning, and this underpinned by what we believe are realistic, if not conservative, underlying assumptions. We’ve said before, but it’s worth reiterating, our managerial posture, as always, is to reflect the reality as we see them today, but also to plan for downside scenarios, which was our approach for the 2023 plan. That said, we shouldn’t lose sight of or underappreciated how our portfolio moves together with sound strategic execution, and enhanced our profitability strengthen our balance sheet and improve the economic resiliency of our company.

With that as important context, let’s turn to Slide 17 for an outlook by end market, starting with residential. Beginning in mid-2022, we have embracing for a slowdown in the residential market as the Feds more restrictive policies would inevitably target the housing sector. Thus far and as a consequence, we’ve witnessed an orderly pullback in selling prices, a substantial, although not uniform decline in single family permits, as well as an uptick in the amount of supply on the market. By enlarge, our observations as well as our conversations with customers indicates the housing market is functioning as intended, and there is an ongoing recalibration on both the supply and demand side of the equation. At Summit we’ve adjusted by increasing our bid activity on non-res and public projects.

And while we’ve been successful, it’s shifting our edge market mix, there are certain limitations to how much volumes can be shifted. Having said all that, we still see near term demand for a single family construction activity, albeit at a moderating pace. Looking beyond the next few months, however, it’s frankly a challenge as visibility’s clouded by a mix of data points. On one hand, affordability remains a stretch and rents have been declining. On the other hand, mortgage interest rates have moved off peak levels, mortgage applications have increased and homebuilder sentiment may have popped. We are hoping to gain better insights on the duration of the residential downturn as we move through the upcoming spring selling season. Until then, we have not seen enough evidence nor have we heard enough confidence coming from our residential customers to call for robust demand at the back half of 2023.

Set another way until we better visibility, our residential outlook for 2023 includes material design and activity. Ultimately, we both know how the second half will shape up until we gather more data. So the prudent approach and what is factored in today’s outlook is for more protracted decline in residential activity for 2023. And its latest terms, we are expecting our residential and market volumes to decline at these 30% in 2023. And that’s generally consistent with common industry forecasts. This viewpoint however, does not changed our overall bullishness on residential, especially in our top two markets, Houston and Salt Lake City, each of which has experienced healthy in migration trends, shortages in housing supply, and both benefit from underlying economic conditions that can support strong residential growth over the long run.

In short we are responding with agility to the near term residential weakness by shifting volumes to growth year end markets have taken a cautious planning stance to backup activity, but remain resolute in our bullishness for residential in the long term. Shifting to non-residential on Slide 18, and what we’re expecting here is for growth trends to diverge between heavy and light verticals. On the heavy side secular tailwinds supporting onshore critical parts manufacturing, as well as efforts to combat energy scarcity is creating strong private and public momentum to lower the live supply chain and improve overall domestic competitiveness. Construction spending for manufacturing grew 35% in 2022, a trend we expect to persist of legislation, such as the Inflation Reduction Act and the Chips Bill to provide a long runway in the investment in U.S. value chain.

And our view is only bolstered by a full heavy non-residential timeline in our markets. Heading into 2023, we see several projects item underway for emerging our footprint. From food manufacturing, that might comes after factories and lease bonds in the Midwest to large scale and active LNG projects in Louisiana, to warehousing and EV battery manufacturing in Georgia, North Carolina, we have a high degree of confidence that heavy non-res will experience healthy levels of growth in 2023, because our markets are showing a steep step up in project activity. Light non-residential on the other hand, is likely to face more challenges this year. Light non-res tends to be the build of retail hospitality and education facilities that follows behind new residential development.

Our expectation is that a high interest rate environment along with the residential slowdown will as a result of way applied non-residential activity in 2023. Despite this, and on balance, we expect the growth from the heavy non-residential to offset the light non- residential slowdown such that we expect non-res to be roughly flat in 2023. Lastly, Slide 19. And on public infrastructure where we have a high degree of conviction that there’s the general consensus surrounding the direction in the sand markets . It will no questionably be the strongest contributors to our growth in the year ahead. The question therefore, is around the magnitude of public growth for this year. To last that question, we look at trends on highway awards and state DoT’s for fiscal year 2023.

And in both instances, we see very encouraging funds. First looking at the value highway award contracts and 2022, not only did contract awards increase materially last year, they accelerated substantially in the second half. Starting around July last year, trailing 12-month award growth topped. And they’ve continued on that upward trajectory as we move through the remainder of the year such that our top five states saw highway and paving awards contract values increased 22% in 2022 and up nearly 30% when you set aside Utah, where we typically do less public work. This momentum and award signal to us that DoT’s have assembled robust project lists and increased confidence to put their dollarsto work. That competence is broadly reinforced by state DoT budgets for 2023.

Our top five states, which is in Texas, Utah, Kansas, Missouri in Virginia, has increased their DoT budgets on average by 18% in fiscal 2023. Similarly, strong levels of DoT funding growth is expected in some of our fastest growing states. In our East region. For example, Georgia and the Carolinas will increase the budgets nearly 13% on average in fiscal 2023. In most instances, these budgets incorporate additional federal investments from the infrastructure investment and Jobs Act. But in some cases, like Utah, the current budget may not fully reflect increased federal funding under IITA. Regardless to step up and state DoT budgets point to a very deep public infrastructure environment in 2023. With the strongest tailwind the second half consistent with private construction fees and catalyzed by IITA flow through.

All in, we expect public clients to be mid-single digits in 2023, with further acceleration probable in 2024. Having tougher demand expectations plan, let’s turn to the price cost picture, on Slide 20. Coming off the year of double-digit cost inflation, we aren’t yet seeing any meaningful signs of cost easing. So our planning stance is for calls to remain elevated for 2023. And if that proves to be overly conservative, and that will represent an upside for 2023 expectations. With ongoing inflation and supply chain constraints as our base case scenario, we need to remain focused on controlling what we can control both on price and on operational excellence. As Brian mentioned earlier, we’ve spent tremendous exit philosophy from 2020 to pricing actions.

And when you combine that, with the widespread pricing actions implemented on January 1, where we’re well positioned to deliver significant pricing gains in 2023, particularly for aggregates and cement, and particularly in the first half of 2020. And operationally we are pressing ahead with our continuous improvement projects across each line of business as spearheaded by our centers of excellence. We expect these projects chopped dollars to the bottom line this year. And we’ve intentionally revised our internal incentive structure to focus behaviors are near term win and reward results on this front. That said, supply chain pressures have not been eased yet and we expect certain input costs to remain challenged in 2023. Specifically, pain points include materials, mainly cement, as well as labor and our energy costs, which includes the edge portion of these.

On balance, we do anticipate the price cost picture to improve in 2023 such that we land a year in positive territory on a full year basis, and that we grow adjusted EBITDA margins in the year ahead. Let’s pull together everything on Slide 21. For 2023, we expect the justice even to come in between $480 million and $520 million based on the following framework, first, due exclusively to the slowdown in residential, we would expect organic volume to be down this year. Second, as commercial and operational excellence efforts take hold, we expect to returns with a positive price net of cost relationship. And third, we will continue to manage our discretionary spend continue to put market conditions such that we expect G&A spend to be essentially flat this year.

And that is in this plan are two elements. First, we plan to meet or beat 2020 EBITDA margin level. But you recall 2020 serves as the baseline reference point for Elevate Summit progress. Here pricing gains and cost our projects will more than offset volume declines and inflationary cost headwinds. And second, our wider than typical EBITDA guidance range accounts for the variability and uncertainty as two intellectual drivers. Residential volumes in the second half and cost trends. If both elements break in our favor, we would expect them closer to the top end of the range, and vice versa in residential buying is a cost or unfavorable. I think you’ll agree that we’ve taken a balanced if not proven approach to setting expectations and the very achievable place for this year.

And while we will be focused on meeting beating this target in 2023, we are unlikely to have strong conviction to materially revise the status quo until we get fully into the prime construction season. Only then will we have a more informed view on critical volume cost and margin trends. Nevertheless, in the meantime, we are sure to advance our strategic agenda, including extending our sustainability and innovation acumen, aggressively pursuing the creative materials led M&A, all capitalized on selfhelp margin opportunities across the enterprise. And you may see available to Summit materials. Let me finish our outlook by outlining our capital allocation priorities which have not changed. We will first prioritize investments in higher term organic and inorganic opportunities, putting capital to work via green fields, profit improvement CapEx, and materials led acquisitions.

Then, when we do our shares as undervalued, we will look to opportunistically return capital to shareholders via share repurchases. We believe this approach coupled with sound operational execution is a powerful combination to drive attractive shareholder returns moving forward. In closing, while we operate in an uncertain environment and contend with certain industry challenges, we do so from a position of strength. We have built a talented high-performance organization that is more capable than ever to navigate ambiguity, these opportunities and deliver on the commitments. We can add will leverage stronger, more resilient portfolio and our balance sheet firepower to drive for Summit strategic and financial goals in 2023, and the years beyond.

Finally, before taking your questions, I’d like to extend a special thank you to those who participated in our recent perception study. We’ve died at the back of the investment community and I believe containing a continuous dialogue will inform our decision making and results in a stronger Summit Materials. I’ll now ask the operator to open their minds for Q&A.

Q&A Session

Operator: Thank you. The first question is from Trey Grooms with Stephens. Your line is open.

Trey Grooms : Hey, good afternoon, everyone.

Brian Harris: Good afternoon, Trey.

Trey Grooms : First, I want to make sure I’m using the right numbers on the guide here. And I think you’ve mentioned meet or beat 2020 EBITDA margin levels. So looking back, it looks like 22.7 on net rev, is that is that the margin you’re referring to just to make sure?

Brian Harris: 22.6 was and that was when we basically lost our Elevate Summit. So that’s what we always guide against.

Trey Grooms : Yeah. Okay. 22.6. All right. So that’s implying, if we get to the midpoint of the EBITDA guide, and we use that 22.6 frame, it should be at least as good, if not better. That’s implying revenue about that’s going to look a lot like ’22 if my math is right. And if I understood kind of the mix you gave us and everything else in your outlook for those in market trends. If I’m kind of backing into kind of high single digit type volume decline, which would imply something like a high single digit price improvement, as well to get to that flat. Am I thinking about that right or my way off?

Anne Noonan : Well, you’re pretty close. So let me take care of the volume first. So from a volume perspective, I would guide you overall as mid to high-single digit volume decline. And what where that’s coming from Trey is if you think about the residential being done 30%, 60% of that is out of our Ready-mix goes into residential and 30% of our ag. So that’s driving a lot of that. Obviously, our Asphalt construction will be up high so that’s not driven by public. And then non-residential is pretty much flat. So the volume, you’re right are pretty close, but I would guide you to mid to high single digit. Now on the pricing. Obviously, the big driver is going to be in aggregates and cement. We’ve exited 2022 with tremendous pricing momentum. I would look at ags as being in the high single digit to double digit across our geographies, and our cement being more double digit price increases.

Trey Grooms : Perfect. Okay, thank you for clearing that up for us. And just as a follow up. ROIC target of 10%, you guys have made a lot of progress on that. You’re getting close here. I mean, you’re over 9% I think in ’22. That target of 10% is any thought on timing there? Is that something you might be able to you think you might be able to achieve this year? Or what any update on the timing?

Anne Noonan : Well, I think what we’ve said is the 10% is a what we said as part of our Elevate Summit goals. And we said we did accomplish that over three to five years from the time we launched. To your point Trey, we’re well on track at 9.1% at the end of 2022. We feel very confident that we’ll achieve that overall goal that we set in place over that three to five year period. And we said 10% is a floor that we’ve got to continually evaluate that and continue to expand our return on invested capital to our shareholders.

Trey Grooms : Right. Okay. Well, thank you for that. And I’ll pass it on. Keep up the good work. Thank you.

Anne Noonan : Thank you, Trey.

Operator: The next question is from Phil Ng with Jefferies. Your line is open.

Anne Noonan : Phil?

Operator: We will move on to the next question, which is from Kathryn Thompson with Thompson Research Group. Your line is open.

Kathryn Thompson : Hi, thank you for taking my question today. The top-line and volume look seems we have been more comfortable without looking, I agree with everything that you outlined today. From my perspective, given a choppy 2021 and 2022 in terms of the price cost balance. As you look into ’23 with your guidance and your general outlook, what gives you current confidence in terms of consistency and visibility and earnings for each of your major operating segments in light of just those the cost landscape coupled with ongoing pricing actions? Thank you.

Anne Noonan : Thanks, Kathryn. So let me kind of address that a few different ways. I would say look, we’ve been very positive on the pricing, as I said in my prepared remarks. And we see that continuing moving forward. The team’s done a very nice job on commercial excellence. What we said before as our ability to deliver margin expansion is really driven by three things. And the first is where we’ve done a lot of heavy lifting, it’s around our portfolio mix. We’ve rich in that mix, such that we ended 2022 fourth quarter at 70% of our EBITDA has been driven from cement and aggregates. And we have opportunity to further enrich that by our investments in Greenfields in high growth, high margin areas, and also any creative M&A that’s more materials led.

So that gives us that has really stabilized our portfolio that wasn’t the Summit of the past. So that gives us a lot of confidence that we’re improving our consistency of earnings. The other two things are controlling what we can control. Value pricing, which I’ve talked a lot about on the call here. And most importantly, is operational excellence. This is where we have really, we gained some momentum in 2022, but in 2023, we’re really doubling down on that. We’ve set very specific targets in a multitude of areas. And we’ve set a special incentive plan to drive growth in that area. And I would say if you look across the board, our aggregates, we have target like two continuous improvement events per month. The team is very focused on production execution, footprint optimization.

Our cement business is focused on grinding capacity, and on guard expansion, which all contributes to that lack of that consistency of earnings. And then Ready-mix has done a great job in 2022, not only just holding margins at high material inflation, but also an expanding sub margins. And they’re doing that through focusing on basically short load fees, and also on their mix optimization. So we have a number of things ongoing. And then the one other thing I will point out that we built in 2022, that will come into effect in 2023 is we built a centralized procurement organization that now has the people processes and tools to fully leverage some expense. So we’ll be really focused on those targets. And that was gave us the confidence to go back to say, we would beat the 2020 EBITDA levels.

Kathryn Thompson : Great, thank you very much.

Anne Noonan : Thanks, Kathryn.

Operator: The next question is from Keith Hughes with Truist. Your line is open.

Keith Hughes: Thank you. Question on the cost side, you highlighted elevated input costs coming into ’23. Could you just talk about what kind of percentage gain do you think you’re going to be looking at at this point and break it into cost buckets if you could please?

Brian Harris: Yeah, thanks, Keith. Obviously, going into 2023, we’ve got a little bit more visibility than we had at the very start of 2022. So when we think about some of the bigger cost buckets, fuel, for example, diesel that we buy forward, we’ve actually hedged about 55% of our estimated usage for 2023 at a price that’s very similar to the actual cost for 2022. So, puts and takes tailwinds on that would be whatever happens to spot prices for the remaining 45% that we buy during the course of the year. On labor — and we expect that to be around about mid-single digit. We have — we’re in the process of putting our annual review in place right now. On cement, where we’re a big purchaser of cement. Again, we’ve seen the signals from our suppliers of cement, they’ve announced price increases in the range of $15 to $20 a ton.

So we’ve got good visibility into that. And as I say most of that cement goes into ready-mix downstream where we will pass that on to our customers. Those would be the other major moving parts. Energy and hydrocarbon is still a lot of pressure there particularly on input coal costs for our kilns. And we see that being significantly higher than it was in 2020. And overall the supply chain issues have not gone away. We still see those as providing a source of inflation and uncertainty as we go through the balance of the year.

Keith Hughes: So would that be all in total, high single digit type increases low double digit, what would be the kind of the final?

Brian Harris: I think, all in — yeah, Keith I think all in for total cost, we’d say mid to — maybe mid to high a little bit above mid.

Keith Hughes: Okay, excellent. Thank you for your help.

Operator: The next question is from Anthony Pettinari with Citi. Your line is open.

Anthony Pettinari : Good afternoon. You talked about volume, you talked about volume declines, I think potentially in the mid-single digit, the high-single digit range. And I’m just wondering if there’s sort of any finer point you can put on that looking across aggregate cement, ready-mix, asphalt. And then again just looking at your major markets, you know, Texas, Utah, Kansas, Missouri, are there any specific markets that you would flag as maybe being a bit underweight or overweight? Maybe based on risk exposure, anything else you’d — anything else you’d flag?

Anne Noonan : Yeah, so let me kind of take it on the volume. I think that’s minus point we can put as buy end market. So let’s take the one that’s mining. So residential, we said 30% decline on that. Well, 60% of our ready-mix goes into residential at 30% of our aggregate. So that’s a big driver of that reduction. If we look at non-res, we’ve said that’s flat. And then if we look at public, we’re calling for mid-single digit growth. Now as you translate that to the lines of business, obviously, the residential is going to drive ready-mix and aggregates down. The public is going to drive up our asphalt and construction. And then the non-res will be a mix of all and will drive up our cement actually for our cement when we look at volume growth for cement, in 2022, we did mid-single digit roughly volume growth.

We are out of capacity, because we are running full out. So what we look at into 2023, I would look at cement volumes have been slash as well. So hopefully that will give you a little more color there. And with respect to your question about our geographies, I would just say that our two biggest markets in residential are in Texas and Utah. And that’s where you would see the biggest reductions on the residential side with respect to volume. Hopefully that answered your question, Anthony.

Anthony Pettinari : That’s very helpful. I’ll turn it over.

Anne Noonan : Thank you.

Operator: Your next question is from Jerry Revich with Goldman Sachs. Your line is open.

Jerry Revich : Yes. Good morning to you folks and your afternoon to everyone else. I’m wondering if we can just talk about the margin cadence in the first quarter. Because you’ve got this interesting dynamic where you’re going to have probably steeper price increases in the first quarter than the fourth quarter. And at the same time, we’re coming off of seasonably low margin comp. Should we be looking for outsized year-over-year margin expansion, just given that unique dynamic of a low base and pricing significantly ahead of cost as we start out ’23?

Anne Noonan : Well, I mean, I would continue to — as Brian pointed out, we’re assuming continued supply chain disruption and continued inflation. Now to your point, I do think because we’ve ended at such strong velocity on pricing. We’ve gone with a January 1 price increase that has had strong execution. Our first half comps will definitely look better. Our second as we get into the second half, the comps are a little tougher. So that kind of informs our overall high single digit to double digit price and for ags and double digit pricing for cement. So definitely second half, the comps will be a little tougher Jerry, to your point.

Jerry Revich : And that’s just a quick follow up. So nice tailwind for price cost net over the course of this year. And I’m wondering if you think about what the industry has learned given inflation? Yes. Are you optimistic that we could see price costs, continuing to be a tailwind for the industry in ’24, given how tough inflation has been for everybody in ’22?

Anne Noonan : I’m not ready to talk about ’24 yet, I got to tell you, Jerry. 2023 is plenty uncertain for us as we go through. We’ve just gone with, we have to plan for as an organization that inflation is going to continue high. That’s what’s made our team very agile around pricing. It’s making us focus and double down on operational excellence. And that’s how we get that price net of cost. So I’ll talk to you later in 2023, about 2024. Thank you.

Jerry Revich : Fair enough.

Operator: The next question is from Brent Thielman with D.A. Davidson. Your line is open.

Brent Thielman : Hey, thanks. Good morning. And Brian, I was interested on the slide on PLC, and specifically that $1.47 per ton cost savings in 2022. I guess my question is would you expect that per unit savings to grow and ’23 even on the same amount of PLC? I’m just wondering if you’ve realized all the cost, sort of incentives associated with that product line that you got in ’22?

Anne Noonan : I think we’ve realized both ended up per unit cost, but we’ll have more going through because we’ve converted. We did 1.5 million on a PLC in 2022. We’ll do our full capacity in 2023. But the per unit cost, I think that’s a pretty good estimate that we have. I wouldn’t expect much more expansion from that.

Brent Thielman : And that was my follow up. So you’ll be sort of full out on PLC in ’23 then?

Anne Noonan : Yep. Yeah, we’re looking forward to that. And that’ll allow us to use more of our domestic production versus the high amount of imports that we had in 2022. So that obviously improves margin. And that’s part of our team’s goal moving into 2023.

Brent Thielman : Okay, all right. Excellent. Thank you.

Anne Noonan : Thanks, Brett.

Operator: The next question is from Garik Shmois with Loop Capital. Your line is open.

Garik Shmois : Hi, thanks. Garik Shmois here. So wanted to follow up on the margin target for the year, the goal to exceed 2020 levels? Would you anticipate exceeding 2020 across all of your business lines? Or would it be carried by one or two business in particular ?

Anne Noonan : Well, just by the nature of where our portfolio has gone, cement and aggregates will carry us. But we do always require more margin expansion by all of our businesses. So I don’t want to over index that. But really, when we talked about if you remember, during our investor day, we talked about our aggregates, Northstar, going to 60% cash adjusted gross profit margin. And getting our cement to sustainable 40% EBITDA margins. Our teams are extremely focused on that driving these operational excellence and commercial excellence initiatives to drive towards that goal. So that’s no different than 2023. As I answered Kathryn’s questionnaire, we are really doubling down on operational excellence, because that’s what the team can control to drop dollars to the bottom line in ’23 and continue with that value pricing excellence that we’ve really driven some strong execution in ’22.

And as we look into ’23, and while we’ve come out with a strong January increase, I wouldn’t rule out multiple price increases given our stance on continued inflation and supply chain disruption.

Garik Shmois : Perfect. Appreciate the color.

Anne Noonan : Thank you.

Operator: The next question is from David MacGregor with Longbow Research. Your line is open.

Joe Nolan : Hey, good afternoon. This is Joe Nolan on for David. I just had one quick question. Hey, just within the pricing guidance, how much of the pricing is from the January increase versus how much of that is going to be carryover pricing? And then you just mentioned the potential for a midyear pricing actions. But I’m assuming that that’s not baked into the guidance at this point.

Anne Noonan : Yeah, so let me give you a little color on that. So we’re exiting 2022 with our aggregates full year price at 8.9% growth. In Q4, we have 14.4% of double digits. And then we on top of that we’ll go with a price increase in January. Our guide only has one price increase in it just for that perspective. And so as we’ve moved throughout the year, we would expect that that price would compound in that high single digit to double digit range across our geographies for aggregates. Cement is obviously exiting at double digit price increase it and we’ve already gone with the $17 per ton price increase in our January increase. And again, that is all that’s baked into the guidance we have not baked in additional inflation and/or additional price increases as we move throughout the year.

Joe Nolan : Great, that’s very helpful. Thanks. I’ll pass it on.

Anne Noonan : Thanks, Joe.

Operator: The next question is from Mike Dahl with RBC Capital Markets. Your line is open.

Mike Dahl: Hi, thanks for taking my questions. Couple of quick follow ups on the price call dynamics. You mentioned that you expect it positive for the full year. When we think about the cadence, and it seems like you’ve got good carryover price to start this year. And inflation yes, elevated but good pricing. Would you make that same comment in terms of first half also being price costs positive? Or was that intentional in terms of full year, because you expect some early headwinds, maybe offset by second half tailwinds.

Anne Noonan : It’s hard to fully tell at this point in time, but with what we see, I think our comps in the first half will look pretty strong on pricing. I think second half price cost will be a little bit more challenged because the comps are harder at that point in time. So we’ll have to see us as the year progresses. But overall, we don’t get quarterly guidance, but we’re very confident that we should be able to get our pricing out of cost with our improved portfolio, focus on commercial excellence and focus on operational excellence as we end the year in ’23.

Mike Dahl: Okay, got it. And then my second question is on the resi piece. So it makes sense, looking at some of the declines recently and permits and starts obviously have some different views out there for how the year progresses. My question is when you think about that 30% and we have seen that in starts and permits usually your business might lag a little bit. Is that already what you’re seeing in your actual shipment trends, or is that something where you’re maybe not experiencing declines quite that severe, but looking at kind of the writing on the wall as you get through 1Q or 2Q?

Anne Noonan : Yeah, so great question. So as of Q4, we started to see in our two major metros, which is basically Salt Lake City in Houston, we saw double digit volume declines in our residential. Now the good news is they’re not at a screaming stop or anything, it was kind of an orderly decline, and we were able to pivot some of our volume into non-res and public. Now the other thing we are looking at right through this time is the single family permits from 2022. And if you look on a full year basis on the national decline, it was 13%. But a lot of the decline was in the second half. So what had accelerated in the second half on single family permits as lines? But if you look on a full year basis, our Houston market fell much in line of a 10% decline with about 2.2 months of supply.

Our Salt Lake City went down 30%, the single family permits went down 30% overall on J REX data. And so we’re not terribly surprised by that, frankly, because if you looked at both those metros, as we started planning for 2023, we had to look at a couple of factors. One, we’re not baked into multifamily, we’re mainly single families. So that’s where our numbers will come from. The second factor is that we’re coming off historic highs for both Salt Lake City and Houston. And just to give you some color around that, our Salt Lake City exceeded the historic average for permits, single family permits by 1,000 per year since 2017. So think about coming off these really high residential builders, our decline is going to be probably steeper. So that’s what kind of informed our decision, plus we’re talking to our customers and they’re not having a high degree of confidence.

And that really all those factors on top of the fact that if you look at, forecasts from NAB and Fannie Mae that are 25% plus on decline, we felt that this was a prudent approach. So we are seeing some of this, and we don’t believe that we should be overly bullish by the second half.

Mike Dahl: Yeah makes sense. Thanks, Anne.

Anne Noonan : Thanks, Mike.

Operator: The next question is from Adam Thalhimer with Thompson Davis. Your line is open.

Adam Thalhimer : Hey, good morning, guys. Quick question on readymix pricing. What’s the range of outcomes if residential does decline 30% plus this year?

Anne Noonan : It’s interesting. We always watch that very closely. Obviously, if demand comes off, will it impact our pricing? But the dynamic you have this year is these high cement prices driven by high input costs. And generally, in our markets, when cement price stays high, we’re able to continue to pass that through and keep our prices high. That will be more challenging this year, if demand drops off more than we think at 30%. Right now, our planning stance is that we will pass through as our teams have executed all year long on passing through the high material costs. And in fact, our ready-mix teams expanded margins in 2022, which was really quite an accomplishment given the cement cadence that they had to pass through.

So we take cement stays up, even though demand is down at 30% our teams can pass through. But I would also say we have additional initiatives, again, controlling what we can control to our operational excellence, centers of excellence for ready-mix, where we’re focused on short load additional fees for short loads, our team has done a great job using AI to optimize our admixtures so that they can value price and great quality into the market. So the combination of all those factors we believe it will hold, but we will watch it very closely. And our team is working very hard in that direction.

Adam Thalhimer : Thanks, Anne.

Operator: The next question is from Phil Ng with Jefferies. Your line is open.

Phil Ng : Hey, guys, sorry about that. Technical issues, unfortunately. And the color you gave in terms of how the man is holding up on the resi side was quite interesting. I guess you got some different factors, right. Your comps are much easier on bonds in the back half. And maybe the public stuff ramps up. So in terms of your volume guidance for the full year, help us think through the shape of the year in terms of declines or do things kind of flatten down at some point.

Anne Noonan : I want to make sure I’m answering your question there. With respect to your question, is totally on resi.

Phil Ng : My question is just volume overall for you guys. You got a confluence of factors you got resi and the town’s like resi is holding up better than the 30% at this juncture. So maybe it’s a bad guy. But infrastructure assume ramps up more than back half. Just wanted to get a better sense of shape of the year drums, your volumes for 2023.

Anne Noonan : We saw Q4 double digit declines in our resi volumes. And we will that’s not our biggest quarter across the board. So when you think about the compounding effect of those declines as you get into our peak season, we’ve that’s where we got to our 30% overall declines in the peak season. So, when they started to go down yes, they will probably go down a little bit more. The rest of the volumes, I think, are driven largely just by the seasonality of our business. If you try and spice it into quarters. Because remember, only 4% of our EBITDA is made in the first quarter generally, if you look back over our historical averages. So when you look at our business, you’ve got to really look at me through September October that makes or breaks our year. So it’s, that’s my prepared comments, I made the comment that it’s going to be we’re not going to be peak seasons, we really understand the depth of their pocket.

Phil Ng : That’s helpful. And if I could sneak one more in. Last year, from a productivity standpoint, you guys had some challenges, because you couldn’t get some equipment you needed. You mentioned supply chain still challenge. Are you seeing any of that freeing up that gives you ability to kind of unlock from the health initiatives you guys have targeted?

Anne Noonan : We are still having problems in our supply chain. The equipment has not eased up at this point in time. We do we are hopeful that as the year proceeds, particularly with respect to our capital equipment that it would ease over time, but our R&M costs are still elevated at this point in time. Brian maybe a little more color on that that you’d like to add for what we’re planning there?

Brian Harris: Yeah, there is still delays from some of our suppliers. And oftentimes, it’s not just — it’s one or two small components that can delay the delivery of an entire piece of equipment. So that continues to be a challenge. We did get some new equipment in Q4, but we’re still have quite a bit carryover from things that we wanted to get in 2022. So that remains an issue and as long as it does repair maintenance costs have been elevated, not just because of the delays and having to run equipment for longer and put more hours on the on the clock, but also because the costs of the components, frankly, whether they be major components, overhaul components, or consumable spare type items have also been higher due to installation.

So it’s a challenged and it continues to be stone. Typically, we would like to get your new equipment on the ground, for the start of the season remains to be seen how we’ll be able to get everything we want by the April — March-April-May timeframe.

Phil Ng : Okay, thank you. Great, color.

Anne Noonan : Thanks, Phil.

Operator: We have no further questions at this time. I’ll turn over to Anne Noonan for any closing comments.

Anne Noonan : Thanks, Chris. I’ll just leave you with three takeaways. 2022 kept a year of tremendous strategic progress. We ended the year with the strongest balance sheets at Summit’s history, that a high watermark for ROIC, began our margin recovery and set all-time records across multiple safety measures. Will carry this momentum into 2023, by building on strong pricing growth, while focusing on those cost levers within our control. We are confident that our continued focus on value pricing principles coupled with operational excellence initiatives across the enterprise will help counter inflation and overtime deliver sustainable margin growth. Today’s Summit is a talent rich and materials led organization that’s better positioned to pursue attractive organic and inorganic opportunities than ever before.

Armed with an exceptional balance sheet, we will continually optimize the portfolio, invest to grow, prioritize markets and strengthen the profitability and economic durability of our company. As always, we thank you for your continued support for Summit Materials. And we hope you have a nice day.

Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.